1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 NV 89109 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (702) 792-7200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE 9.25% SENIOR NOTES NEW YORK STOCK EXCHANGE 9.50% SENIOR SUBORDINATED NOTES NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 than the Registrant was required to file such reports), 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. [ ] As of February 26, 1999, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price on the New York Stock Exchange for such date, was approximately $111,010,000. Shares of Common Stock held by officers, directors and holders of more than 5% of the outstanding Common Stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 26, 1999, the Registrant had outstanding 62,027,514 shares of Common Stock. Documents Incorporated by Reference into Parts I - III: Portions of the definitive Proxy Statement for the Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 BOYD GAMING CORPORATION 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PAGE NO. -------- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 33 Item 3. Legal Proceedings........................................... 33 Item 4. Submission of Matters to a Vote of Security Holders......... 33 Item 4A. Executive Officers of the Registrant........................ 34 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 35 Item 6. Selected Consolidated Financial Data........................ 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 37 Item 7A. Quantitative and Qualitative Disclosure about Market Risk... 49 Item 8. Financial Statements and Supplementary Data................. 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.......... 51 Item 11. Executive Compensation...................................... 51 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 51 Item 13. Certain Relationships and Related Transactions.............. 51 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.................................................. 52 i 3 PART I ITEM 1. BUSINESS GENERAL Boyd Gaming Corporation is a multi-jurisdictional gaming company which currently owns or operates eleven casino entertainment facilities. The Company has operated successfully for more than two decades in the highly competitive Las Vegas market and has entered several other gaming jurisdictions in the past five years. The Company owns and operates seven facilities in three distinct markets in Las Vegas, Nevada: the Stardust Resort and Casino (the "Stardust") on the Las Vegas Strip; Sam's Town Hotel and Gambling Hall ("Sam's Town Las Vegas"), the Eldorado Casino (the "Eldorado") and the Jokers Wild Casino ("Jokers Wild") on the Boulder Strip; and the California Hotel and Casino (the "California"), the Fremont Hotel and Casino (the "Fremont") and Main Street Station Casino, Brewery and Hotel ("Main Street Station") in downtown Las Vegas. The Company also owns or manages four facilities in other gaming jurisdictions. The Company owns and operates Sam's Town Hotel and Gambling Hall, a dockside gaming and entertainment complex in Tunica County, Mississippi ("Sam's Town Tunica") and the Par-A-Dice Hotel and Casino in East Peoria, Illinois ("Par-A-Dice"). In October 1997, the Company completed the acquisition of Treasure Chest Casino ("Treasure Chest"), a riverboat casino in Kenner, Louisiana, which the Company had previously partially owned and managed pursuant to a management agreement. The Company manages, for the Mississippi Band of Choctaw Indians, the Silver Star Resort and Casino ("Silver Star"), a land-based gaming and entertainment complex located near Philadelphia, Mississippi. The Company also owns and operates Vacations Hawaii, a travel agency that operates for the benefit of the California, Fremont and Main Street Station. The Company currently owns or operates an aggregate of approximately 562,000 square feet of casino space, containing 15,793 slot machines and 497 table games. As such, the Company derives the majority of its gross revenues from its casino operations, which produced over 60% of gross revenues during the last three fiscal years. Food and beverage revenue, which produced over 15% of gross revenues during the last three fiscal years, represents the only other revenue source which produced more than 10% of gross revenues during this time frame. See "Properties" and "Item 2 -- Properties." The Company currently conducts substantially all of its business through seven wholly-owned subsidiaries: California Hotel and Casino ("CH&C"); Boyd Tunica, Inc. ("Boyd Tunica"); Boyd Kenner, Inc. ("Boyd Kenner"); Boyd Louisiana L.L.C. ("Boyd Louisiana"); Boyd Mississippi, Inc. ("Boyd Mississippi"); Par-A- Dice Gaming Corporation ("Par-A-Dice Gaming") and East Peoria Hotel, Inc. ("EPH"). CH&C directly owns and operates Sam's Town Las Vegas and the California and owns and operates the Stardust, the Fremont, the Eldorado, Jokers Wild and Main Street Station through wholly-owned subsidiaries. Boyd Tunica owns and operates Sam's Town Tunica; Boyd Kenner operates Treasure Chest and owns a 15% equity interest in Treasure Chest, L.L.C., the owner of Treasure Chest; Boyd Louisiana owns the remaining 85% equity interest in Treasure Chest, L.L.C.; Boyd Mississippi operates Silver Star; Par-A-Dice Gaming owns and operates the Par-A-Dice, and EPH is the general partner and Par-A-Dice Gaming is the limited partner of a limited partnership that owns the Par-A-Dice Hotel. OPERATING STRATEGY The Company believes that the following key elements have contributed to the success of the Company in the past and are central to its future success. VALUE-ORIENTED CASINO ENTERTAINMENT EXPERIENCE The Company is committed to providing a high-quality casino entertainment experience to its primarily middle-income customers at an affordable price in order to develop and maintain customer loyalty. The Company delivers value to its customers through providing service in an inviting and entertaining environment. The Company delivers additional value to its customers through moderately-priced casino entertain- 1 4 ment, hotel, restaurant and live entertainment offerings and regularly reinvests in its existing facilities in an effort to maintain the quality and competitiveness of its properties. LIVELY, FRIENDLY ATMOSPHERE Each of the Company's facilities is clean and modern and offers friendly service in an informal and lively atmosphere. The Company's employee training programs are designed to motivate employees to provide the type of friendly and attentive service which the Company seeks to provide at its facilities. The Company has an extensive customer feedback system, ranging from guest comment cards in its restaurants and hotel rooms, to other consumer surveys and research. In addition to providing a measure of customer service, comment cards and consumer research allow the Company to obtain valuable customer feedback and marketing information for its database. EMPHASIS ON SLOT PLAY The Company emphasizes slot machine wagering, the most consistently profitable segment of the casino entertainment business. Technological advances in slot products have resulted in sophisticated interactive games, which offer customers greater variety, more generous payoffs and increased periods of play for their casino entertainment dollar. The Company continually invests in upgrading its machines to reflect advances in technology and the development of proprietary slot games and related equipment at all of its facilities in order to further enhance the slot customer's experience. COMPREHENSIVE MARKETING AND PROMOTION The Company actively promotes its casino entertainment offerings, its hotels, destination restaurants and live entertainment using a variety of promotional advertising media including outdoor advertising as well as print, broadcast and Internet media. The Company develops and maintains an extensive customer database. The database is expanded daily, adding new casino customers by obtaining their mailing addresses and other marketing information. To encourage repeat visitation, the Company employs a direct mail program targeting its database customers with a variety of product offerings, including incentives to visit the Company's facilities frequently. During the year ended December 31, 1998, the Company distributed approximately 11 million pieces of mail to its database customers. The Company also provides complimentary rooms, food and beverage and other services to valued customers, but maintains limits on such items consistent with its focus on middle-income patrons. PROPERTIES The Company currently owns and operates seven properties in Las Vegas: the Stardust; Sam's Town Las Vegas; the Eldorado; Jokers Wild; the California; the Fremont; and Main Street Station. The Company also owns and/or operates four properties outside the State of Nevada: Sam's Town Tunica, in Tunica County, Mississippi; Treasure Chest, in the western suburbs of New Orleans; Silver Star, in central Mississippi; and Par-A-Dice in East Peoria, Illinois. THE STARDUST The Stardust, situated on 52 acres of land owned and nine acres of land leased by the Company on the Las Vegas Strip, is a casino hotel complex with approximately 87,000 square feet of casino space, a conference center containing approximately 35,000 square feet of meeting space and a 900-seat showroom. The casino offers nearly 2,000 slot machines and 79 table games, including tables featuring "21," craps, roulette, baccarat, mini-baccarat, Big Six, progressive pai gow poker, Caribbean stud, Let it Ride and poker, as well as keno. The Stardust features "Enter the Night," a production show that includes computerized lighting, lasers and digital surround sound. The Stardust also has one of the largest and best known race and sports books in the United States and is the home of the Stardust line, a sports line service that is quoted throughout the United States and abroad. The Stardust features 2,112 guest rooms, 1,331 in its 32-story hotel tower. The Stardust complex, which is distinguished by dramatic building lighting, has six restaurants, a shopping arcade, two swimming 2 5 pools and parking spaces for approximately 2,900 cars. The occupancy rate and average room rate at the Stardust were approximately 90% and $47, respectively, during 1998. The Stardust caters primarily to adult Las Vegas visitors seeking the classic Las Vegas gaming experience. Using its extensive database, the property promotes customer loyalty and generates repeat customer business by communicating with its customers regarding special events, new product offerings and special incentive promotions at the property. The Company uses a network of tour operators and wholesalers to reach customers who prefer packaged trips and print and broadcast media to attract the independent traveler. The Company attracts proven slot and table game players through direct mail promotions for tournaments, events and a variety of special offers. With its conference center, the Stardust also attracts meeting and banquet business. In addition, the Stardust draws a significant number of walk-in customers. Patrons of the Stardust come primarily from the western United States, including Southern California and Arizona, and the Midwest. The Stardust is currently in the process of a $25 million renovation, which includes guest rooms, public space and exterior enhancements, and is intended to make the property more competitive with other Strip resorts. In connection with the renovation project, the Stardust will remove all of its approximately 550 motor inn rooms from service for a period of approximately 90 days beginning in April 1999. During this time, the Company will evaluate the impact of the motor inn closure on the Stardust's operations. Based upon the results of the evaluation, the Company will either refurbish or demolish the Stardust motor inn rooms. The renovation project is expected to be completed in 1999, although there can be no assurance that the renovation will be completed on time or within budget. BOULDER STRIP PROPERTIES Sam's Town Las Vegas is situated on 56 acres of land owned and seven acres of land leased by the Company on the Boulder Strip, approximately six miles east of the Las Vegas Strip. Sam's Town features an approximately 118,000-square foot casino, a newly renovated state-of-the-art 56-lane bowling center and the 25,000-square foot Western Emporium retail store. The gaming facilities include approximately 2,900 slot machines and 52 table games, including tables featuring blackjack, craps, roulette, pai gow, poker and Caribbean stud, as well as keno, a race and sports book, and bingo. The property has 642 guest rooms, 12 restaurants, 500 spaces for recreational vehicles and approximately 4,000 parking spaces, including two parking garages which together can accommodate up to 2,400 cars. The resort features a 25,000-square foot atrium which contains extensive foliage and trees, streams, bridges, and a large waterfall with a laser light show. Adjacent to the atrium there are several restaurants and a large sports bar. Other features of the property include an outdoor recreation area, as well as banquet and meeting facilities. The occupancy rate and average room rate at Sam's Town Las Vegas were approximately 95% and $42, respectively, during 1998. Sam's Town Las Vegas has a western theme and features an informal, friendly atmosphere that appeals to both local residents and visitors. Gaming, bowling, a western dance hall and live entertainment create a social center that attracts many Las Vegas residents. The property is a major sponsor of the Ladies Professional Bowling Tour and hosts many bowling events which are televised throughout the United States and attract participants from around the world. Additionally, Sam's Town Las Vegas sponsors several NASCAR events at the new Las Vegas Motor Speedway that are televised nationally. The property attracts a mix of tourists and local market patrons, many of whom are repeat customers, by offering excellent price/value relationships in its food and beverage operations, and by slot marketing programs that include generous slot payouts. The popularity of Sam's Town Las Vegas among local residents allows it to benefit from the rapid development of the Las Vegas metropolitan area, which has been one of the fastest growing communities in the United States over the last decade. Sam's Town Las Vegas will begin a renovation project during 1999 intended to update the casino and reconfigure the gaming space to allow for slightly more gaming positions. In addition, the porte cochere and valet parking area will be reconfigured and remodeled to facilitate access into the property. The renovation is expected to be completed in mid-2000 and cost approximately $25 million, although there can be no assurance that the renovation will be completed on time or within budget. 3 6 The Eldorado is situated on four acres of land owned by the Company in downtown Henderson, Nevada, which is southeast of Las Vegas. The casino has over 16,000 square feet of gaming space featuring approximately 600 slot machines and 11 table games, including tables featuring "21," craps, roulette and pai gow, as well as keno, bingo and a sports book. The facility also offers three restaurants, a children's arcade and a parking garage for up to 500 cars. The principal customers at the Eldorado are Henderson residents. Jokers Wild is situated on 13 acres of land owned by the Company on the Boulder Strip. The property offers 22,500 square feet of casino space with 625 slot machines and 11 table games, including tables featuring "21," craps and roulette, as well as keno and a sports book. The facility also offers a 24-hour restaurant, a buffet, an entertainment lounge, a sports bar, a video arcade and approximately 800 parking spaces. Jokers Wild serves both local residents and visitors to the Las Vegas area traveling on the Boulder Highway. DOWNTOWN PROPERTIES The California is situated on 13.9 acres of land owned and 1.6 acres of land leased by the Company in downtown Las Vegas. The California, the Company's first property, has 36,000 square feet of gaming space, 781 guest rooms, five restaurants, approximately 5,000 square feet of meeting space, more than 800 parking spaces, including a parking garage for up to 425 cars, and an approximately 95-space recreational vehicle park, the only such facility in the downtown area. The casino offers approximately 1,100 slot machines and 35 table games, including tables featuring "21," craps, roulette, pai gow and Caribbean stud, as well as keno and a sports book. The occupancy rate and average room rate at the California were approximately 94% and $30, respectively, during 1998. The Fremont is situated on 1.4 acres of land owned and 0.9 acres of land leased by the Company on the principal pedestrian thoroughfare in downtown Las Vegas. The property offers 32,000 square feet of casino space, including 1,031 slot machines and 28 table games, including tables featuring "21," craps, roulette, pai gow, and Caribbean stud, as well as keno and a race and sports book. The hotel has 447 guest rooms and five restaurants including the Second Street Grill, an upscale contemporary restaurant, and the Paradise Buffet, which features tropical-themed surroundings. The property also has approximately 8,200 square feet of meeting space and a parking garage for up to 350 cars. The occupancy rate and average room rate at the Fremont were approximately 94% and $30, respectively, during 1998. Main Street Station is situated on 15 acres of land owned by the Company in downtown Las Vegas and was renovated and expanded prior to its November 1996 opening. The property includes 28,500 square feet of gaming space with 22 table games and 905 slot machines. The property also includes 406 hotel rooms, a 475-seat buffet, a 125-seat specialty restaurant, a 90-seat cafe, a 200-seat brew pub and oyster bar and expanded parking to include over 2,000 spaces. The occupancy rate and average room rate at Main Street Station were approximately 96% and $30, respectively, during 1998. The Company coordinates marketing efforts and support functions and has standardized operating procedures and systems among its three Downtown Properties with the goal of enhancing revenues and reducing expenses. This effort includes a consolidated database and marketing program for all Downtown Properties. The Company believes these efforts have significantly reduced costs and will continue to provide the Downtown Properties with a competitive advantage. While many casinos in downtown Las Vegas compete with other downtown properties and properties on the Las Vegas Strip for the same customers, the Company has developed a distinctive niche for its Downtown Properties by focusing primarily on customers from Hawaii. The Company's marketing strategy for the Downtown Properties focuses on gaming enthusiasts from Hawaii and tour and travel agents from Hawaii with whom the Company has cultivated relationships since it opened the California in 1975. Through the Company's Hawaiian travel agency, Vacations Hawaii, the Company currently operates six DC-10 charter flights from Honolulu to Las Vegas each week, helping to ensure a stable supply of reasonably priced air seats. This, as well as the Company's strong, informal relationships with other Hawaiian travel agencies, its affordably priced, all-inclusive packages and its Hawaiian promotions have allowed the California and the Fremont to capture a significant share of the Hawaiian tourist trade in Las Vegas. For more than a decade, the California and Fremont have been the leading Las Vegas destination for visitors from Hawaii. The Company 4 7 attributes this success to the amenities and atmosphere at the California and Fremont, which are designed to appeal specifically to visitors from Hawaii, and to its marketing strategy featuring significant promotions in Hawaii and a bi-monthly newsletter circulated to over 87,000 households, primarily in Hawaii. During fiscal 1998, patrons from Hawaii comprised approximately 67% of the room nights at the California, 55% of the room nights at the Fremont and 39% of the room nights at Main Street Station. CENTRAL REGION PROPERTIES The Company exported its popular Sam's Town western theme and atmosphere to the Mississippi dockside gaming market by developing Sam's Town Tunica, which opened in May 1994. Since its opening, Sam's Town Tunica has undergone two expansions. In December 1994, an $18 million expansion was completed which included the addition of 308 guest rooms surrounding a swimming pool and recreational area. During 1996, the Company, seeking to further its position in both the overnight and drive-in markets in Tunica expanded Sam's Town Tunica. The $40 million expansion project included a 350-room hotel tower and a 1,000-car parking garage. The hotel has a total room count of 843 including 49 suites, and the garage was the first enclosed parking structure at a Tunica County casino. The complex offers a two-story casino of approximately 75,000 square feet featuring 1,715 slot machines and 72 table games, including tables featuring "21," craps, roulette, poker, Caribbean stud and pai gow, as well as the only live keno in Tunica County. The design of the facility integrates the water-based and land-based components of the facility. Sam's Town Tunica is located in Tunica County near State Highway 61 approximately 25 miles south of Memphis, Tennessee. The adult population within a 200-mile radius is over 3 million and includes the cities of Nashville, Tennessee; Jackson, Mississippi; and Little Rock, Arkansas. The Company has distinguished itself from most other operators in the area by developing a major casino entertainment complex with extensive amenities including a 843-room hotel, an entertainment lounge featuring regional country-western and top-40 music, five restaurants including Corky's B-B-Q, featuring the food of that popular Memphis eatery, bars, specialty shops and the River Palace Arena, a 1,650-seat entertainment facility featuring a cross-section of national recording artists. Additionally, Sam's Town Tunica and two other neighboring casino properties are each 1/3 partners in the River Bend Links Golf Course, an 18-hole championship lynx style golf course which opened in November 1998. The occupancy rate and average room rate at Sam's Town Tunica were approximately 85% and $45, respectively, during 1998. In October 1997, the Company completed the acquisition of the remaining 85% interest in Treasure Chest the Company did not already own. Treasure Chest, a riverboat casino operation located on Lake Pontchartrain in Kenner, Louisiana, opened in September 1994 and is located near the New Orleans International Airport. Treasure Chest primarily serves patrons from Jefferson Parish, including suburbs on the west side of New Orleans. In January 1996, an $11 million entertainment complex was added to serve as the main boarding area and showcase the 140 seat Caribbean Showroom, as well as a 24 hour buffet, a Steak house, a gift shop and snack bar. The gaming operation features a classic 18th century Victorian-style paddle-wheel riverboat with a total capacity of 1,750 persons, approximately 24,000 square feet of casino space, over 950 slot machines and 55 table games, including tables for "21," craps, roulette and poker. Each of the riverboat's gaming decks has a different theme, with one featuring contemporary Las Vegas-style decor, one offering a Caribbean environment and one providing a festive Mardi Gras setting. Prior to the October 1997 acquisition, the Company owned a 15% equity interest in Treasure Chest and managed the property pursuant to a management agreement. Pursuant to an agreement with the Mississippi Band of Choctaw Indians, the Company operates Silver Star located near Philadelphia, Mississippi. The facility, which opened in July 1994, is located on tribal lands in central Mississippi. The principal markets served by the facility are central Mississippi and Alabama, with the Birmingham, Montgomery and Tuscaloosa metropolitan areas located within approximately 200 miles of the site, as well as the Atlanta metropolitan area. The Mississippi Band of Choctaw Indians recently completed a major expansion project, and the property now includes a 505-room hotel, a casino with approximately 90,000 square feet of gaming space, approximately 3,000 slot machines and 96 table games, including tables for "21," craps, roulette, mini-baccarat and Caribbean stud, a lounge suitable for entertainment and dancing, a swimming pool, spa, six restaurants, a 28,000-square foot conference center, more than 5 8 2,700 parking spaces, and a 36-hole golf course owned and operated by the Mississippi Band of Choctaw Indians. The management agreement for Silver Star provides for a seven-year term expiring in June 2001 and a management fee of 30% of the enterprise's operating income before debt service for the first five years and 40% of its operating income before debt service for the final two years. In December 1996, the Company completed the acquisition of Par-A-Dice, a riverboat casino operation located along the Illinois River in East Peoria, Illinois, approximately 170 miles from Chicago. The boat measures 238 feet long and 66 feet wide and since the completion of an expansion in March 1996, features 33,000 square feet of gaming space on four levels with over 1,000 slot machines and 36 table games, as well as limited food and beverage services. Located adjacent to Par-A-Dice is the Par-A-Dice Hotel, a 208-room full-service hotel with food and beverage, banquet and meeting facilities. The occupancy rate and average room rate at Par-A-Dice were approximately 82% and $58, respectively, during 1998. Par-A-Dice is the primary casino entertainment facility serving central Illinois, and is strategically located within 1/8 of a mile from an exit off of Interstate 74, a major regional east-west interstate highway. Par-A-Dice is the only casino entertainment facility within approximately 100 miles of Peoria. There are more than 350,000 people living within the Peoria metropolitan area and over 1.7 million people over the age of 21 living within 100 miles of Peoria. MIRAGE JOINT VENTURE On July 14, 1998, Mirage Resorts, Incorporated, through a wholly-owned subsidiary (collectively "Mirage") and the Company, through a wholly-owned subsidiary, entered into an amended and restated joint venture agreement (as currently amended, the "Agreement") to jointly develop and own a casino hotel entertainment facility in Atlantic City, New Jersey (the "Mirage Joint Venture"). Among other things, the 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 Mirage Joint Venture project has been named The Borgata and will be one component of a multi-facility casino entertainment development master-planned by Mirage for the Marina district of Atlantic City and is expected to cost $750 million. The Agreement calls for funding $450 million of the project cost with non-recourse third-party financing. The remaining $300 million will be funded equally by capital contributions from the venturers, including, in the case of Mirage, contribution of the land. Of the Company's share of capital contributions, $90 million is expected to be contributed in 1999. Funding of the Company's capital contributions to The Borgata is expected to be derived from cash flow from operations and availability under the Company's five year, reducing revolving credit facility (the "Bank Credit Facility"). Pursuant to the Agreement, the Company's wholly-owned subsidiary, Boyd Atlantic City, Inc. ("Boyd AC"), will control the development and operation of The Borgata. The Borgata contemplates a hotel of over 1,400 rooms, and a casino and related amenities adjacent and connected to Mirage's planned wholly-owned resort. The Company believes that certain highway improvements to permit greater access to the Marina district of Atlantic City will be necessary to support the multi-facility casino entertainment development master-planned by Mirage. After environmental remediation has been completed, which has commenced as is expected to take at least six months, financing has been arranged and other requisite approvals are received, the construction of The Borgata can begin and, once begun would thereafter take at least two years, although there can be no assurance that The Borgata will be completed on time or within budget. On April 27, 1997, Boyd AC filed an application for a casino license with the New Jersey Casino Control Commission (the "NJCCC"). Boyd AC and Boyd Gaming Corporation ("Boyd") also sought Statements of Compliance regarding their satisfaction of certain criteria in connection with Boyd AC's application for a casino license. On July 8, 1998, at a public meeting, the NJCCC confirmed Boyd AC's status as an applicant for a casino license. The NJCCC also considered the petition for Statements of Compliance and declared that, as of the date of the meeting, Boyd AC and Boyd possessed: (i) the required financial stability, integrity and responsibility; (ii) the required good character, honesty and integrity; and (iii) the required business ability and casino experience. The NJCCC further found that, as of the date thereof, the officers and directors of Boyd AC and Boyd whose qualifications must be established to receive Statements of Compliance met the qualifications established under the Casino Control Act. While the issuance of Statements of Compliance 6 9 indicate satisfaction of various criteria as of the date thereof, such issuance is not an assurance of licensure and the NJCCC retains the right to review the Statements of Compliance based on changes of circumstances. Furthermore, the Statements of Compliance do not address many of the items required for casino licensure. Boyd AC, Boyd and The Borgata will continue to submit additional license application items to the NJCCC as is required. With a Statement of Compliance for the Company in place, the investigation by the NJCCC and New Jersey Division of Gaming Enforcement ("NJDGE") in connection with the casino license application will focus on issues concerning operations, the facility and equal employment and business opportunities. See "Investment Considerations -- Expansion." The Borgata once opened, shall give the Company a presence in Atlantic City, the primary casino gaming market serving the eastern United States. INVESTMENT CONSIDERATIONS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Forward looking statements may be recognized by the use of words such as "believes," "expects," "may," "will," "should," "seeks," "anticipates" and similar expressions, or a general description of these types of statements. Discussions containing such forward-looking statements may be found in the material set forth under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as within the Annual Report generally. Also, documents subsequently filed by the Company with the Securities and Exchange Commission contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the investment conditions set forth below and the matters set forth in the Annual Report generally. The Company cautions the reader, however, that this list of factors may not be exhaustive, particularly with respect to future filings. Before making a decision to invest in the Company's Common Stock or other securities, prospective investors should carefully consider the following factors. COMPETITION The gaming industry is highly competitive. Gaming activities include: traditional land-based casinos; riverboat and dockside gaming; casino gaming on Indian land; state-sponsored lotteries; video poker in restaurants, bars and hotels; pari-mutuel betting on horse racing, dog racing and jai-alai; sports bookmaking; and card rooms. The casinos owned, managed and being developed by the Company compete and will in the future compete with all these forms of gaming and with any new forms of gaming that may be legalized in existing and additional jurisdictions, as well as with other types of entertainment. In addition, further expansion of gaming into other jurisdictions could adversely affect the Company's business by diverting its customers to competitors in such jurisdictions. In particular, the expansion of casino gaming in or near any geographic area from which the Company attracts or expects to attract a significant number of its customers could have a material adverse effect on the Company's business, financial condition and results of operations. The California electorate approved Proposition 5 in November 1998. Proposition 5, if implemented, would give all California Indian tribes the right to operate an unlimited number of certain kinds of gaming machines and other forms of casino wagering on California Indian reservations. Legal challenges to Proposition 5 have been filed that may delay or prevent its implementation. If implemented, Proposition 5 may negatively affect Nevada gaming markets. Management is unable, however, to assess the magnitude of the impact to the Company. The Company believes that successful gaming facilities compete based on the following factors: location; attractions; quality of gaming facilities, gaming experience and entertainment; quality of food, beverage and atmosphere; and price. Although the Company believes it competes favorably with respect to these factors in most of its markets, some of its competitors have significantly greater financial and other resources than the Company. The Company's Las Vegas properties compete with a multitude of casino hotels in the greater Las Vegas Metropolitan area. Currently, there are approximately 21 major gaming properties located on or near the Las Vegas Strip, 13 located in the downtown area and several located in other areas of Las Vegas. Las Vegas gaming square footage and room capacity are continuing to increase. On the Las Vegas Strip, a number of marquee properties have opened in the last several years, and others are currently under construction or planned, including the 3,000-room Paris Casino-Resort, the 3,000-room Venetian and the 2,600-room Aladdin 7 10 Hotel and Casino. Each of the foregoing facilities has or may have a theme and attractions which have drawn or may draw significant numbers of visitors. Moreover, most of these facilities attract or may attract primarily middle-income patrons, who are the focus of the Company's marketing strategy. Although the Company believes that these additional facilities will draw more visitors to Las Vegas, these properties also may divert potential gaming activity from the Company. Future additions, expansions and enhancements to existing properties and construction of new properties by the Company's competitors could divert additional gaming activity from the Company's facilities. There can be no assurance that the Company will compete successfully in the Las Vegas market in the future. Sam's Town Tunica competes primarily with other dockside gaming operations in Tunica County and, to a lesser extent, with dockside casinos in Vicksburg, Greenville, Natchez and Coahoma Counties, Mississippi, with dockside casinos on the Mississippi Gulf Coast and with gaming operations in Louisiana. Gaming has grown rapidly in Tunica County with nine dockside casinos now in operation and the Isle of Capri Casinos' facility set to open in the summer of 1999. In addition, several Tunica-area casinos have recently added hotel rooms and other enhancements to their properties. Some of these facilities are operated by certain of the Company's principal Nevada competitors and may be operated or financed by companies with significantly greater financial resources than the Company. There can be no assurance that the Company will compete successfully in the Mississippi market in the future. There are presently 14 licenses issued and 13 riverboats operating in the State of Louisiana. Treasure Chest competes primarily with two of those riverboat operations in the New Orleans metropolitan area as well as the 12 casinos on the Mississippi Gulf Coast, including Mirage's $680 million Beau Rivage which opened in March 1999. In addition, a 100,000 square foot land based casino is currently under construction in downtown New Orleans and is expected to open in late October 1999. These new facilities may divert local market patrons from Treasure Chest. There can be no assurance that Treasure Chest will compete successfully in the future. Par-A-Dice competes primarily with other gaming operations in Illinois and, to a lesser extent, with riverboats and dockside gaming facilities in Indiana, Iowa and Missouri. The Illinois Riverboat Gambling Act authorizes ten owner's licenses for riverboat gaming operations. All ten licenses have been granted and nine riverboat gaming facilities are currently in operation in Illinois. Some of these riverboats are being operated by companies with greater experience in the Illinois market and significantly greater financial resources than the Company. There can be no assurance that Par-A-Dice will compete successfully in the future. Silver Star is located on tribal lands in central Mississippi. The principle markets served by the facility are central Mississippi and Alabama, with the Birmingham, Montgomery and Tuscaloosa metropolitan areas located within approximately 200 miles of the site, as well as the Atlanta metropolitan area. Mirage's $680 million Beau Rivage, which opened in March 1999, may divert patrons from Silver Star. There can be no assurance that Silver Star will compete successfully in the future. Failure to compete successfully in any of these markets could have a material adverse effect on the Company's business, financial condition and results of operations. EXPANSION On July 14, 1998, the Company entered into the Agreement with Mirage to jointly develop and own The Borgata. The construction and opening of the Borgata project is subject to a number of contingencies, including, but not limited to, obtaining adequate financing, continuing construction of highway improvements necessary to accommodate the additional traffic that is expected to be generated to and from the Marina district, approval and licensing by the New Jersey gaming authorities, environmental remediation, the receipt of state and local land-use permits, building and zoning permits and liquor licenses. After environmental remediation has been completed, which has commenced as is expected to take at least six months, and other requisite approvals are received, the construction of The Borgata would thereafter take at least two years. The Borgata will be subject to the many risks inherent in the establishment of a new business enterprise, including potential unanticipated design, construction, regulatory, environmental and operating problems, lack of adequate financing and the significant risks commonly associated with implementing a marketing strategy in a 8 11 new market. If the Borgata does not become operational within the time frame and budget currently contemplated or does not compete successfully in its new market, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company, as part of its ongoing strategic planning process, is currently establishing its priorities for future growth. 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 local market. Outside of Nevada, the Company continues to monitor acquisition opportunities in many of the newer gaming markets as the industry continues to consolidate. ADDITIONAL FINANCING REQUIREMENTS Based upon the extent and scope of the above mentioned expansion plans, the Company may be able to finance its current and future expansion projects primarily with cash flow from operations and borrowings from the Bank Credit Facility. If the Company is unable to finance such projects through cash flow from operations and borrowings under its Bank Credit Facility, it will have to adopt one or more alternatives, such as reducing or delaying planned expansion and capital expenditures, selling assets, obtaining additional equity financing or joint venture partners, modifying the Bank Credit Facility or obtaining additional debt financing. No assurance can be given that the aforementioned sources of funds will be sufficient to finance the Company's expansion, or that other financing will be available on acceptable terms, in a timely manner or at all. In addition, each of the Company's significant long-term debt agreements contain certain restrictions on the ability of the Company to incur additional indebtedness. If the Company is unable to secure additional financing, it could be forced to limit or suspend expansion, development and acquisition projects, which may adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." LEVERAGE AND DEBT SERVICE At December 31, 1998, the Company had total consolidated long-term debt, less current maturities, of approximately $775 million, which represents approximately 77% of the total capitalization of the Company as of such date. Debt service requirements on the Company's Bank Credit Facility consist of interest expense on outstanding indebtedness. In December 1998, the total principal amount available under the Bank Credit Facility was reduced by $25 million to $475 million and will be reduced by an additional $50 million at the end of each six-month period thereafter until December 2000. The Bank Credit Facility matures in June 2001. The Company is currently exploring various alternatives to modify the Bank Credit Facility including, but not limited to, increasing the total principal amount available under the Bank Credit Facility. Debt service requirements under the Company's 9.25% and 9.50% Notes consist of semi-annual interest payments and repayment of the $200 million and $250 million of principal on October 1, 2003 and July 15, 2007, respectively. If The Borgata goes forward, the Company expects to fund its subsidiary's required capital contributions to The Borgata, currently expected to be at least $150 million, with borrowings under the Bank Credit Facility to the extent not funded from cash flow from operations. The Company's ability to service its debt will be dependent on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, no assurance can be given that the Company will maintain a level of operating cash flow that will permit it to service its obligations. If the Company is unable to generate sufficient cash flow or is unable to refinance or extend outstanding borrowings, it will have to adopt one or more alternatives, such as reducing or delaying planned expansion and capital expenditures, selling assets, restructuring debt, obtaining additional equity or debt financing or joint venture partners. There can be no assurance that any of these financing strategies could be effected on satisfactory terms, if at all. In addition, certain states' laws contain restrictions on the ability of companies engaged in the gaming business to undertake certain financing transactions. Such restrictions may prevent the Company from obtaining necessary capital. See "-- Additional Financing Requirements," "-- Governmental Gaming Regulation," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 9 12 GOVERNMENTAL GAMING REGULATION The Company is subject to a variety of regulations in the jurisdictions in which it operates. If additional gaming regulations are adopted in a jurisdiction in which the Company operates, such regulations could impose restrictions or costs that could have a material adverse effect on the Company. From time to time, various proposals have been introduced in the legislatures of some of the jurisdictions in which the Company has existing or planned operations that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and the Company. No assurance can be given that such legislation will not be enacted. The federal government has also previously considered a federal tax on casino revenues and may consider such a tax in the future. In addition, gaming companies are currently subject to significant state and local taxes and fees in addition to normal federal and state corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees could adversely affect 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 thereunder (collectively, the "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 (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and the Clark County Liquor and Gaming Licensing Board (the "Clark County Board"). The Nevada Commission, the Nevada Board and the Clark County Board are collectively referred to herein 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 establishing 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) the provision of 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 the Company's gaming operations and the Company's business, financial condition and results of operations. Corporations that operate casinos in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license requires the periodic payment of fees and taxes and is not transferable. The Company is registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and as such, it 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. The Company has been found suitable by the Nevada Commission to own the stock of CH&C. CH&C is licensed by the Nevada Commission to operate non-restricted gaming activities at the California and Sam's Town Las Vegas and is additionally registered as a holding corporation and approved by the Nevada Gaming Authorities to own the stock of Mare Bear, Inc. ("Mare Bear"), the operator of the Stardust, Sam Will, Inc. ("Sam Will"), the operator of the Fremont and Eldorado, Inc., the operator of the Eldorado and Jokers Wild, and MSW, Inc. ("MSW"), the operator of Main Street Station. No person may become a stockholder of, or receive any percentage of profits from, CH&C or its subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, CH&C, Mare Bear, Sam Will, Eldorado, Inc. and MSW have obtained from the Nevada Gaming Authorities the various registrations, 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, CH&C or any of its licensed subsidiaries 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 CH&C and its licensed subsidiaries must file applications with the 10 13 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 who are actively and directly involved in gaming activities of CH&C or its licensed subsidiaries 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, CH&C or any of its licensed subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company, CH&C or any of its licensed subsidiaries 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, CH&C and its licensed subsidiaries 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 CH&C and its subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by CH&C or any of its licensed subsidiaries, the gaming licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, CH&C, the subsidiary involved, the Company, 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 the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. 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's gaming operations and the Company's business, financial condition and results of 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 have his suitability as a beneficial holder of the Company's voting securities determined 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 more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company'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 the Company'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 Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes include only: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of 11 14 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 of a Registered Corporation 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, CH&C or any of its licensed subsidiaries, 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 the 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 for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. 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 the Company's securities to 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 may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. The Nevada Commission granted the Company prior approval to make public offerings through September 1999, subject to certain conditions ("Shelf Approval"). However, the Shelf Approval 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 by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. Changes in control of the Company 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 12 15 Corporation must satisfy the Nevada Gaming Authorities 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, repurchase of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those licensees, 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 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 Nevada Commission before the Company 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 Company'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, Clark County and the City of Las Vegas. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon any of: (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 connection with the selling of food or refreshments. 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 of the Nevada Board of their 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 that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of food or alcoholic beverages at the Company's Nevada casinos is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. 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 material adverse effect upon the operations of the affected casino or casinos. INDIAN LANDS Gaming on Indian lands is extensively regulated under federal law, tribal-state compacts and tribal law. The terms and conditions of management agreements and the operation of gaming facilities on Indian lands are governed by the Indian Gaming Regulatory Act of 1988 ("IGRA"), which is administered by the National Indian Gaming Commission ("NIGC"), and are also subject to the provisions of statutes relating to contracts with Indian tribes, which are administered by the Secretary of the Interior (the "Secretary") and the Bureau of Indian Affairs ("BIA"). The NIGC oversees Class II Indian gaming (essentially bingo and bingo-like games) and, to a lesser degree, Class III gaming (e.g., slots, casino games and banking card games). The actual regulation of 13 16 Class III gaming is determined pursuant to the terms of tribal-state compacts, which regulate agreements between individual tribes and states that govern gaming on tribal lands. Under IGRA, the NIGC must approve all management agreements between Indian tribes and managers of tribal gaming facilities. IGRA is subject to interpretation by the Secretary and the NIGC and may be subject to judicial and legislative clarification or amendments. The Company's management contract with the Mississippi Bank of Choctaw Indians (the "Choctaws") for the Silver Star was approved by the NIGC in December 1993. The management agreement provides for a seven-year term expiring in June 2001 and a management fee of 30% of the enterprise's operating income before debt service for the first five years and 40% of its operating income before debt service for the final two years. Under the agreement, the Company provided $30.5 million in debt financing for the construction and start-up of the facility, which was repaid during fiscal 1995 from the enterprise's cash flow. Pursuant to NIGC approval dated November 23, 1994, the Company has loaned to the Choctaws an additional $10 million to expand the property. Payments on the loan were current as of December 31, 1998. The NIGC regulations provide detailed requirements as to certain provisions which must be included in management agreements, including (i) adequate accounting procedures and verifiable financial reports, which must be furnished to the tribe; (ii) tribal access to the daily operations of the gaming enterprise, including the right to verify daily gross revenues and income; (iii) minimum guaranteed payments to the tribe, which must have priority over the retirement of development and construction costs; (iv) a ceiling on the repayment of such development and construction costs and (v) a term not to exceed five years except that, upon request of a tribe, a term of seven years may be allowed by the NIGC Chairman if the Chairman is satisfied that the capital investment and income projections for the gaming facility require the additional time. Further, the fee received by the manager of a gaming facility may not exceed 30% of net revenues except that a fee of 40% of net revenues may be approved if the NIGC Chairman is satisfied that the capital investment and income projections for the gaming facility require the additional fee. Under IGRA, a management company, its directors, persons with management responsibilities and certain of the company's owners must provide background information, be investigated by the NIGC and be found suitable to be affiliated with a gaming operation prior to the NIGC's approval of the management agreement. The NIGC regulations provide that each of the ten persons who have the greatest direct or indirect financial interest in a management agreement must be found suitable in order for the management agreement to be approved by the NIGC. The NIGC regulations provide that any entity with a financial interest in a management agreement must be found suitable, as must the directors and ten largest shareholders of such entities in the case of a corporate entity, or the ten largest holders of interest in the case of a trust or partnership. The Chairman of the NIGC may reduce the scope of information to be provided by institutional investors. At any time, the NIGC has power to investigate and require the finding of suitability of any person with a direct or indirect interest in the management agreement, as determined by the NIGC. The management company must pay all fees associated with background investigations by the NIGC. The NIGC regulations require that background information as described above must be submitted for approval within ten days of any proposed change in financial interest in a management agreement. The NIGC regulations do not address any specialized procedures for investigations and suitability findings in the context of publicly held corporations. If, subsequent to the approval of a management agreement, the NIGC determines that any of its requirements pertaining to the management agreement have been violated, it may require the management agreement to be modified or voided, subject to rights of appeal. In addition, any amendments to the management agreement must be approved by the NIGC. In addition to IGRA, tribal-owned gaming facilities on Indian land are subject to a number of other federal statutes. Title 25, Section 81 of the United States Code states that "no agreement shall be made by any person with any tribe of Indians, or individual Indians not citizens of the United States, for the payment or delivery of any money or other thing of value . . . in consideration of services for said Indians relative to their lands . . . unless such contract or agreement be executed and approved" by the Secretary or his or her 14 17 designee. An agreement or contract for services relative to Indian lands which fails to conform with the requirements of Section 81 will be void and unenforceable. All money or other things of value paid to any person by any Indian or tribe for or on his or their behalf, on account of such services, in excess of any amount approved by the Secretary or his or her authorized representative will be subject to forfeiture. The Company believes that it has complied with the requirements of Section 81 with respect to its management contract for Silver Star. The Indian Trader Licensing Act, Title 25, Sections 261-264 of the United States Code ("ITLA") states that "any person other than an Indian of the full blood who shall attempt to reside in the Indian country, or on any Indian reservation, as a trader, or to introduce goods, or to trade therein, without such license, shall forfeit all merchandise offered for sale to the Indians or found in his possession, and shall moreover be liable to a penalty of $500 . . ." No such licenses have been issued to the Company to date. The applicability of ITLA to management contracts is unclear. The Company believes that ITLA is not applicable to its management contracts under which the Company provides services rather than goods to Indian tribes. The Company further believes that ITLA has been superseded by IGRA. On December 4, 1992, the Choctaws and the State of Mississippi entered into a tribal-state compact regarding the regulation of gaming on Choctaw lands in Mississippi. The tribal-state compact has been approved by the BIA. The tribal-state compact as well as tribal regulations provide for the creation of the Choctaw Gaming Commission which has regulatory jurisdiction over gaming on Choctaw lands. The Choctaw Gaming Commission must perform background checks and suitability findings on "parties in interest" to a management contract, which includes the same persons as required by the NIGC regulations discussed above but also specifically includes direct lenders and persons who hold at least ten percent of the stock of any corporation which is a party to the management contract. All investigatory fees of the Choctaw Gaming Commission are to be paid by the Company. The directors and officers of the Company who are required to submit background information for Choctaw Gaming Commission investigatory purposes have done so and the Choctaw Gaming Commission issued the Company a license in December 1993 (subject to renewal on a yearly basis). Management officials and key employees of the Company affiliated with Silver Star, as well as distributors and manufacturers of gaming devices whose products are used on the reservation, must be licensed by the Choctaw Gaming Commission. In addition, all employees associated with casino gaming must obtain work permits issued by the Choctaw Gaming Commission. All holders of casino gaming licenses and work permits (including the Company's license) are subject to immediate revocation of such licenses and work permits under certain circumstances, including (i) the conviction of a felony or any crime of moral turpitude; (ii) unsuitability to be associated with casino gaming; (iii) the violation or conspiracy to violate IGRA, the tribal-state compact, or other tribal or federal laws applicable to casino gaming; or (iv) the violation of certain tribal conflict of interest laws. The management agreement provides that, should a person or entity which is required to undergo a finding of suitability fail to be found suitable in a final, nonappealable order of the NIGC or the Choctaw Gaming Commission, then such person or entity must divest its interest in the management agreement within 72 hours or receipt of such notice. ILLINOIS In February 1990, the State of Illinois legalized riverboat gaming. The Illinois Riverboat Gambling Act (the "Illinois Act") authorizes the issuance by the five-member Illinois Gaming Board of up to ten riverboat gaming owner's licenses for navigable streams within or forming a boundary of the State of Illinois, except for Lake Michigan and any waterway in Cook County, which includes Chicago. The Illinois Act regulates strictly the facilities, persons, associations and practices related to riverboat gaming operations. The Illinois Act grants the Illinois Gaming Board specific powers and duties, and all other powers necessary and proper, to fully and effectively execute the Illinois Act for the purpose of administering, regulating and enforcing the system of riverboat gaming. The Illinois Gaming Board's jurisdiction extends to every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. The ownership and 15 18 operation of a riverboat gaming operation is subject to extensive regulation. Applicants must submit comprehensive application and personal disclosure forms and undergo an exhaustive background investigation prior to the issuance of a license. The Illinois Act requires the owner of a riverboat gaming operation to hold an owner's license issued by the Illinois Gaming Board. The Illinois Act restricts the granting of certain of the ten owner's licenses by location. Four are for operators docking at sites on the Mississippi River, one is for an operator docking at a site on the Illinois River south of Marshall County and one is for an operator docking at a site on the Des Plaines River in Will County. The remaining four owner's licenses are not restricted as to location. Riverboats operating on the Des Plaines River must have a minimum capacity of at least 400 persons. All riverboats must be accessible to disabled persons, must be either a replica of a 19th-century Illinois riverboat or be of a casino cruise ship design and must comply with applicable federal and state laws, including, but not limited to, U.S. Coast Guard regulations. There are currently nine owner's licenses in operation in Alton, East Peoria, Rock Island, Metropolis, East St. Louis, Aurora, Elgin and two licenses to riverboat operators in Joliet. The tenth license which was granted to an operator in East Dubuque, was not renewed by the Gaming Board and is the subject of litigation. In addition to the ten owner's licenses which are authorized under the Illinois Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming on a specified date or series of dates. Each owner's license initially runs for a period of three years. Thereafter, the license is subject to renewal on an annual basis upon a determination by the Illinois Gaming Board that the licensee continues to be eligible for an owner's license pursuant to the Illinois Act and the Illinois Gaming Board's rules. The owner's license for Par-A-Dice initially expired in February 1995. Its license was renewed in February 1996, February 1997 and in February 1998. Par-A-Dice will be required to renew its license each year thereafter. A licensed owner is authorized to apply to the Illinois Gaming Board for and, if approved, will receive all licenses necessary for the operation of a riverboat. These licenses include a liquor license, a license to prepare and serve food and all other necessary licenses. Each license granted entitles a licensee to own and operate up to two riverboats (with a combined maximum of 1,200 gaming participants) as part of the riverboat gaming operation. The number of gaming participants will be determined by the number of gaming positions available and such positions will be counted as follows: positions for games utilizing electronic gaming devices will be determined as 90 percent of the total number of devices available for play; craps tables will be counted as having ten gaming positions; and games utilizing live gaming devices, except for craps, will be counted as having five gaming positions. No person or entity may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner of greater than 10% may hold up to a 10% ownership interest in a second riverboat gaming operation in Illinois. The Illinois Act does not limit the maximum bet or per patron loss. Minimum and maximum wagers on games are set by the licensee and wagering may not be conducted with money or other negotiable currency. No person under the age of 21 is permitted to wager and wagers may only be received from a person present on the riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. From time to time, various proposals have been introduced in the Illinois legislature regarding riverboat gaming. Such proposals include, among other things, taxes, licensing and conduct of gaming. The Company cannot offer any opinion of the outcome or effect of any pending or proposed legislation. In December 1997, the Illinois General Assembly passed, and the Governor signed into law, an increase in the wagering tax on adjusted gross receipts (which is gross gaming revenues minus winnings paid to patrons). Instead of a flat 20% tax, the new law, which became effective on January 1, 1998, imposes graduated tax rates. The new graduated rates are as follows: 15% of the calendar year adjusted gross receipts up to and including $25,000,000; 20% of the calendar year adjusted gross receipts in excess of $25,000,000 but not exceeding $50,000,000; 25% of the calendar year adjusted gross receipts in excess of $50,000,000 but not exceeding $75,000,000; 30% of the calendar year adjusted gross receipts in excess of $75,000,000 but not exceeding $100,000,000; and 35% of the 16 19 calendar year adjusted gross receipts in excess of $100,000,000. The tax imposed is to be paid by the licensed owner to the Illinois Gaming board on the day after the day when the liability was established. The Illinois Act also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. All state use, occupation and excise taxes which apply to the sale of food and beverages and taxes imposed on the sale or use of tangible property apply to such sales aboard riverboats. Under the Illinois Act, there is a four-hour maximum period during which gaming may be conducted during a gaming excursion. Gaming is deemed to commence when the first passenger boards a riverboat for an excursion and may continue while other passengers are boarding for a period not to exceed 30 minutes. A gaming excursion is deemed to have started upon the commencement of gaming. Gaming may continue for a period not to exceed 30 minutes after the gangplank or its equivalent is lowered. During this 30 minute period of egress, new passengers may not board a riverboat. If a riverboat captain reasonably determines that either it is unsafe to transport passengers on the waterway due to inclement weather or the riverboat has been rendered temporarily inoperable by river icing or unforeseeable mechanical or structural difficulties, the riverboat shall either not leave the dock or immediately return to it. In the case of unforeseeable mechanical or structural difficulties, the owner licensee shall make all reasonable effort to promptly remedy the problem. If a riverboat captain reasonably determines for reasons of safety that although seaworthy, the riverboat should not leave the dock or should return immediately thereto, due to the above conditions, a gaming excursion may commence or continue while the gangplank or its equivalent is raised and remains raised, in which event the riverboat is not considered docked. If, due to the above conditions, a gaming excursion must commence or continue with the gangplank or its equivalent raised and the riverboat does not leave the dock, ingress is prohibited until the completion of the excursion. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming as it may deem necessary and proper and into alleged violations of the Illinois Act and Illinois Gaming Board Rules. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to the riverboat gaming operations at all times. A holder of a riverboat gaming license will be subject to the imposition of fines and suspension or revocation of its license for any act by such holder, its agents or employees that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. The following may be grounds for such discipline: (i) failing to comply with or make provision for compliance with the Illinois Act, the rules promulgated thereunder, any federal, state or local law or regulation, or the license holder's internal procedures and administration and accounting controls; (ii) failing to comply with any rule, order or filing of the Illinois Gaming Board or its agents pertaining to gaming; (iii) receiving goods or services from a person or business entity who does not hold a supplier's license but who is required to hold such license by the rules; (iv) being suspended or ruled ineligible or having a license revoked or suspended in any other state or gaming jurisdiction; (v) associating with, either socially or in business affairs, or employing persons of notorious or unsavory reputation or who have extensive police records, or who have failed to cooperate with any officially constituted investigatory or administrative body and would adversely affect public confidence and trust in gaming; (vi) failing to establish and maintain standards and procedures designed to prevent ineligible or unsuitable persons from becoming employed by a licensee, including any person known to have been found guilty of cheating or using any improper device in connection with any game; (vii) failing to promulgate an approved Internal Control System; (viii) any reason set forth in Section 3000.241(d) or resulting from an event set forth in Section 3000.243; and (ix) aiding and abetting a violation by a Gaming Board member or employee, or other government official, of ethical requirements established by statute, resolution, ordinance, personal code or code of conduct. Licensees are required to obtain formal approval from the Illinois Gaming Board whenever a change is proposed in the following areas: (i) "Key Persons" (as defined below); (ii) type of entity; (iii) the equity and debt capitalization of the entity; (iv) investors and/or debt holders; (v) sources of funds; (vi) the applicant's economic development plan; (vii) riverboat capacity or significant design change; (viii) the number of gaming positions; (ix) anticipated economic impact; or (x) agreements, oral or written, relating to the acquisition or 17 20 disposition of property (real or personal) of a value greater than $1 million. In addition, distributions to shareholders, partners and others are limited to those which cannot impair the financial viability of the gaming operation. The Illinois Gaming Board requires that a Key Person of an owner licensee must submit a Personal Disclosure or Business Entity Form and be investigated and approved by the Illinois Gaming Board. The Gaming Board shall certify for each applicant for or holder of an owner's license each position, individual or Business Entity that is to be approved by the Board and maintain suitability as a Key Person. With respect to an applicant for or the holder of an owner's license, a Key Person includes: any Business Entity and any individual with an ownership interest or voting rights of more than 5 percent in the licensee or applicant, and the trustee of any trust holding such ownership interest or voting rights; the directors of the licensee or applicant and its chief executive officer, president and chief operating officer, or their functional equivalents; and all other individuals or Business Entities that, upon review of the applicant's or licensee's Table of Organization, Ownership and Control the Board determines hold a position or a level of ownership, control or influence that is material to the regulatory concerns and obligations of the Board for the specified licensee or applicant. In order to assist the Gaming Board in its determination of Key Persons, applicants for or holders of an owner's license shall provide to the Gaming Board a Table of Organization, Ownership and Control. The Table of Organization, Ownership and Control shall identify in sufficient detail to identify the hierarchy of individuals and Business Entities that, through direct or indirect means, manage own or control the interest and assets of the applicant or licensee holder. If a Business Entity identified in the Table of Organization, Ownership and Control is a publicly traded company, the following information must be provided in the Table: the name and percentage of ownership interest of each individual or Business Entity with ownership of more than 5 percent of the voting shares of the entity, to the extent such information is known or contained in Schedule 13D or 13G Securities and Exchange Commission filings; to the extent known, the names and percentage of interest of ownership of persons who are relatives of one another and who together (as individuals or through trusts) exercise control over or own more than 10 percent of the voting shares of the entity; and any trust holding more than 5 percent ownership or voting interest in the Company, to the extent such information is know or contained in Schedule 13D or 13G Securities and Exchange Commission filings. The Table of Organization may be disclosed under the Freedom of Information Act. Each owner licensee must provide a means for the economic disassociation of a Key Person in the event such economic disassociation is required by an order of the Gaming Board. Based upon findings from an investigation into the character, reputation, experience, associations, business probity and financial integrity of a Key Person, the Gaming Board may enter an order upon the licensee to require the economic disassociation of such Key Person. Furthermore, each applicant or owner licensee must disclose the identity of every person, association, trust or corporation having a greater than 1% direct or indirect pecuniary interest in an owner licensee or in the riverboat gaming operation with respect to which the license is sought. The Illinois Gaming Board may also require an applicant or owner licensee to disclose any other principal or investor and require the investigation and approval of such individuals. The Illinois Gaming Board (unless the investor qualifies as an Institutional Investor) requires a Personal Disclosure Form from any person or entity who or which, individually or in association with others, acquires directly or indirectly, beneficial ownership of more than 5% of any class of voting securities or non-voting securities convertible into voting securities of a publicly-traded corporation which holds an ownership interest in the holder of an owner's license. If the Illinois Gaming Board denies an application for such a transfer and if no hearing is requested, the applicant for the transfer of ownership interest must promptly divest those shares in the publicly-traded parent corporation. The holder of an owner's license would not be able to distribute profits to a publicly-traded parent corporation until such shares have been divested. If a hearing is requested, the shares need not be divested and profits may be distributed to a publicly-held parent corporation pending the issuance of a final order from the Illinois Gaming Board. 18 21 An Institutional Investor that individually or jointly with others, cumulatively acquires, directly or indirectly, 5% or more of any class of voting securities of a publicly-traded licensee or a licensee's publicly-traded parent corporation shall, within no less than ten days after acquiring such securities, notify the Administrator of the Board of such ownership and shall provide any additional information as may be required. If an Institutional Investor (as specified above) acquires 10% or more of any class of voting securities of a publicly-traded licensee or a licensee's publicly-traded parent corporation, it shall file an Institutional Investor Disclosure Form within 45 days after acquiring such level of ownership interest. A person employed at a riverboat gaming operation must hold an occupational license from the Illinois Gaming Board. The occupational license permits the holder to perform only activities included within such holder's level of occupational license or any lower level of occupational license. A holder of a riverboat gaming license is required to investigate the background and qualifications of all persons who apply for employment at its gaming operation. Suppliers of gaming equipment and supplies and certain other vendors must obtain a supplier's license from the Illinois Gaming Board prior to selling or leasing any equipment and supplies as defined in Illinois Gaming Board Rules. The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interest of the public and the gaming industry. NEW JERSEY On April 27, 1997, Boyd AC filed an application for a casino license with the NJCCC. Boyd AC and Boyd Gaming Corporation ("Boyd") also sought Statements of Compliance regarding their satisfaction of certain criteria in connection with Boyd AC's application for a casino license. On July 8, 1998, at a public meeting, the NJCCC confirmed Boyd AC's status as an applicant for a casino license. The NJCCC also considered the petition for Statements of Compliance and declared that, as of the date of the meeting, Boyd AC and Boyd possessed: (i) the required financial stability, integrity and responsibility; (ii) the required good character, honesty and integrity; and (iii) the required business ability and casino experience. The NJCCC further found that, as of the date thereof, the officers and directors of Boyd AC and Boyd whose qualifications must be established to receive Statements of Compliance met the qualifications established under the Casino Control Act. On August 8, 1998, Boyd notified the NJCCC that its proposed casino project will be that of Marina District Development Company ("MDDC"), a joint venture between Boyd AC and MAC, CORP., a wholly owned subsidiary of Mirage Resorts, Inc. Subsequently, on October 6, 1998, the general counsel's office of the NJCCC, by letter, confirmed that the staff of the NJCCC is treating Marina District Development Corporation as the applicant for the proposed casino hotel project. While the issuance of Statements of Compliance indicate satisfaction of various criteria as of the date thereof, such issuance is not an assurance of licensure and the NJCCC retains the right to review the Statements of Compliance based on changes of circumstances. Furthermore, the Statements of Compliance do not address many of the items required for casino licensure. Boyd AC, Boyd and MDDC will continue to submit additional license application items to the NJCCC as is required. The ownership and operation of casino gaming facilities in New Jersey are subject to the New Jersey Casino Control Act (the "Casino Control Act"). In general, the Casino Control Act and the regulations promulgated thereunder contain detailed provisions concerning, among other things: the granting of casino licenses; the suitability of the approved hotel facility and the amount of authorized casino space and gaming units permitted therein; the qualification of natural persons and entities related to the casino licensee; the licensing and registration of employees and vendors of casino licensees; rules of the games; the selling and redeeming of gaming chips; the granting and duration of credit and the enforceability of gaming debts; management control procedures, accountability, and cash control methods and reports to gaming agencies; security standards; the manufacture and distribution of gaming equipment; equal opportunity for employees and casino operators, contractors of casino facilities, and others; and advertising, entertainment, and alcoholic beverages. The New Jersey Casino Control Commission (the "NJCCC") is empowered under the Casino 19 22 Control Act to regulate a wide spectrum of gaming and nongaming related activities and to approve the form of ownership and financial structure of not only a casino licensee, but also its entity qualifiers and intermediary and holding companies. No casino hotel facility may operate unless the appropriate license and approvals are obtained from the NJCCC, which has broad discretion with regard to the issuance, renewal, revocation, and suspension of such licenses and approvals, which are nontransferable. The qualification criteria with respect to the holder of a casino license include its financial stability, integrity and responsibility; the integrity and adequacy of its financial resources which bear any relation to the casino project; its good character, honesty, and integrity; and the sufficiency of its business ability and casino experience to establish the likelihood of creation and maintenance of a successful, efficient casino operation. The NJCCC may reopen licensing hearings at any time and must reopen a licensing hearing at the request of the New Jersey Division of Gaming Enforcement (the "NJDGE"). To be considered financially stable, a licensee must demonstrate the following ability: to pay winning wagers when due; to achieve a gross operating profit; to pay all local, state, and federal taxes when due; to make necessary capital and maintenance expenditures to insure that it has a superior first-class facility; and to pay, exchange, refinance or extend debts which will mature and become due and payable during the license term. In the event a licensee fails to demonstrate financial stability, the NJCCC may take such action as it deems necessary to fulfill the purposes of the Casino Control Act and protect the public interest, including: issuing conditional licenses approvals or determinations; establishing an appropriate cure period; imposing reporting requirements; placing restrictions on the transfer of cash or the assumption of liability; requiring reasonable reserves or trust accounts; denying licensure; or appointing a conservator. Pursuant to the Casino Control Act, NJCCC regulations and precedent, no entity may hold a casino license unless each officer, director, principal employee, person who directly or indirectly holds any beneficial interest or ownership in the licensee, each person who in the opinion of the NJCCC has the ability to control or elect a majority of the board of directors of the licensee (other than a banking or other licensed lending institution which makes a loan or holds a mortgage or other loan acquired in the ordinary course of business), and any lender, whom the NJCCC may consider appropriate, obtains and maintains qualification approval from the NJCCC. Qualification approval means qualification requirements as a casino key employee, as described below. An entity qualifier or intermediary or holding company is required to register with the NJCCC and meet the same basic standards for approval as a casino licensee; provided, however, that the NJCCC, with the concurrence of the Director of the NJDGE, may waive compliance by a publicly-traded corporate holding company as to any officer, director, lender, underwriter, agent or employee thereof, or person directly or indirectly holding a beneficial interest or ownership of the securities of such company, where the NJCCC and the Director of the NJDGE are satisfied that such persons are not significantly involved in the activities of the corporate licensee, and in the case of security holders, do not have the ability to control the publicly-traded corporation or elect one or more of its directors. The NJCCC may require all financial backers, investors, mortgagees, bond holders and holders of notes or other evidence of indebtedness, either in effect or proposed, which bears any relation to the casino project, publicly-traded securities of an entity which holds a casino license or is an entity qualifier, subsidiary, or holding company of a casino licensee (a "Regulated Company"), to qualify as financial sources. An institutional investor ("Institutional Investors") is defined by the Casino Control Act as any retirement fund administered by a public agency for the exclusive benefit of federal, state, or local public employees; investment company registered under the Investment Company Act of 1940; collective investment trust organized by banks under Part Nine of the Rules of the Comptroller of the Currency; closed end investment trust; chartered or licensed life insurance company or property and casualty insurance company; banking and other chartered or licensed lending institution; investment advisor registered under the 20 23 Investment Advisers Act of 1940; and such other persons as the NJCCC may determine for reasons consistent with the policies of the Casino Control Act. An Institutional Investor is granted a waiver by the NJCCC from financial source or other qualification requirements applicable to a holder of publicly-traded securities, in the absence of a prima facie showing by the NJDGE that there is any cause to believe that the Institutional Investor may be found unqualified, on the basis of NJCCC findings that: (a) its holdings were purchased for investment purposes only and, upon request by the NJCCC, it files a certified statement to the effect that is has no intention of influencing or affecting the affairs of the issuer, the casino licensee or its holding or intermediary companies; provided, however, that the Institutional Investor will be permitted to vote on matters put to the vote of the outstanding security holders; and (b) if (i) the securities are debt securities of a casino licensee's holding or intermediary companies or another subsidiary company of the casino licensee's holding or intermediary companies which is related in any way to the financing of the casino licensee and represent either (x) 20% or less of the total outstanding debt of the company, or (y) 50% or less of any issue of outstanding debt of the company, (ii) the securities are under 10% of the equity securities of a casino licensee's holding or intermediary companies, or (iii) if the securities so held exceed such percentages, upon a showing of good cause. The NJCCC may grant a waiver of qualification to an Institutional Investor holding a higher percentage of such securities upon a showing of good cause and if the conditions specified above are met. Generally, the NJCCC requires each institutional holder seeking waiver of qualification to execute a certification to the effect that (i) the holder has reviewed the definition of Institutional Investor under the Casino Control Act and believes that it meets the definition of Institutional Investor; (ii) the securities are those of a publicly-traded corporation; (iii) the holder purchased the securities for investment purposes only and holds them in the ordinary course of business; (iv) the holder has no involvement in the business activities of, and no intention of influencing or affecting the affairs of the issuer, the casino licensee, or any affiliate; and (v) if the holder subsequently determines to influence or affect the affairs of the issuer, the casino licensee or any affiliate, will provide not less than 30 days' prior notice of such intent and will file with the NJCCC an application for qualification before taking any such action. If an Institutional Investor changes its investment intent, or if the NJCCC finds reasonable cause to believe that it may be found unqualified, the Institutional Investor may take no action with respect to the security holdings, other than to divest itself of such holdings, until it has applied for interim casino authorization and has executed a trust agreement pursuant to such an application. The Casino Control Act imposes certain restrictions upon the issuance, ownership, and transfer of securities of a Regulated Company, and defines the term "security" to include instruments which evidence a direct or indirect beneficial ownership or creditor interest in a Regulated Company including, but not limited to, mortgages, debentures, security agreements, notes, and warrants. If the NJCCC finds that a holder of such securities is not qualified under the Casino Control Act, it has the right to take any remedial action it may deem appropriate, including the right to force divestiture by such disqualified holder of such securities. In the event that certain disqualified holders fail to divest themselves of such securities, the NJCCC has the power to revoke or suspend the casino license affiliated with the Regulated Company which issued the securities. If a holder is found unqualified, it is unlawful for the holder (i) to exercise, directly or through any trustee or nominee, any right conferred by such securities, or (ii) to receive any dividends or interest upon any such securities or any remuneration, in any form, from its affiliated casino licensee for services rendered or otherwise. With respect to non-publicly-traded securities, the Casino Control Act and NJCCC regulations require that the corporate charter or partnership agreement of a Regulated Company establish a right in the NJCCC of prior approval with regard to transfers of securities, shares and other interests and an absolute right in the Regulated Company to repurchase at the market price or the purchase price, whichever is the lesser, any such security, share, or other interest in the event that the NJCCC disapproves a transfer. With respect to publicly-traded securities, such corporate charter or partnership agreement is required to establish that any such securities of the entity are held subject to the condition that, if a holder thereof is found to be disqualified by the NJCCC, such holder shall dispose of such securities. 21 24 Whenever any person enters into a contract to transfer any property which relates to an ongoing casino operation, including a security of the casino licensee or a holding or intermediary company or entity qualifier, under circumstances which would require that the transferee obtain licensure or be qualified under the Casino Control Act, and that person is not already licensed or qualified, the transferee is required to apply for interim authorization. Furthermore, the closing or settlement date in the contract may not be earlier than the 121st day after the submission of a complete application for licensure or qualification together with a fully executed trust agreement in a form approved by the NJCCC. If, after the report of the NJDGE and a hearing by the NJCCC, the NJCCC grants interim authorization, the property will be subject to a trust. If the NJCCC denies interim authorization, the contract may not close or settle until the NJCCC makes a determination on the qualifications of the applicant. If the NJCCC denies qualification, the contract will be terminated for all purposes, and there will be no liability on the part of the transferor. If, as the result of a transfer of publicly-traded securities of a Regulated Company or a financing entity of a Regulated Company, any person is required to qualify under the Casino Control Act, that person is required to file an application for licensure or qualification within 30 days after the NJCCC determines that qualification is required or declines to waive qualification. The application must include a fully executed trust agreement in a form approved by the NJCCC, or in the alternative, within 120 days after the NJCCC determines that qualification is required, the person whose qualification is required must divest such securities as the NJCCC may require in order to remove the need to qualify. The NJCCC may grant interim casino authorization where it finds by clear and convincing evidence that: (i) statements of compliance have been issued pursuant to the Casino Control Act; (ii) the casino hotel is an approved hotel in accordance with the Casino Control Act; (iii) the trustee satisfies qualification criteria applicable to casino key employees, except for residency; and (iv) interim operation will best serve the interests of the public. When the NJCCC finds the applicant qualified, the trust will terminate. If the NJCCC denies qualification to a person who has received interim casino authorization, the trustee is required to endeavor, and is authorized, to sell, assign, convey, or otherwise dispose of the property subject to the trust to such persons who are licensed or qualified or shall themselves obtain interim casino authorization. Where a holder of publicly-traded securities is required, in applying for qualification as a financial source or qualifier, to transfer such securities to a trust in application for interim casino authorization and the NJCCC thereafter orders that the trust become operative: (i) during the time the trust is operative, the holder may not participate in the earnings of the casino hotel or receive any return on its investment or debt security holdings; and (ii) after disposition, if any, of the securities by the trustee, proceeds distributed to the unqualified holder may not exceed the lower of their actual cost to the unqualified holder or their value calculated as if the investment had been made on the date the trust became operative. The NJCCC may permit a licensee to increase its casino space if the licensee agrees to add a prescribed number of qualifying sleeping units within two years after the commencement of gaming operations in the additional casino space. However, if the casino licensee does not fulfill such agreement due to conditions within its control, the licensee will be required to close the additional casino space, or any portion of thereof that the NJCCC determines should be closed. The NJCCC is authorized to establish annual fees for the renewal of casino licenses. The renewal fee is based upon the cost of maintaining control and regulatory activities prescribed by the Casino Control Act, and may not be less than $100,000 for a one-year casino license nor less than $200,000 for a four-year casino license. Additionally, casino licenses are subject to potential assessments to fund any annual operating deficits incurred by the NJCCC or the NJDGE. There is also an annual license fee of $500 for each slot machine maintained for use or in use in any casino. Additionally, each casino licensee is also required to pay an annual tax of 8% on its gross casino revenues. Each party to an agreement for the management of a casino is required to hold a casino license, and the party who is to manage the casino must own at least 10% of all the outstanding equity securities of the casino 22 25 licensee. Such an agreement shall provide for: (i) the complete management of the casino; (ii) the sole and unrestricted power to direct the casino operations; and (iii) a term long enough to ensure the reasonable continuity, stability, independence and management of the casino. An investment alternative tax imposed on the gross casino revenues of each licensee in the amount of 2.5% is due and payable on the last day of April next following the end of the calendar year. A licensee is obligated to pay the investment alternative tax for a period of 30 years. Estimated payments of the investment alternative tax obligation must be made quarterly in an amount equal to 1.25% of estimated gross revenues for the preceding three-month period. Investment tax credits may be obtained by the Casino Reinvestment Development Authority ("CRDA"). CRDA bonds have terms as long as 50 years and bear interest at below market rates, resulting in a value lower than the face value of such CRDA bonds. For the first 10 years of its obligation, the licensee is entitled to an investment tax credit against the investment alternative tax in an amount equal to twice the purchase price of the bonds issued to the licensee by the CRDA. Thereafter, the licensee is (i) entitled to an investment tax credit in an amount equal to twice the purchase price of such bonds or twice the amount of its investments authorized in lieu of such bond investments made in projects designated as eligible by the CRDA, and (ii) has the option of entering into a contract with the CRDA to have its tax credit comprised of direct investments in approved eligible projects which may not comprise more than 50% of its eligible tax credit in any one year. From the monies made available to the CRDA, the CRDA is required to set aside $100 million for investment in hotel development projects in Atlantic City undertaken by a licensee which result in the construction or rehabilitation of at least 200 hotel rooms by December 31, 1996 or such later date as extended by the CRDA. These monies will be held to fund up to 27% of the cost to casino licensees of expanding their hotel facilities to provide additional hotel rooms, but in no event may the amount reserved exceed $52,500 per unit, a portion of which will be required to be available to the new Atlantic City convention center and dedicated to convention events. From the monies made available to it, the CRDA shall also set aside an additional $75,000,000 for investment in hotel development projects in Atlantic City. Casino licensees who had approved projects which were not fully funded under the $100,000,000 allotment are first eligible for these funds as long as the approved project has actually and substantially commenced on or before August 31, 1996. Thereafter, any casino licensee is eligible for the remaining funds as long as the application is received by April 1, 1996. The $75,000,000 allotment is subject to the same requirements as the $100,000,000 allotment. On each October 31 during the years 1996 through 2003, each casino licensee must pay into an account established in the CRDA and known as the Atlantic City Fund, its proportional share of an amount related to the amount by which annual operating expenses of the NJCCC and the NJDGE are less than a certain fixed sum. Additionally, a portion of the investment alternative tax obligation of each casino licensee for the years 1994 through 1998 allocated for projects in northern New Jersey is required to be paid into and credited to the Atlantic City Fund. Amounts in the Atlantic City Fund will be expended by the CRDA for economic development projects of a revenue producing nature that foster the redevelopment of Atlantic City, other than the construction and renovation of casino hotels. As of July 1, 1993, there was established a standard minimum parking charge of at least $2.00 per day for the use of a parking space for the purpose of parking, garaging or storing motor vehicles in a parking facility owned or leased by a casino licensee or by any person on behalf of a casino licensee. Of the amount collected by the casino licensee, $1.50 is required to be paid to the New Jersey State Treasurer and paid by the New Jersey State Treasurer into a special fund established and held by the New Jersey State Treasurer for the exclusive use of the CRDA. Amounts in the special fund will be expended by the CRDA for (i) eligible projects in the corridor region of Atlantic City, which projects are related to the improvement of roads, infrastructure, traffic regulation, and public safety, and (ii) funding up to 35% of the cost to casino licensees of expanding their hotel facilities to provide additional hotel rooms, which hotel rooms are required to be available upon the opening of the Atlantic City Convention Center and dedicated to convention events. 23 26 On April 15, 1997, the CRDA approved a funding package for the development of the H-Tract. The funding package consists of the following: (i) a $65 million dollar allocation from the parking fees referred to above of casinos being developed in the H-Tract; and (ii) a $55 million allocation from future CRDA obligations of those casinos. If, at any time, it is determined that a Regulated Company has violated the Casino Control Act, or that any such entity cannot meet the qualification requirements of the Casino Control Act, such entity could be subject to fines or the suspension or revocation of its license or qualification. If a Regulated Company's license is suspended for a period in excess of 120 days or revoked, or upon the failure or refusal to renew a casino license, the NJCCC could appoint a conservator to operate or dispose of such entity's casino hotel facilities. The conservator would be required to act under the direct supervision of the NJCCC and would be charged with the duty of conserving, preserving and, if permitted, continuing the operation of such casino hotel. During the period of true conservatorship, a former or suspended casino licensee is entitled to a fair rate of return out of net earnings, if any, on the property retained by the conservator. The NJCCC may also discontinue any conservatorship action and direct the conservator to take such steps as are necessary to effect an orderly transfer of the property of a former or suspended casino licensee. Casino employees are subject to more stringent requirements than non-casino employees and must meet applicable standards pertaining to financial stability, responsibility, good character, honesty, integrity and New Jersey residency. These requirements have resulted in significant competition among Atlantic City casino operators for the services of qualified employees. Casinos must follow certain procedures which are outlined in the Casino Control Act when granting gaming credit and recording counter checks which have been exchanged, redeemed or consolidated. Gaming debts arising in Atlantic City in accordance with applicable regulations are enforceable in the courts of the State of New Jersey. LOUISIANA The operation and management of riverboat casino facilities in Louisiana are subject to extensive state regulation. The Louisiana Riverboat Economic Development and Gaming Control Act (the "Riverboat Act") became effective on July 19, 1991 and authorized the formation of the Louisiana Riverboat Gaming Commission (the "Commission") and the Riverboat Gaming Enforcement Division of the Louisiana State Police (the "Division"). Both the Commission and the Division, which have since been dissolved, promulgated extensive regulations which controlled riverboat gaming in Louisiana. The Riverboat Act states, among other things, that certain of the policies of the State of Louisiana are to develop a historic riverboat industry that will assist in the growth of the tourism market, to license and supervise the riverboat industry from the period of construction through the actual operation, to regulate the operators, manufacturers, suppliers and distributors of gaming devices and to license all entities involved in the riverboat gaming industry. The Riverboat Act makes it clear, however, that no holder of a license or permit possesses any vested interest in such license or permit and that the license or permit may be revoked at any time. In a special session held in April 1996, the Louisiana legislature passed the Louisiana Gaming Control Act (the "Gaming Control Act") which dissolved both the Commission and the Division and replaced them with the Louisiana Gaming Control Board. Pursuant to the Gaming Control Act, all of the regulatory authority, control and jurisdiction of licensing has now been transferred to the Gaming Control Board. The Gaming Control Board came into existence on May 1, 1996 and is made up of nine members and two ex-officio members (including the Secretary of Revenue and Taxation and the superintendent of Louisiana State Police). It is domiciled in Baton Rouge and regulates riverboat gaming, the land-based casino in New Orleans and video poker. The Attorney General acts as legal counsel to the Gaming Control Board as he did for the Commission. Any material alteration in the method whereby riverboat gaming is regulated in the State of Louisiana could have an adverse effect on the operations of the Treasure Chest. The Louisiana legislature also passed legislation requiring each parish (county) where riverboat gaming is currently authorized to hold an election in order for the voters to decide whether riverboat gaming will 24 27 remain legal in that parish. The Treasure Chest is located in Jefferson Parish, Louisiana. Jefferson Parish approved riverboat gaming at the special election held on November 6, 1996. The Riverboat Act approved the conducting of gaming activities on a riverboat, in accordance with the Riverboat Act, on twelve separate waterways in Louisiana. The Riverboat Act allows the Gaming Control Board to issue up to 15 licenses to operate riverboat gaming projects within the state, with no more than six in any one parish. There are presently 14 licenses issued and 13 riverboats operating. Pursuant to the Riverboat Act and the regulations promulgated thereunder, each applicant which desired to operate a riverboat casino in Louisiana was required to file a number of separate applications for a Certificate of Preliminary Approval, all necessary gaming licenses and a Certificate of Final Approval. No final Certificate was issued without all necessary and proper certificates from all regulatory agencies including the U.S. Coast Guard, the U.S. Army Corps of Engineers, local port authorities and local levee authorities. The Treasure Chest project application for a Certificate of Preliminary Approval was filed by Treasure Chest Casino, L.L.C., the owner of Treasure Chest. Treasure Chest received its Preliminary Certificate in August 1993 and received its license on May 18, 1994. The license is subject to certain general operational conditions and is subject to revocation pursuant to applicable laws and regulations. The Company and certain of its directors and officers and certain key personnel were found suitable by the Division. New directors, officers and certain key employees associated with gaming must also be found suitable by the Gaming Control Board prior to working in gaming-related areas. These approvals may be immediately revoked for a number of causes as determined by the Gaming Control Board. The Gaming Control Board may deny any application for a certificate, permit or license for any cause found to be reasonable by the Gaming Control Board. The Gaming Control Board has the authority to require the Company to sever its relationships with any persons for any cause deemed reasonable by the Division or for the failure of that person to file necessary applications with the Gaming Control Board. The Louisiana riverboat gaming license of Treasure Chest is valid for five years and will expire on May 18, 1999. An application for a one year renewal was filed and, in March 1999, the renewal was conditionally approved by the Louisiana Gaming Control Board for an additional one year period, subject to the completion of the Louisiana State Police's customary suitability investigation. Treasure Chest will apply for one year renewals each year hereafter. In October 1998, a former majority member of Treasure Chest pleaded guilty to conspiracy to commit extortion under the Hobbs Act, 18 U.S.C. 371, in connection with the granting of the original Louisiana gaming license of Treasure Chest. Neither Treasure Chest nor the Company or any of its affiliates or employees have been implicated in any manner in this investigation or prosecution. The Louisiana Gaming Control Board stated that a full and complete investigation into the matter will be undertaken. Additionally, two unsuccessful applicants for riverboat licenses have raised issues concerning the issuance of the Treasure Chest license. In November 1998, Astoria Entertainment, Inc. ("Astoria"), an unsuccessful applicant for a riverboat gaming license in Jefferson Parish, Louisiana, filed two separate lawsuits (one in state court, one in federal court) which named Treasure Chest and the Company as defendants. After the Company filed a motion to dismiss the federal claim, Astoria voluntarily dismissed all claims against the Company and Treasure Chest in the federal actions without prejudice to its right to refile the claims at a later date. The Astoria state court suit is still pending. Also, Alvin C. Copeland ("Copeland"), the sole shareholder of an unsuccessful applicant for the original license that was granted to Treasure Chest, challenged the validity of Treasure Chest's license at the recent Louisiana Gaming Control Board meeting at which the Company received its renewal. Copeland's challenges were based upon several allegations, including the Hobbs Act violation discussed above, alleged licensing process irregularities and alleged improper conduct by the Company. In addition, in 1993, Copeland objected to the granting of Treasure Chest's license through an administrative procedure which was denied by the Louisiana Gaming Control Board. Copeland's appeal of the decision is presently pending in the Louisiana District Court. 25 28 If any of these matters ultimately result in the Treasure Chest license not being renewed, it could have a material adverse effect on the business, financial condition and results of operations of the Company. At any time, the Gaming Control Board may investigate and require the finding of suitability of any beneficial shareholder of the Company. The Gaming Control Board requires all holders of more than a 5% interest in the license holder to submit to suitability requirements. Additionally, if a shareholder who must be found suitable is a corporate or partnership entity, then the shareholders of partners of the entity must also submit to investigation. The sale or transfer of more than a 5% interest in any riverboat project is subject to Gaming Control Board approval. Annual fees are currently charged to each riverboat project as follows: (i) $50,000 per year for the first year and $100,000 for each year thereafter; and (ii) 18.5% of the net gaming proceeds. Additionally, each riverboat must pay to the local government a boarding fee of $2.50 per passenger boarding the vessel. These fees could be increased by the Gaming Control Board. Pursuant to the regulations promulgated by the Division and the Commission (prior to the formation of the Gaming Control Board), all licensees are required to inform the Commission and the Division of all debt, credit, financing and loan transactions, including the identity of debt holders. This practice will be followed with the Gaming Control Board pending the issuance of conflicting regulations. Although the Company is not presently a license holder, its subsidiaries, Boyd Kenner, Boyd Louisiana L.L.C. and Treasure Chest Casino, L.L.C. are licensees and are subject to these regulations. In addition, the Gaming Control Board, in its sole discretion, may require the holders of such debt securities to file applications and obtain suitability certificates from the Gaming Control Board. Although the Riverboat Act does not specifically require debt holders to be licensed or to be found suitable, the Gaming Control Board will retain the discretion to investigate and require that any holders of debt securities be found suitable under the Riverboat Act. Additionally, if the Gaming Control Board finds that any holder exercises a material influence over the gaming operations, a suitability certificate will be required. If the Gaming Control Board determines that a person is unsuitable to own such a security or to hold such an indebtedness, the Gaming Control Board may propose any action which it determines proper and necessary to protect the public interest, including the suspension or revocation of the license. The Gaming Control Board may also, under the penalty of revocation of license, issue a condition of disqualification naming the person(s) and declaring that such person(s) may not: (i) receive dividends or interest in debt or securities; (ii) exercise directly or through a nominee a right conferred by the securities or indebtedness; (iii) receive any remuneration from the licensee; (iv) receive any economic benefit from the licensee; or (v) continue in an ownership or economic interest in a licensee or remain as a manager, director or partner of a licensee. Any violation of the Riverboat Act or the rules promulgated by the Commission, the Division or the Gaming Control Board could result in substantial fines, penalties (including a revocation of the license) and criminal actions. Additionally, all licenses and permits issued by the Commission or the Division are revocable privileges and may be revoked at any time by the Gaming Control Board. 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 Control Act (the "Mississippi Act"), which legalized dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although not identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The Mississippi Commission has 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 26 29 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 law or regulations may limit or otherwise materially affect the types of gaming that may be conducted and could have an adverse effect on the Company and the Company's Mississippi gaming operations. The Mississippi Act provides for legalized dockside gaming at the discretion of the 14 counties that either 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. Certain amendments to the Mississippi Constitution have been proposed for adoption through the initiative and referendum process which, if a sufficient number of signatures are gathered to place the matter on the ballot and if adopted by the voters of the state, would prohibit gaming in Mississippi. See "Mississippi Anti-Gaming Initiatives". As of October 1, 1998, dockside gaming was permissible in nine of the 14 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 of the State of Mississippi lying south of the state in eligible counties along the Mississippi Gulf Coast. The Company's Sam's Town Tunica casino is located on barges situated in a specially constructed basin several hundred feet inland from the Mississippi River. In the recent past, whether basins such as the one in which the Company's barges are located constituted "navigable waters" suitable for gaming under Mississippi law was a controversial issue. The Mississippi Attorney General issued an opinion in July 1993 addressing legal locations for gaming vessels under the Mississippi Act and the Mississippi Commission later approved the location of the barges on the Sam's Town Tunica site as legal under the opinion of the Mississippi Attorney General. Although a competitor requested the Mississippi Commission to review and reconsider its decision, the Mississippi Commission declined to do so and since that date has issued or renewed licenses to Sam's Town Tunica on three separate occasions. The license requires demonstration of compliance with the Mississippi Attorney General's "navigable waters" opinion, a requirement which has been imposed on many licenses for Tunica County gaming projects. The Company believes that the Sam's Town Tunica site is in compliance with the Mississippi Act and the Mississippi Attorney General's "navigable waters" opinion. However, no assurance can be given that a court would ultimately conclude that a site constitutes navigable waters within the meaning of Mississippi law. If the basin in which the Company's barges are presently located were not deemed navigable waters within the meaning of Mississippi law, there would be a material adverse effect on the Company and Sam's Town Tunica's business, financial condition and results of operations. The Mississippi Act 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. 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 that decision to the Mississippi Supreme Court and a decision is expected in the near future. The Company and its Mississippi licensee are subject to the licensing and regulatory control of the Mississippi Commission. The Company is registered under the Mississippi Act as the publicly traded holding company of its Mississippi licensee. Each is required periodically to submit detailed financial and operating reports to the Mississippi 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 affiliates cannot own or operate gaming facilities in Mississippi. The Company's Mississippi licensee 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. There are no limitations on the number of gaming licenses which may be issued in Mississippi. Gaming licenses are not 27 30 transferable, are issued for a two-year period and must be renewed periodically thereafter. Sam's Town Tunica's gaming license expires in December of 1999. No person may become a stockholder of or receive any percentage of profits from a licensed subsidiary of a holding company without first obtaining licenses and approvals from the Mississippi Commission. The Company has obtained such approvals in connection with its registration with the Mississippi Commission as a holding company. Certain officers and employees of the Company and the officers, directors and certain key employees of the Company's licensed Mississippi subsidiary must be found suitable or be licensed by the Mississippi Commission. The Company believes it has obtained, applied for or is in the process of applying for all necessary findings of suitability with respect to such persons, 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 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 any 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 Company and its registered or licensed subsidiaries 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 will 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 shareholder 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 generally has 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, the Mississippi Commission has adopted a policy that permits certain institutional investors to own beneficially up to 10% of a registered public company's common stock without a finding of suitability. 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 licensed 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 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 28 31 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 debt or other securities. In addition, under the Mississippi Act the Mississippi Commission may, in its discretion, (i) require holders of debt securities of registered corporations to file applications, (ii) investigate such holders, and (iii) require such holders to be found suitable to own such debt securities or receive distributions thereon. 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 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 Company's Mississippi licensed subsidiary must maintain in Mississippi a current ledger with respect to the ownership of its equity securities and the Company must maintain in the offices of the Company's Mississippi licensed subsidiary a current list of stockholders of the Company which must reflect the record ownership of each outstanding share of any 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 identify of the beneficial owner. The Mississippi Act requires that the certificates representing securities of a registered 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 an exemption 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 a licensed gaming subsidiary must be reported to or approved by the Mississippi Commission. A licensed 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 affiliated 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 the 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 29 32 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 stockholders 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 Company will be required to obtain the approval or a waiver of such approval from the Mississippi Commission prior to engaging in any additional future gaming operations outside of Mississippi. If the Mississippi Commission decided that the Company's licensed gaming subsidiary violated a gaming law or regulation, the Mississippi Commission could limit, condition, suspend or revoke the license of the subsidiary, subject to compliance with certain statutory and regulatory procedures. In addition, the licensed 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) have a material adverse effect upon the Company's business, financial condition and 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 a licensed gaming subsidiary's respective 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 (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 payouts 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 Company's Mississippi income tax liability for the year paid. The gross revenue fee imposed by Tunica County in which the Company's casino operations are located equals approximately 4% of the gaming receipts. The Mississippi Commission has adopted a regulation requiring as a condition of licensure that a new gaming establishment's plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities which will amount to at least 100% of the casino cost. Recently, the Mississippi Commission adopted an amendment which would increase the infrastructure requirement to 100% from the existing 25%; however, the increase will apply only to new casino projects and casinos that are not operating at the time of acquisition or purchase. Management of the Company believes that its Mississippi gaming licensee is in compliance with the previously existing requirement and will not be subject to the new regulation. 30 33 The sale of alcoholic beverages by the Company's licensed subsidiary is subject to the licensing, control and regulation by both the local jurisdiction and the Alcoholic Beverage Control Division (the "ABC") of the Mississippi State Tax Commission. The Company's Mississippi casino is in an area designated as special resort area, which allows the casinos to serve alcoholic beverages on a 24-hour basis. The ABC has the full power to limit, condition, suspend or revoke any license for the serving of alcoholic beverages or to place such a licensee on probation with or without conditions. Any such disciplinary action could (and revocation would) have a material adverse effect upon the Company's business, financial condition and results of operations. Certain officers and managers of the Company's and the casino must be investigated by the ABC in connection with its liquor permits and changes in certain positions must be approved by the ABC. In Mississippi, 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. 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 to place such a proposal on the ballot would be in November 2000. It is likely at some point that a revised initiative will be filed which will adequately address the issues regarding the effect on government revenues of a 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 material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL RISKS The Company is subject to certain federal, state and local environmental, safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental, safety and health laws, regulations and ordinances. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in future additional costs to the Company's operations. Any significant environmental liability or compliance costs could have a material adverse effect on the Company's business, financial condition and results of operations. REGULATION OF RIVERBOATS The riverboats operated by the Company must comply with U.S. Coast Guard requirements as to boat design, on-board facilities, equipment, personnel and safety. Each of them must hold a Certificate of Seaworthiness or must be approved by the American Bureau of Shipping ("ABS") for stabilization and flotation, and may also be subject to local zoning and building codes. The U.S. Coast Guard requirements establish design standards, set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessels. Loss of a vessel's Certificate of Seaworthiness or ABS approval would preclude its use as a floating casino. In addition, U.S. Coast Guard regulations require a hull inspection at a U.S. Coast Guard-approved dry docking facility for all cruising riverboats at five-year intervals. The travel to and from such docking facility, as well as the time required for inspections of the Treasure Chest and Par-A-Dice riverboats, could be significant. The loss of a dockside casino or riverboat casino from service for any period of time could adversely affect the Company's business, financial condition and results of operations. 31 34 CONTROL BY BOYD FAMILY William S. Boyd, Chairman and Chief Executive Officer of the Company, together with his immediate family, beneficially own approximately 50% of the outstanding shares of Common Stock of the Company as of December 31, 1998. As a result, the Boyd family has the ability to significantly influence the affairs of the Company, including the election of all of the directors of the Company and, except as otherwise provided by law, approving or disapproving other matters submitted to a vote of the Company's stockholders, including a merger, consolidation or sale of assets. MANAGEMENT AGREEMENT OF LIMITED DURATION The management agreement for Silver Star, which is owned by the Mississippi Band of Choctaw Indians, expires in June 2001. The Company must submit any renewal of the management agreement to the NIGC, which has the right to review management agreements. There can be no assurance that the current management agreement will be renewed upon expiration or approved by the NIGC upon any such review. The failure to renew the Company's management agreement would result in the loss of revenues to the Company derived from the Silver Star management agreement, which could have a material adverse effect on the Company. The NIGC also has the authority to reduce the term of a management agreement or the management fee or otherwise require modification of the agreement, which could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON CERTAIN MARKETS The California, Fremont and Main Street Station derive a substantial portion of their customers from the Hawaiian market. During the fiscal year ended December 31, 1998, patrons from Hawaii comprised approximately 67% of the room nights at the California, 55% at the Fremont and 39% at Main Street Station. An increase in fuel costs or transportation prices, a decrease in airplane seat availability or a deterioration of relations with tour and travel agents, as they affect travel between the Hawaiian market and the Company's facilities, could adversely affect the Company's business, financial condition and results of operations. The Company's Las Vegas properties also draw a substantial number of customers from certain other specific geographic areas, including Southern California, Arizona, Las Vegas and the Midwest. The California electorate approved Proposition 5 in November 1998. Proposition 5 if implemented, would give all California Indian tribes the right to operate an unlimited number of certain kinds of gaming machines and other forms of casino wagering on California Indian reservations. Legal challenges to Proposition 5 have been filed that may delay or prevent its implementation. If implemented, Proposition 5 may negatively affect Nevada gaming markets. Management is unable, however, to assess the magnitude of the impact to the Company. Sam's Town Tunica draws patrons from northern Mississippi, western Tennessee (principally Memphis) and Arkansas. Treasure Chest appeals primarily to local market patrons and attracts patrons from the western suburbs of New Orleans. Silver Star draws customers from central Mississippi, including the greater Jackson area, and central Alabama, including Birmingham, Montgomery and Tuscaloosa. Par-A-Dice draws customers not only from the greater Peoria area but also from Chicago, Indiana, Iowa and Missouri. Adverse economic conditions in any of these markets, or the failure of the Company's facilities to continue to attract customers from these geographic markets as a result of increased competition in those markets, could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES At December 31, 1998, the Company employed approximately 15,000 persons. On such date, the Company had collective bargaining relationships with eleven unions covering approximately 2,500 employees, substantially all of whom are employed at the Stardust, the Fremont and Main Street Station. Several collective bargaining agreements are currently in effect; other agreements have expired and are in various stages of negotiation. Employees covered by expired agreements have continued to work during the negotiations, in some cases under the terms of the expired agreements and in others under modifications thereof. 32 35 YEAR 2000 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Project." ITEM 2. PROPERTIES The following table sets forth certain information regarding the properties owned or operated by the Company as of December 31, 1998. YEAR BUILT CASINO SPACE SLOT TABLE HOTEL LAND OR ACQUIRED (SQ. FT.) MACHINES GAMES ROOMS RESTAURANTS (ACRES) ----------- ------------ -------- ----- ----- ----------- ------- LAS VEGAS STRIP Stardust Resort and Casino................. 1985 87,000 1,958 79 2,112 6 61 BOULDER STRIP Sam's Town Las Vegas....................... 1979 118,000 2,884 52 642 12 63 Eldorado Casino............................ 1993 16,000 599 11 -- 3 4 Jokers Wild Casino......................... 1993 22,500 625 11 -- 2 13 DOWNTOWN LAS VEGAS California Hotel and Casino................ 1975 36,000 1,108 35 781 5 16 Fremont Hotel and Casino................... 1985 32,000 1,031 28 447 5 2 Main Street Station Casino, Brewery and Hotel................................ 1993 28,500 905 22 406 4 15 CENTRAL REGION Sam's Town Tunica.......................... 1994 75,000 1,715 72 843 5 150 Silver Star Resort and Casino.............. 1994 90,000 2,955 96 505 6 20 Treasure Chest Casino...................... 1994 24,000 951 55 -- 4 -- Par-A-Dice Hotel and Casino................ 1996 33,000 1,062 36 208 3 19 ------- ------ --- ----- -- --- Total.............................. 562,000 15,793 497 5,944 55 363 ======= ====== === ===== == === ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. Except for the Astoria and Copeland matters, in the opinion of management, all pending claims in such matters, if adversely decided, would not have a material adverse effect on the Company's financial position or results of operations. See "Item 1 -- Investment Considerations -- Governmental Gaming Regulation -- Louisiana" for a discussion regarding each of the pending Astoria and Copeland matters. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 33 36 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the non-director executive officers of Boyd Gaming Corporation as of February 26, 1999: NAME AGE POSITION ---- --- -------- Ellis Landau................... 55 Executive Vice President, Chief Financial Officer and Treasurer Keith E. Smith................. 38 Executive Vice President -- Operations James W. Hippler............... 52 Senior Vice President -- Administration Brian A. Larson................ 43 Senior Vice President and General Counsel Charles E. Huff................ 53 Vice President, Secretary and Senior Gaming Counsel ELLIS LANDAU has been Executive Vice President since January 1997 and Senior Vice President, Chief Financial Officer and Treasurer of the Company since August 1990. From April 1990 through July 1990, he served as a consultant to the Company. KEITH E. SMITH became Executive Vice President -- Operations in May 1998. Mr. Smith joined the Company in September 1990 serving in various controllership positions, the last of which was Senior Vice President and Controller. JAMES W. HIPPLER has been Senior Vice President -- Administration of the Company since April 1990. From 1980 to 1990, Mr. Hippler held various positions with CH&C, including Director of Risk Management, Director of Internal Audit and Director of Human Resources. BRIAN A. LARSON became Senior Vice President and General Counsel in January 1998. He became Vice President -- Development of the Company in June 1993 and Assistant Secretary in August 1993. He has also served as Associate General Counsel of the Company since March 1993. CHARLES E. HUFF has been Vice President and Secretary of the Company since its inception and became Senior Gaming Counsel in January 1998. He has served as Vice President and General Counsel of CH&C since July 1986 and Secretary since January 1988. 34 37 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange under the symbol "BYD." Information with respect to sales prices and record holders of the Company's Common Stock is set forth below: PRICE RANGE OF COMMON STOCK The following table sets forth, for the calendar quarters indicated, the high and low sales prices of the Common Stock as reported on the NYSE Composite Tape. HIGH LOW ---- ---- 1996 First Quarter........................................... 12 7/8 10 3/4 Second Quarter.......................................... 17 3/8 11 1/8 Third Quarter........................................... 15 1/2 9 3/8 Fourth Quarter.......................................... 9 1/4 7 1/8 1997 First Quarter........................................... 8 5/8 5 3/8 Second Quarter.......................................... 6 1/8 5 3/8 Third Quarter........................................... 9 1/4 5 Fourth Quarter.......................................... 9 1/4 6 5/8 1998 First Quarter........................................... 8 3/8 5 1/2 Second Quarter.......................................... 7 5/16 5 11/16 Third Quarter........................................... 6 7/16 3 1/2 Fourth Quarter.......................................... 4 1/2 2 1/2 1999 First Quarter (through February 26, 1999)............... 4 5/8 3 1/16 On February 26, 1999, the closing sales price of the Common Stock on the NYSE was $4.13 per share. On that date, the Company had approximately 2,550 holders of record of its Common Stock. The Company has not paid any cash dividends on its Common Stock to date. The Company currently anticipates that it will retain future earnings to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. Restrictions imposed by commercial lenders and note holders may also limit the ability of the Company to pay cash dividends. 35 38 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below as of December 31, 1998 and 1997 and for the fiscal year ended December 31, 1998, the six month period ended December 31, 1997 and for the fiscal years ended June 30, 1997 and 1996, have been derived from the audited consolidated financial statements contained elsewhere in this Form 10-K. The selected consolidated financial data presented below as of June 30, 1997 and 1996 and as of and for the fiscal years ended June 30, 1995 and 1994 have been derived from audited consolidated financial statements of the Company not contained herein. Operating results for the periods presented below are not necessarily indicative of the results that may be expected for future years. Effective July 1, 1997, the Company changed its fiscal year from a June 30 year end to a December 31 year end. SIX MONTH YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------------------------- 1998 1997 1997 1996 1995 1994 ------------ ------------ -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA Net revenues........................................ $975,096 $455,771 $819,259 $775,857 $660,340 $468,219 Operating expense(a)................................ 851,408 397,625 863,685 675,071 549,770 413,971 -------- -------- -------- -------- -------- -------- Operating income (loss)............................. 123,688 58,146 (44,426) 100,786 110,570 54,248 Interest expense, net(b)............................ 73,797 37,310 61,022 51,186 46,371 36,093 Income (loss) before provision (benefit) for income taxes, cumulative effect of a change in accounting principle and extraordinary items................. 49,891 20,836 (105,448) 49,600 64,199 18,155 Provision (benefit) for income taxes................ 21,291 8,736 (34,025) 20,021 27,950 7,505 -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle and extraordinary items... 28,600 12,100 (71,423) 29,579 36,249 10,650 Cumulative effect of a change in accounting for income taxes...................................... -- -- -- -- -- 2,035 -------- -------- -------- -------- -------- -------- Income (loss) before extraordinary items............ 28,600 12,100 (71,423) 29,579 36,249 12,685 Extraordinary items, net of tax..................... -- 7,240 6,069 1,435 -- -- -------- -------- -------- -------- -------- -------- Net income (loss)................................... 28,600 4,860 (77,492) 28,144 36,249 12,685 Dividends on preferred stock........................ -- -- -- -- -- 467 -------- -------- -------- -------- -------- -------- Net income (loss) applicable to common stock........ $ 28,600 $ 4,860 $(77,492) $ 28,144 $ 36,249 $ 12,218 ======== ======== ======== ======== ======== ======== PER SHARE DATA Basic and diluted net income (loss) per common share: Income (loss) before cumulative effect of a change in accounting principle and extraordinary items........................................... $ 0.46 $ 0.20 $ (1.19) $ 0.52 $ 0.64 $ 0.19 Cumulative effect of a change in accounting for income taxes.................................... -- -- -- -- -- 0.04 Extraordinary items............................... -- (0.12) (0.10) (0.03) -- -- -------- -------- -------- -------- -------- -------- Net income (loss)................................. $ 0.46 $ 0.08 $ (1.29) $ 0.49 $ 0.64 $ 0.23 ======== ======== ======== ======== ======== ======== Dividends on Common Stock......................... -- -- -- -- -- -- Weighted average common shares: Basic........................................... 61,749 61,525 60,248 57,058 56,870 54,297 Diluted......................................... 61,850 61,786 60,248 57,058 56,870 54,297 OTHER OPERATING DATA Depreciation and amortization....................... $ 73,407 $ 35,097 $ 67,242 $ 60,626 $ 54,518 $ 42,136 Preopening expense.................................. -- -- 3,481 10,004 -- 4,605 Capital expenditures................................ 70,848 17,816 99,207 90,977 183,299 326,829 DECEMBER 31, JUNE 30, ------------------------ ---------------------------------------------- 1998 1997 1997 1996 1995 1994 ---------- ---------- ---------- -------- -------- -------- BALANCE SHEET DATA Total assets............................... $1,146,256 $1,152,415 $1,030,185 $953,425 $949,513 $836,297 Long-term debt (excluding current maturities).............................. 774,890 842,932 739,792 590,808 587,957 525,637 Stockholders' equity....................... $ 227,306 $ 197,141 $ 191,316 $233,257 $202,613 $164,405 - --------------- (a) Includes $5,925 and $131,339 of impairment and restructuring charges recorded during the years ended December 31, 1998 and June 30, 1997, respectively. See Note 3 to Notes to Consolidated Financial Statements. (b) Net of interest income and amounts capitalized. 36 39 ITEM 7. 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 the Jokers Wild; "Downtown Properties" consist of the California, the Fremont, Main Street Station (opened November 1996) and Vacations Hawaii (acquired October 1995), the Company's wholly-owned travel agency which operates for the benefit of the Downtown casino properties; and "Central Region Properties" consists of Sam's Town Tunica, Sam's Town Kansas City (opened September 1995 and closed in July 1998), Par-A-Dice (acquired December 1996), management fee income from the Silver Star, and management fee and joint venture income from the Treasure Chest 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 Consolidated Statements of Operations. Operating income from properties for the purpose of this table excludes corporate expense, including related depreciation and amortization, preopening expense and impairment and restructuring charges. TWELVE MONTH SIX MONTHS ENDED FISCAL YEAR ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, JUNE 30, DECEMBER 31, DECEMBER 31, ----------------------- -------------------- 1998 1997 1997 1996 1997 1996 ------------ ------------ -------- ----------- -------- -------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) Net revenues Stardust................. $162,628 $172,723 $ 83,626 $ 91,290 $180,387 $194,513 Boulder Strip Properties............. 192,021 189,666 93,419 96,757 193,004 189,315 Downtown Properties(a)... 207,510 187,020 96,369 76,679 167,330 146,825 Central Region Properties............. 412,937 341,463 182,357 119,432 278,538 245,204 -------- -------- -------- -------- -------- -------- Total properties...... $975,096 $890,872 $455,771 $384,158 $819,259 $775,857 ======== ======== ======== ======== ======== ======== Operating income Stardust................. $ 10,326 $ 17,725 $ 6,981 $ 8,342 $ 19,086 $ 30,748 Boulder Strip Properties............. 24,690 25,812 10,464 11,419 26,766 23,904 Downtown Properties...... 13,390 4,715 1,574 5,623(b) 8,763(b) 17,431 Central Region Properties............. 102,932(c) 90,496(c) 49,343 21,781 62,935(c) 66,683(b) -------- -------- -------- -------- -------- -------- Total properties...... $151,338 $138,748 $ 68,362 $ 47,165 $117,550 $138,766 ======== ======== ======== ======== ======== ======== - --------------- (a) Includes revenues related to Vacations Hawaii, a Honolulu Travel Agency, of $32,341 and $27,240, respectively for the year ended December 31, 1998 and the twelve month period ended December 31, 1997, $16,420 and $6,102, respectively, for the six month periods ended December 31, 1997 and 1996, and $16,922 and $7,222, respectively, for the fiscal years ended June 30, 1997 and 1996. (b) Before preopening expense. (c) Before impairment and restructuring charges. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1997 REVENUES Consolidated net revenues increased 9.5% during the year ended December 31, 1998 compared to the twelve month period ended December 31, 1997. Company-wide casino revenue increased 14.8%, food and beverage revenue declined 1.8% and room revenue declined 9.2%. Net revenues from the Stardust, Boulder Strip Properties and Downtown Properties (the "Nevada Region") increased 2.3% during 1998 compared to the twelve month period ended December 31, 1997 due to an 11.0% increase in net revenues from the Downtown Properties, partially offset by a decline of 5.8% in net revenues at the Stardust that is primarily attributable to the competitive environment on the Las Vegas Strip. Net revenues on the Boulder Strip for 37 40 1998 increased slightly (1.2%) compared to the twelve month period ended December 31, 1997. Net revenues in the Central Region increased 21% during the year ended December 31, 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 55% 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 For the year ended December 31, 1998, consolidated operating income before impairment and restructuring charges increased by 14.1% to $130 million compared to $114 million in the twelve month period ended December 31, 1997. Operating income in the Nevada Region remained virtually unchanged as the gains experienced at the Downtown Properties were nearly offset by reductions in operating income at the Stardust as a result of the competitive environment on the Las Vegas Strip. In the Central Region, operating income increased 13.7% due primarily to the October 1997 acquisition of Treasure Chest and the reduction of operating loss at Sam's Town Kansas City due to the closure of the property in July 1998. This operating income increase was partially offset by the decline experienced at Sam's Town Tunica as a result of the increased competition in the Tunica gaming market. STARDUST For the year ended December 31, 1998, net revenues at the Stardust declined by 5.8% versus the prior year. Casino revenue declined by 1.7% due primarily to a decline in slot and table game wagering. Non-gaming revenues declined 13.0% due to a 10.7% decline in the number of occupied rooms. The decline in the number of occupied rooms is attributable in part to competitive factors and in part to a $9 million suite remodel project which reduced the number of available rooms by 8.1% during 1998. Operating income declined by 42% or $7.4 million during 1998 compared to the twelve month period ended December 31, 1997. Operating income margin declined to 6.3% during 1998 from 10.3% during the same period in the prior year. 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 slightly (1.2%) during the year ended December 31, 1998 compared to the twelve month period ended December 31, 1997. Casino revenue increased 4.4% due primarily to an increase in slot win percentage. Food and beverage revenue and room revenue declined by 7.9% and 9.2%, respectively, from 1997. The decline in room revenue is primarily attributable to a decrease in average daily room rates at Sam's Town Las Vegas. During 1998, operating income at the Boulder Strip Properties declined 4.3% or $1.1 million versus the same period in the prior year. Operating income margin declined to 12.9% for 1998 compared to 13.6% for the twelve month period ended December 31, 1997. The decline in operating income and margin is primarily attributable to an increase in marketing expense for 1998 as compared to the same period in the prior year. DOWNTOWN PROPERTIES Net revenues at the Downtown Properties increased 11.0% during 1998 compared to the twelve month period ended December 31, 1997. Casino revenue increased 12.2% due primarily to increased slot wagering volumes at each of the Downtown casino properties. Non-gaming revenues at the Downtown Properties increased 3.3% during 1998 versus the same period in the prior year due to increases in both food and beverage revenue and room revenue. Operating income at the Downtown Properties increased $8.7 million or 184% during 1998 compared to the twelve month period ended December 31, 1997 because of improvements in operating income at the California, the Fremont and Vacations Hawaii, as well as a decrease in the operating loss at Main Street. Operating income margin increased to 6.5% during 1998 versus 2.5% during the twelve month period ended December 31, 1997. These increases are primarily attributable to the implementation of 38 41 various marketing programs to enhance operating volumes, as well as the coordination of support functions and standardized operating procedures and systems at the Downtown Properties. CENTRAL REGION Net revenues from the Central Region increased 21% during 1998 compared to the twelve month period ended December 31, 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 5.7% increase in management fees from Silver Star. Treasure Chest produced net revenues for the Company of $124 million during 1998 versus $26 million during the prior year. 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 consolidated statements of operations. The increases in net revenues were partially offset by a 55% 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 4.5% 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 1998 compared to the prior year. Operating income for the Central Region increased to $103 million during 1998 from $90 million during the twelve month period ended December 31, 1997 due primarily to the acquisition of Treasure Chest and the reduction of operating loss at Sam's Town Kansas City due to the closure of the property in July 1998. This operating income increase was 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 expected this trend to continue and, therefore, did not expect to recover its investment in this entity. OTHER EXPENSES Depreciation and amortization expense increased by $1.9 million during 1998 compared to the twelve month period ended December 31, 1997 due primarily 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. OTHER INCOME (EXPENSE) Other income and expense is primarily comprised of interest expense. Interest expense increased by $2.0 million during 1998 compared to the twelve month period ended December 31, 1997. This increase is 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 floating rate debt. 39 42 PROVISION (BENEFIT) FOR INCOME TAXES The Company's effective tax rates were 43% and (30%), respectively during 1998 and the twelve month period ended December 31, 1997. The fluctuation in the rates during 1998 and the prior year is primarily attributable to the impairment loss recorded during the quarter ended March 31, 1997. EXTRAORDINARY ITEM The Company recorded an extraordinary loss of $7.2 million, net of tax, during the twelve month period ended December 31, 1997 related to the early redemption of the Company's $185 million, 11% Notes in December 1997. There were no such items recorded during the year ended December 31, 1998. NET INCOME (LOSS) As a result of these factors, the Company reported net income of $28.6 million during 1998 compared to a net loss of $69.4 million during the twelve month period ended December 31, 1997. SIX MONTH PERIOD ENDED DECEMBER 31, 1997 COMPARED TO THE SIX MONTH PERIOD ENDED DECEMBER 31, 1996 REVENUES Consolidated net revenues increased 18.6% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996. Company-wide casino revenue increased 20.7%, food and beverage revenue increased 4.4% and room revenue increased 14.8%. Net revenues from the Nevada Region increased 3.3% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996 primarily as a result of the opening of Main Street Station in November 1996, and enhanced utilization of the Company's wholly-owned travel agency, Vacations Hawaii. These increases were partially offset by declines in net revenues experienced principally at the Stardust (8.4%), the Fremont (14.2%), and Sam's Town Las Vegas (4.4%). Net revenues in the Central Region increased 52.7% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996 primarily as a result of the acquisitions of Par-A-Dice in December 1996 and Treasure Chest in October 1997, as well as a 15.3% increase in net revenues at Sam's Town Tunica. These increases were partially offset by a 39.9% decline in net revenues experienced at Sam's Town Kansas City. The decline in net revenues at those properties which were included as part of the Company's consolidated operations for the full six months in the periods ended December 1997 and 1996 (excludes Par-A-Dice, Treasure Chest, Main Street Station and Vacations Hawaii) is attributable, in each case, to increased competition. In addition, the Fremont was adversely impacted by construction disruption during the six month period ended December 31, 1997. OPERATING INCOME Consolidated operating income before preopening expense increased by 66.3% from $35.0 million during the six month period ended December 31, 1996 to $58.1 million during the six month period ended December 31, 1997. Operating income in the Nevada Region declined 25.1% due to declines experienced at the Stardust, Boulder Strip and Downtown Properties. In the Central Region, operating income increased 127% due primarily to the acquisitions of Par-A-Dice in December 1996 and Treasure Chest in October 1997, as well as gains experienced at each of the other Central Region Properties. STARDUST Net revenues at the Stardust declined by 8.4% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996 due to increased competition on the Las Vegas Strip. The majority of the decline is attributable to a 8.2% reduction in casino revenue, as a result of a decline in slot and table game wagering. In addition, food and beverage revenue also declined by approximately 11.2% due to a decline in the number of food guests. Operating income declined by 16.3% to $7.0 million during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996, and operating income margin declined to 8.3% during the six month period ended December 31, 1997 from 9.1% 40 43 during the six month period ended December 31, 1996. These declines in operating income and operating income margin are primarily the result of the decline in net revenues. BOULDER STRIP PROPERTIES Net revenues at the Boulder Strip Properties decreased 3.4% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996 due to increased competition on the Boulder Strip. Casino revenue declined by 1.8% primarily as a result of a decrease in table game wagering volume. Room revenue and food and beverage revenue decreased 6.9% and 9.2%, respectively, over the prior period levels. The decline in room revenue is primarily attributable to a decrease in average daily room rates at Sam's Town Las Vegas. Operating income margin at the Boulder Strip Properties decreased from 11.8% during the six month period ended December 31, 1996 to 11.2% during the six month period ended December 31, 1997, due to the decrease in net revenues. DOWNTOWN PROPERTIES Net revenues at the Downtown Properties increased 25.7% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996. The increase is attributable to the November 1996 opening of Main Street Station as well as increased revenues from Vacations Hawaii. (Hawaiian customers comprise a significant portion of the available room nights at the three downtown casino properties. See "Business -- Properties"). These increases in net revenues were partially offset by declines in net revenues at the Fremont and California of 14.2% and 3.5%, respectively. The decline in net revenues at the Fremont is primarily attributable to a rooms remodel project which began in July 1997 and was substantially complete by the end of calendar 1997. Aggregate operating income for the Downtown Properties decreased from $5.6 million (before preopening expense) during the six month period ended December 31, 1996 to $1.6 million during the comparable period in 1997. The decrease is mainly attributable to the Fremont, which posted operating income of $.6 million during the six month period ended December 31, 1997 compared to $3.3 million during the six month period ended December 31, 1996 due primarily to the rooms remodel project discussed above. In addition, Main Street Station's operating loss (before preopening expense) increased from $.4 million during the six month period ended December 31, 1996 to $2.6 million during the six month period ended December 31, 1997. CENTRAL REGION Net revenues from the Central Region increased 52.7% during the six month period ended December 31, 1997 compared to the six month period ended December 31, 1996. The majority of the increase is attributable to the acquisition of Par-A-Dice on December 4, 1996 and the acquisition of the remaining interest in Treasure Chest on October 27, 1997. Par-A-Dice generated $54.2 million in net revenues during the six month period ended December 31, 1997 compared to $7.5 million during the six month period ended December 31, 1996, and Treasure Chest produced net revenues of $22.6 million during the six month period ended December 31, 1997 compared to $3.0 million during the six month period ended December 31, 1996. 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 operations of that property are now included in the Company's consolidated statement of operations. In addition, Sam's Town Tunica experienced a 15.3% increase in net revenues during the six month period ended December 31, 1997 versus the comparable period in 1996 due to the addition of a 350-room hotel tower and 1,000 space parking garage in December 1996. These increases in net revenues during the December 31, 1997 period were partially offset by a 39.9% decline in net revenues at Sam's Town Kansas City due to increased market competition. Operating income and operating margin for the Central Region increased to $49.3 million and 27.1%, respectively, during the six month period ended December 31, 1997 from $21.8 million and 18.2%, respectively, during the comparable period in 1996. These increases are due to the acquisitions of Par-A-Dice and Treasure Chest, as well as an increase of 101% in operating income from Sam's Town Tunica and a 44.2% reduction in the operating loss at Sam's Town Kansas City. In addition, management fee income from Silver Star increased 7.7% during the six month period ended December 31, 1997 versus the comparable period in 41 44 1996. This increase is due to the completion of a guest room expansion project and a golf course project in July 1997. OTHER EXPENSES Depreciation and amortization expense increased by $4.3 million during the six month period ended December 31, 1997 versus the comparable period in 1996 due to the increased levels of property and equipment in service, as well as an increase in intangible assets related to the acquisitions of Par-A-Dice in December 1996 and Treasure Chest in October 1997. Corporate expenses declined from $10.7 million during the six month period ended December 31, 1996 to $9.1 million during the comparable period in 1997. The decline is primarily attributable to a reduction in development related expenses. During the six month period ended December 31, 1996, the Company recorded a preopening charge of $3.5 million upon the opening of Main Street Station. No preopening costs were incurred during the six month period ended December 31, 1997. OTHER INCOME (EXPENSE) Other income and expense is primarily comprised of interest expense, net of amounts capitalized. Interest expense increased by $10.5 million during the six month period ended December 31, 1997 compared to the corresponding period in 1996. The increase is attributable to higher levels of debt outstanding due to, among other things, the December 1996 acquisition of Par-A-Dice for approximately $171 million, the October 1997 acquisition of Treasure Chest for approximately $117 million, the major renovation and expansion of Main Street Station and the addition of a 350-room hotel tower and 1,000 space parking garage at Sam's Town Tunica. In addition, the Company capitalized $3.0 million in interest costs during the six month period ended December 31, 1996 related to the renovation and expansion of Main Street Station and Sam's Town Tunica. There were no such costs capitalized during the comparable period in 1997. PROVISION FOR INCOME TAXES The Company's effective tax rate was 41.9% and 40.0%, respectively, for the six month periods ended December 31, 1997 and 1996. The fluctuation in the rates 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 a state income tax. EXTRAORDINARY ITEMS The Company recorded an extraordinary loss of $7.2 million, net of tax, during the six month period ended December 31, 1997 related to the early redemption of the Company's $185 million, 11% Notes in December 1997. In addition, in connection with the early redemption of the Company's $150 million, 10.75% Notes in October 1996, the Company recognized an extraordinary loss of $6.1 million, net of tax, during the six month period ended December 31, 1996. NET INCOME As a result of these factors, the Company reported net income of $4.9 million during the six month period ended December 31, 1997 compared to a net loss of $3.2 million during the six month period ended December 31, 1996. Effective July 1, 1997, the Company changed its fiscal year from a June 30 year end to a December 31 year end. As such, fiscal year, as defined in the following sections for the fiscal years 1997 and 1996 is the period beginning on July 1 and ending on June 30. 42 45 FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1996 REVENUES Consolidated net revenues increased 5.6% during fiscal 1997 compared to fiscal 1996. Company-wide casino revenue increased 4.7%, food and beverage revenue increased 6.2% and room revenue increased 5.8%. Net revenues in the Nevada Region increased 1.9% in fiscal 1997 compared to fiscal 1996 primarily as a result of the opening of Main Street Station in November 1996, as well as a full year of operations and enhanced utilization of the Company's wholly-owned travel agency, Vacations Hawaii. These increases were partially offset by declines in net revenues experienced principally at the Stardust (7.3%) and the California (13.1%). Net revenues in the Central Region increased 13.6% in fiscal 1997 compared to fiscal 1996 primarily as a result of the acquisition of Par-A-Dice in December 1996, partially offset by declines in net revenues experienced at Sam's Town Tunica (13.8%) and Sam's Town Kansas City (12.9%). The decline in net revenues at those properties which were in operation for the full 12 months of fiscal 1997 and 1996 (excludes Par-A-Dice, Main Street Station, Vacations Hawaii and Sam's Town Kansas City) is attributable, in each case, to increased competition. In addition, Sam's Town Tunica and the California were each adversely impacted by construction disruption during the first part of fiscal 1997. OPERATING INCOME (LOSS) Consolidated operating loss was $44.4 million during fiscal 1997 compared to consolidated operating income of $100.8 million in fiscal 1996. The majority of the decline in consolidated operating income was the result of $131 million in impairment losses recorded during fiscal 1997, primarily related to the write-down of certain fixed and intangible assets in the Missouri gaming market to fair value. See further discussion under Impairment Losses. Consolidated operating income before impairment loss and preopening expense declined by 18.4% from $110.8 million in fiscal 1996 to $90.4 million in fiscal 1997, while consolidated operating margins declined from 14.3% to 11.0%, respectively. Operating income in the Nevada Region declined 24.2% due to declines experienced at the Stardust and Downtown Properties, partially offset by an increase in operating income at the Boulder Strip Properties. In the Central Region, operating income declined by 19.6% as a result of declines experienced at Sam's Town Tunica and Sam's Town Kansas City, offset by operating income from Par-A-Dice (acquired December 1996). Management fee and joint venture income from Silver Star and Treasure Chest operating income increased 2.8% in fiscal 1997 versus fiscal 1996. STARDUST Net revenues at the Stardust declined by 7.3% during fiscal 1997 compared to fiscal 1996 due to increased competition on the Las Vegas Strip. The majority of the decline is attributable to an 8.5% reduction in casino revenue, as a result of a decline in slot wagering and a lower win percentage in the sports book partially offset by increased wagering. Revenues from room, food and beverage also declined by approximately 6.2% during the fiscal year due to a decline in the number of occupied rooms and food covers. Operating income declined by 37.9% to $19.1 million in fiscal 1997 compared to fiscal 1996, and operating income margin declined from 15.8% in fiscal 1996 to 10.6% in fiscal 1997. These declines in operating income and operating income margin are primarily the result of the decline in revenues. BOULDER STRIP PROPERTIES Net revenues at the Boulder Strip Properties increased 1.9% during fiscal 1997 compared to fiscal 1996. The increase is primarily attributable to a 2.2% increase in casino revenue as a result of increased wagering volume in table games and slots at Sam's Town Las Vegas. Room revenue and food and beverage revenue increased 11.0% and 2.2%, respectively, over the prior fiscal year's levels. The increase in room revenue is primarily attributable to a 24.3% increase in average daily room rates at Sam's Town Las Vegas. Operating income margin at the Boulder Strip Properties increased from 12.6% in fiscal 1996 to 13.9% in fiscal 1997, due 43 46 to the increase in net revenues as well as improved operating margins in the room and food and beverage departments at Sam's Town Las Vegas. DOWNTOWN PROPERTIES Net revenues at the Downtown Properties increased 14.0% during fiscal 1997 compared to fiscal 1996. The increase is attributable to the November 1996 opening of Main Street Station as well as increased revenues from Vacations Hawaii. Hawaiian customers comprise a significant portion of the available room nights at the three downtown casino properties. See "Business -- Properties". These increases in net revenues were partially offset by declines in net revenues at the California and Fremont of 13.1% and 5.7%, respectively. These two properties have been affected by the opening of Main Street Station, which initially attracted patrons from their customer bases. In addition, each component of the California's net revenues were adversely impacted by a rooms remodel project which reduced its room availability by approximately 15% during the first fiscal quarter of 1997. Aggregate operating income for the Downtown Properties declined by 50% during fiscal 1997 to $8.8 million, and aggregate operating income margin for the Downtown Properties decreased from 11.9% in fiscal 1996 to 5.2% in fiscal 1997. These declines are a result of the reduction in net revenues at the California and Fremont, as well as the $1.6 million operating loss from Vacations Hawaii. In addition, Main Street Station posted a $1.9 million operating loss before preopening expense since its opening in November 1996. CENTRAL REGION Net revenues from the Central Region increased 13.6% during fiscal 1997 compared to fiscal 1996. The majority of the increase is attributable to Par-A-Dice, which was acquired on December 4, 1996. Par-A-Dice generated net revenues of $59.6 million since its acquisition. This increase was partially offset by declines of 13.8% and 12.9%, respectively, in net revenues at Sam's Town Tunica and Sam's Town Kansas City. Operating income before preopening expense and impairment loss declined by 5.6% in fiscal 1997, and operating income margin declined from 27.2% in fiscal 1996 to 22.6% in fiscal 1997. The decrease in operating income is due to the decline in net revenues at Sam's Town Tunica and the increased operating losses at Sam's Town Kansas City, offset by the operating income from Par-A-Dice. Sam's Town Tunica's operating margin declined from 21.8% in fiscal 1996 to 14.9% during fiscal 1997 as a result of increased competition in that market as well as the construction disruption from the 350-room hotel tower and the additional 1,000 space parking garage which were completed in December 1996. Sam's Town Kansas City posted a $10.9 million operating loss (before impairment loss) during fiscal 1997 compared to a $5.0 million operating loss in the prior fiscal year. The increase in operating loss is attributable to increased market competition. Due to the significant change in the competitive environment, the Company recorded an impairment loss of approximately $126 million related to its investment in the Missouri gaming market. See further discussion below regarding this write-down under Impairment Losses. OTHER EXPENSES Depreciation and amortization expense increased by $6.6 million during fiscal 1997. The increase is primarily attributable to an increase in fixed and intangible assets related to the opening of Main Street Station in November 1996, the acquisition of Par-A-Dice in December 1996, and the completion of the new hotel tower and parking garage at Sam's Town Tunica in December 1996. As discussed below under Impairment Losses, the write-down of the fixed and intangible assets related to Sam's Town Kansas City is expected to reduce future depreciation and amortization expense by approximately $7 million on an annual basis. Corporate expenses were $24.3 million for both fiscal 1997 and fiscal 1996. During fiscal 1997 and 1996, the Company recorded a preopening charge of $3.5 million and $10.0 million, respectively, upon the opening of Main Street Station in November 1996 and Sam's Town Kansas City in September 1995. 44 47 IMPAIRMENT LOSSES During fiscal 1997, the Company, in accordance with SFAS No. 121, 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. In addition, the restrictive nature of the Missouri gaming regulations with respect to wagering limits and simulated cruise requirements has not been conducive to profitable operations, and based upon currently available information, management does not believe that any significant regulatory relief is forthcoming. The Company continued to operate Sam's Town Kansas City while focusing on cost control measures and the pursuit of future legislative and regulatory relief. In addition, the Company recorded a $5.3 million impairment loss related to its 17.4% ownership interest in FSE during fiscal 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. OTHER INCOME (EXPENSE) Other income and expense is primarily comprised of interest expense, net of amounts capitalized. Interest expense increased by $9.3 million during fiscal 1997 to $61.7 million and is primarily attributable to higher levels of debt outstanding due to, among other things, the December 1996 acquisition of Par-A-Dice for approximately $171 million and the major renovation and expansion projects related to Main Street Station and Sam's Town Tunica. PROVISION (BENEFIT) FOR INCOME TAXES The Company's effective tax rate was (32.3%) and 40.4%, respectively, for fiscal years ended June 30, 1997 and 1996. The fluctuation in the rates is primarily attributable to the impairment loss recorded during fiscal 1997. EXTRAORDINARY ITEMS In connection with the early redemption of the Company's $150 million, 10.75% Notes in October 1996, the Company recognized an extraordinary loss of $6.1 million, net of tax, during fiscal 1997. In addition, the Company recorded an extraordinary loss of $1.4 million, net of tax, during fiscal 1996 related to the write-off of unamortized bank loan fees in connection with the completion of the Company's current Bank Credit Facility in June 1996. NET INCOME (LOSS) As a result of these factors, the Company reported a net loss of $77.5 million for fiscal 1997 compared to net income of $28.1 million in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES The following table sets forth, for the periods indicated, certain cash flow data for the Company. TWELVE MONTH YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (UNAUDITED) (IN THOUSANDS) Cash flow from operating activities............... $121,749 $ 97,425 -------- --------- Cash flow from investing activities............... $(57,511) $(145,362) -------- --------- Cash flow from financing activities............... $(66,578) $ 55,788 -------- --------- 45 48 CASH FLOW FROM OPERATING ACTIVITIES AND WORKING CAPITAL The Company's policy is to use operating cash flow in combination with debt and equity financing to fund renovations and expansion of its business. During 1998, the Company generated operating cash flows of $122 million compared to $97 million during the twelve month period ended December 31, 1997. The increase in operating cash flows is primarily attributable to the operations of Treasure Chest, which was acquired in October 1997. As of December 31, 1998 and 1997, the Company had balances of cash and cash equivalents of $76 million and $78 million, respectively, and working capital of $24 million and $12 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 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, which began in the quarter ended September 30, 1998, will continue to benefit operating cash flows in 1999 by generating tax refunds and reducing the amount of future federal income tax payments. CASH FLOW FROM INVESTING ACTIVITIES During 1998, net cash used in investing activities was $58 million compared to $145 million during the twelve month period ended December 31, 1997. The Company is committed to continually maintaining and enhancing its existing facilities, most notably by upgrading and remodeling its casinos, hotel rooms, restaurants and other public space and by providing the latest slot machines for its customers. The Company's capital expenditures primarily related to these purposes, were approximately $68 million and $42 million, respectively, during 1998 and the twelve month period ended December 31, 1997. During the prior year, cash used in investing activities also included $103 million for the acquisition of the remaining 85% of Treasure Chest the Company did not already own. CASH FLOW FROM FINANCING ACTIVITIES Much of the funding for the Company's renovation and expansion projects comes from debt and equity financings, as well as cash flows from existing operations. The Company paid down outstanding debt with its free cash flow generated from operations and proceeds from the sale of Sam's Town Kansas City's assets, which resulted in cash flow used for financing activities of $67 million during 1998. In comparison, net cash provided by financing activities during the twelve month period ended December 31, 1997 was $56 million, which consisted primarily of proceeds from the issuance of $250 million principal amount of 9.50% Senior Subordinated Notes (the "9.50% Notes") offset by the redemption of $185 million principal amount of 11% Senior Subordinated Notes (the "11% Notes"). At December 31, 1998, outstanding borrowings and unused availability under the Bank Credit Facility were $317 million and $158 million, respectively. Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or the London Interbank Offered Rate ("LIBOR"), at the discretion of the Company. The blended rate under the Bank Credit Facility at December 31, 1998 was 7.3%. In October 1996, the Company issued $200 million principal amount of 9.25% Senior Notes due October 1, 2003. The net proceeds from this offering were used to reduce outstanding indebtedness under the Company's Bank Credit Facility. Subsequently, in November 1996, the Company used amounts available under its Bank Credit Facility to redeem its $150 million principal amount of 10.75% Senior Subordinated Notes prior to their scheduled maturity. Also in October 1996, the Company completed an offering of 4,000,000 shares of common stock at $9.00 per share, generating net proceeds of approximately $34 million. The net proceeds from this offering were used to reduce outstanding indebtedness under the Company's Bank Credit Facility. In July 1997, the Company issued $250 million principal amount of 9.50% Senior Subordinated Notes due July 2007. The net proceeds from this offering were used to reduce outstanding indebtedness under the 46 49 Company's Bank Credit Facility. Subsequently, in December 1997, the Company used its availability under the Bank Credit Facility to redeem the 11% Notes prior to their scheduled maturity. 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 maintenance capital expenditures during each year of 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 (except for a redemption of the 11% Notes, which was permitted), 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 December 31, 1998. The 9.25% and 9.50% Notes contains 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 December 31, 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. EXPANSION AND OTHER 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 local 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 has initiated a $25 million renovation of the Stardust which includes guest rooms, public space and exterior enhancements intended to make the property more competitive with other Strip resorts. In connection with the renovation project, the Stardust will remove all of its approximately 550 motor inn rooms from service for a period of approximately 90 days beginning in April 1999. During this time, the Company will evaluate the impact of the motor inn closure on the Stardust's operations. Based upon the results of the evaluation, the Company will either refurbish or demolish the Stardust motor inn rooms. In addition, Sam's Town Las Vegas will begin a $25 million renovation project during 1999 intended to update the casino and reconfigure the gaming space to allow for slightly more gaming positions. In addition, the porte cochere and valet parking area will be reconfigured and remodeled to facilitate access into the property. This project is expected to be completed in mid-2000. On July 14, 1998, the Company, through a wholly-owned subsidiary, entered into an amended and restated joint venture agreement with Mirage Resorts, Incorporated to jointly develop and own The Borgata, a casino hotel entertainment facility in Atlantic City, New Jersey. Among other things, the 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 Borgata is expected to cost $750 million and contemplates a hotel of over 1,400 rooms and a casino and related amenities adjacent and connected to Mirage's planned wholly-owned resort. The Agreement provides for at least $150 million in capital contributions by the Company, $90 million of which is expected to be contributed in 1999. Funding of the Company's joint venture capital contributions is expected to be derived from cash flow from operations and availability under the Company's 47 50 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. The Company recently began an information systems ("IS") project that will standardize the Company's customer tracking systems. The purpose of the IS project is to link all points of customer contact to enable the Company to better monitor customer activity in order to enhance and direct marketing efforts. The Company expects to spend $14 million in 1999 on the IS project and will account for those costs in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (see Note 1 of the Notes to Consolidated Financial Statements). Substantial funds are required for The Borgata, as well as the other projects 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. The first phase of the process is the evaluation and development of remediation plans for IT systems which was completed in the fourth quarter of 1998. In this phase, the Company evaluated which IT systems are Year 2000 compliant and made plans to bring identified non-compliant systems into compliance. The second phase of the process, expected to be completed by the second quarter of 1999, 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. The Company may discover Year 2000 issues in the course of its evaluation processes in phases one or two, or issues may not be detected, that would have a material adverse effect on the business, financial condition and 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 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 with 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, the Company 48 51 may discover Year 2000 issues in the course of its testing process, or issues may not be detected, that would have a material adverse effect on the business, financial condition and results of operations of the Company. Phase four, expected to be completed by the end of the second 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 the goods or services used in the non-gaming operations, the Company may discover Year 2000 issues in the course of evaluation of its vendors, or issues may not be detected, that would have a material adverse effect on the business, financial condition and results of operations of the Company. The final phase of the process, expected to be completed during the third quarter of 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 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 $8 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 million in operating expenses related to the remediation efforts, including training. At December 31, 1998, the Company had incurred approximately $2 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. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 1 to Notes to Consolidated Financial Statements for a complete discussion of recently issued accounting standards and their expected impact on the Company's consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates. To reduce such risks, the Company selectively uses financial instruments for its floating rate debt. On December 31, 1997, the Company entered into an interest rate swap agreement for a notional amount of $100 million. The agreement calls for the Company to swap its variable LIBOR rate (5.31% at December 31, 1998) for a fixed LIBOR rate of 5.54%. The variable LIBOR rate readjusts each quarter and the agreement is cancelable should the LIBOR rate exceed 5.99%. The swap agreement terminates in December 2000. The fair value of the swap liability at December 31, 1998 is approximately $419,000 based on the present value of future cash outflows expected from the Company based on the LIBOR rate at December 31, 1998. 49 52 The Company also has certain fixed-rate debt which it believes to have a fair value that approximates its reported amounts. The Company believes that the market risk arising from these financial instruments is not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 50 53 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors of the Company is set forth under the caption "Proposal No. 1 -- Election of Directors" and "Executive Compensation and Other Information -- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement to be filed in connection with its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. Information regarding non-director executive officers of the Company is set forth in Item 4A of Part I of this Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is set forth under the caption "Executive Compensation and Other Information" and "Proposal No. 1 -- Election of Directors -- Compensation of Directors" in the Company's definitive Proxy Statement to be filed in connection with its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is set forth under the caption "Stock Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed in connection with its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is set forth under the captions "Executive Compensation and Other Information -- Certain Relationships and Related Transactions" and "-- Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement to be filed in connection with its 1999 Annual Meeting of Stockholders and is incorporated herein by reference. 51 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K PAGE NO. -------- 1. FINANCIAL STATEMENTS. The following financial statements for the year ended December 31, 1998, the six month periods ended December 31, 1997 and December 31, 1996 (unaudited) and for the fiscal years ended June 30, 1997 and 1996 are filed as part of this report: Independent Auditors' Report................................ 54 Consolidated Balance Sheets at December 31, 1998 and 1997... 55 Consolidated Statements of Operations for the Year Ended December 31, 1998, the Six Month Periods Ended December 31, 1997 and December 31, 1996 (unaudited) and for the Fiscal Years Ended June 30, 1997 and 1996................. 56 Consolidated Statements of Changes in Stockholders' Equity for the Year Ended December 31, 1998, the Six Month Period Ended December 31, 1997 and for the Fiscal Years Ended June 30, 1997 and 1996.................................... 57 Consolidated Statements of Cash Flows for the Year Ended December 31, 1998, the Six Month Periods Ended December 31, 1997 and December 31, 1996 (unaudited) and for the Fiscal Years Ended June 30, 1997 and 1996................. 58 Notes to Consolidated Financial Statements.................. 59 2. REPORTS ON FORM 8-K. (a) Company's current report on Form 8-K dated July 14, 1998 related to the Amended and Restated Joint Venture Agreement of Stardust A.C. 3. EXHIBITS. Refer to (c) on page 81. 52 55 BOYD GAMING CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report................................ 54 Consolidated Financial Statements Consolidated Balance Sheets............................... 55 Consolidated Statements of Operations..................... 56 Consolidated Statements of Changes in Stockholders' Equity................................................. 57 Consolidated Statements of Cash Flows..................... 58 Notes to Consolidated Financial Statements................ 59 53 56 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Boyd Gaming Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Boyd Gaming Corporation and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year ended December 31, 1998, the six month period ended December 31, 1997, and for each of the two years in the period ended June 30, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of Boyd Gaming Corporation and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for the year ended December 31, 1998, the six month period ended December 31, 1997, and for each of the two years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada February 15, 1999 54 57 BOYD GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS DECEMBER 31, ------------------------ 1998 1997 ---------- ---------- Current assets Cash and cash equivalents................................. $ 75,937 $ 78,277 Accounts receivable, net.................................. 21,988 19,372 Inventories............................................... 9,567 9,906 Prepaid expenses and other................................ 17,333 14,357 Income taxes receivable................................... 11,065 2,787 Deferred income taxes..................................... 5,855 -- ---------- ---------- Total current assets.............................. 141,745 124,699 Property and equipment, net................................. 763,207 771,235 Other assets and deferred charges........................... 38,690 41,912 Deferred income taxes....................................... -- 6,558 Goodwill and other intangible assets, net................... 202,614 208,011 ---------- ---------- Total assets...................................... $1,146,256 $1,152,415 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt...................... $ 1,961 $ 1,828 Accounts payable.......................................... 32,065 28,535 Accrued liabilities Payroll and related.................................... 29,465 26,100 Interest and other..................................... 54,162 55,879 ---------- ---------- Total current liabilities......................... 117,653 112,342 Long-term debt, net of current maturities................... 774,890 842,932 Deferred income taxes and other liabilities................. 26,407 -- 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; 62,027,514 and 61,669,628 shares outstanding............................................ 620 617 Additional paid-in capital................................ 140,616 139,054 Retained earnings......................................... 86,070 57,470 ---------- ---------- Total stockholders' equity........................ 227,306 197,141 ---------- ---------- Total liabilities and stockholders' equity........ $1,146,256 $1,152,415 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 55 58 BOYD GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) SIX MONTHS FISCAL YEAR YEAR ENDED ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, -------------------- ------------------- 1998 1997 1996 1997 1996 ------------ -------- --------- -------- -------- UNAUDITED Revenues Casino................................. $ 722,124 $323,707 $ 268,208 $573,782 $548,167 Food and beverage...................... 161,582 78,658 73,387 151,261 142,420 Room................................... 74,053 38,330 35,449 74,209 69,645 Other.................................. 70,903 39,074 26,883 58,311 49,895 Management fees and joint venture...... 40,206 20,310 20,406 42,747 41,576 ---------- -------- --------- -------- -------- Gross revenues........................... 1,068,868 500,079 424,333 900,310 851,703 Less promotional allowances.............. 93,772 44,308 40,175 81,051 75,846 ---------- -------- --------- -------- -------- Net revenues................... 975,096 455,771 384,158 819,259 775,857 ---------- -------- --------- -------- -------- Costs and expenses Casino................................. 366,746 166,776 145,928 298,081 273,545 Food and beverage...................... 106,195 53,757 50,885 106,729 99,213 Room................................... 24,724 12,958 12,044 25,210 25,842 Other.................................. 65,626 32,793 21,574 50,695 36,830 Selling, general and administrative.... 147,647 68,461 58,860 120,538 114,497 Maintenance and utilities.............. 41,144 18,652 18,327 36,037 30,171 Depreciation and amortization.......... 73,407 35,097 30,834 67,242 60,626 Corporate expense...................... 19,994 9,131 10,744 24,333 24,343 Preopening expense..................... -- -- 3,481 3,481 10,004 Impairment and restructuring charges... 5,925 -- -- 131,339 -- ---------- -------- --------- -------- -------- Total.......................... 851,408 397,625 352,677 863,685 675,071 ---------- -------- --------- -------- -------- Operating income (loss).................. 123,688 58,146 31,481 (44,426) 100,786 ---------- -------- --------- -------- -------- Other income (expense) Interest income........................ 365 261 342 650 1,174 Interest expense, net of amounts capitalized......................... (74,162) (37,571) (27,069) (61,672) (52,360) ---------- -------- --------- -------- -------- Total.......................... (73,797) (37,310) (26,727) (61,022) (51,186) ---------- -------- --------- -------- -------- Income (loss) before provision (benefit) for income taxes and extraordinary items.................................. 49,891 20,836 4,754 (105,448) 49,600 Provision (benefit) for income taxes..... 21,291 8,736 1,902 (34,025) 20,021 ---------- -------- --------- -------- -------- Income (loss) before extraordinary items.................................. 28,600 12,100 2,852 (71,423) 29,579 Extraordinary items, net of tax benefit of $3,899, $3,268, $3,268 and $889, respectively........................... -- 7,240 6,069 6,069 1,435 ---------- -------- --------- -------- -------- Net income (loss)........................ $ 28,600 $ 4,860 $ (3,217) $(77,492) $ 28,144 ========== ======== ========= ======== ======== Basic and diluted net income (loss) per common share: Income (loss) before extraordinary items............................... $ 0.46 $ 0.20 $ 0.05 $ (1.19) $ 0.52 Extraordinary items, net of tax........ -- (0.12) (0.10) (0.10) (0.03) ---------- -------- --------- -------- -------- Net income (loss)...................... $ 0.46 $ 0.08 $ (0.05) $ (1.29) $ 0.49 ========== ======== ========= ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 56 59 BOYD GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998, THE SIX MONTH PERIOD ENDED DECEMBER 31, 1997, AND FISCAL YEARS ENDED JUNE 30, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK ADDITIONAL TOTAL ------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- ------ ---------- -------- ------------- Balances, July 1, 1995..................... 56,999,018 $570 $100,085 $101,958 $202,613 Net income................................. 28,144 28,144 Stock issued in connection with employee stock purchase plan...................... 212,368 2 2,466 -- 2,468 Stock options exercised.................... 2,334 -- 32 -- 32 ---------- ---- -------- -------- -------- Balances, June 30, 1996.................... 57,213,720 572 102,583 130,102 233,257 Net loss................................... (77,492) (77,492) Issuance of stock, net of expenses......... 4,000,000 40 33,493 -- 33,533 Stock issued in connection with employee stock purchase plan...................... 310,268 3 2,015 -- 2,018 ---------- ---- -------- -------- -------- Balances, June 30, 1997.................... 61,523,988 615 138,091 52,610 191,316 Net income................................. 4,860 4,860 Stock issued in connection with employee stock purchase plan...................... 145,640 2 963 -- 965 ---------- ---- -------- -------- -------- Balances, December 31, 1997................ 61,669,628 617 139,054 57,470 197,141 Net income................................. 28,600 28,600 Stock issued in connection with employee stock purchase plan...................... 357,886 3 1,562 -- 1,565 ---------- ---- -------- -------- -------- BALANCES, DECEMBER 31, 1998................ 62,027,514 $620 $140,616 $ 86,070 $227,306 ========== ==== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 57 60 BOYD GAMING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED FISCAL YEAR ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, --------------------- --------------------- 1998 1997 1996 1997 1996 ------------ --------- --------- --------- --------- UNAUDITED CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $ 28,600 $ 4,860 $ (3,217) $ (77,492) $ 28,144 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 73,407 35,097 30,834 67,242 60,626 Loss on early retirement of debt........................ -- 11,139 9,337 9,337 3,759 Deferred income taxes................................... 26,259 1,975 171 (42,079) 3,903 Impairment and restructuring charges.................... 5,925 -- -- 131,339 -- Other..................................................... -- -- 301 -- 185 Changes in assets and liabilities: Accounts receivable, net................................ (616) (2,426) (9,836) (906) 95 Inventories............................................. 339 (1,405) (2,319) (1,970) 117 Prepaid expenses and other.............................. (574) 516 (3,855) 392 (1,800) Other assets............................................ (814) (5) (4,902) (4,853) (6,736) Other current liabilities............................... (3,350) 11,611 33,016 574 15,504 Other liabilities....................................... 851 -- -- -- -- Income taxes receivable................................. (8,278) (2,787) (7,144) -- -- Income taxes payable.................................... -- (1,103) (678) 425 82 -------- --------- --------- --------- --------- Net cash provided by operating activities................... 121,749 57,472 41,708 82,009 103,879 -------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net cash paid for acquisition of Treasure Chest Casino, L.L.C................................................... -- (103,040) -- -- -- Net cash paid for acquisition of Par-A-Dice Hotel and Casino.................................................. -- -- (170,725) (170,725) -- Proceeds from sale of Sam's Town Kansas City's assets..... 10,500 -- -- -- -- Acquisition of property, equipment and other assets....... (68,011) (22,186) (79,132) (99,586) (107,734) Proceeds from loans receivable............................ -- -- -- -- 2,000 Proceeds from sale of riverboat........................... -- -- 20,000 20,000 -- -------- --------- --------- --------- --------- Net cash used in investing activities....................... (57,511) (125,226) (229,857) (250,311) (105,734) -------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt.................. 8,000 244,525 200,000 200,148 230,934 Payments on long-term debt................................ (2,909) (903) (18,334) (19,354) (265,149) Early retirement of long-term debt........................ -- (192,631) (157,500) (157,500) -- Net borrowings (payments) under credit agreements......... (73,000) 39,000 150,850 116,000 (250) Proceeds from issuance of common stock.................... 1,331 820 34,579 35,248 2,131 -------- --------- --------- --------- --------- Net cash provided by (used in) financing activities......... (66,578) 90,811 209,595 174,542 (32,334) -------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ (2,340) 23,057 21,446 6,240 (34,189) Cash and cash equivalents, beginning of year................ 78,277 55,220 48,980 48,980 83,169 -------- --------- --------- --------- --------- Cash and cash equivalents, end of year...................... $ 75,937 $ 78,277 $ 70,426 $ 55,220 $ 48,980 ======== ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized........ $ 74,080 $ 29,029 $ 29,950 $ 58,556 $ 54,342 Cash paid for income taxes................................ 5,992 6,815 4,915 7,981 15,266 ======== ========= ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Property additions acquired on contracts and trade payables which were accrued, but not yet paid........... $ 5,440 $ 2,603 $ 7,398 $ 6,973 $ 7,352 Receivable from sale of Sam's Town Kansas City's assets... 2,000 -- -- -- -- Deferred bond financing costs incurred.................... -- 5,475 -- 4,624 -- Acquisition of Par-A-Dice Hotel and Casino Fair value of assets acquired........................... $ -- $ -- $ 174,800 $ 174,800 $ -- Cash paid to seller..................................... -- -- 170,725 170,725 -- -------- --------- --------- --------- --------- Liabilities assumed..................................... $ -- $ -- $ 4,075 $ 4,075 $ -- ======== ========= ========= ========= ========= Acquisition of Treasure Chest Casino, L.L.C Fair value of assets acquired........................... $ -- $ 110,180 $ -- $ -- $ -- Cash paid to seller..................................... -- 103,040 -- -- -- -------- --------- --------- --------- --------- Liabilities assumed..................................... $ -- $ 7,140 $ -- $ -- $ -- ======== ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 58 61 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of Boyd Gaming Corporation and its wholly-owned subsidiaries, collectively referred to herein as the "Company." The Company owns and operates 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 June 2001. All material intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. These investments are stated at cost which approximates fair value. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out and retail inventory methods. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on disposal of assets are recognized as incurred. Capitalized Interest Interest costs associated with major construction projects are capitalized. When no debt is incurred specifically for a project, interest is capitalized on amounts expended for the project using the Company's weighted average cost of borrowing. Capitalization of interest ceases when the project is substantially complete. Capitalized interest during the fiscal years ended June 30, 1997 and 1996 was $3.2 million and $4.6 million, respectively. There were no such interest costs capitalized during the year ended December 31, 1998 or the six month period ended December 31, 1997. Goodwill and Other Intangible Assets The excess of total acquisition costs over the fair market value of net assets acquired is amortized using the straight-line method over forty years. Management periodically assesses the recoverability of goodwill and other intangible assets by comparing its carrying value to the undiscounted cash flows expected to be generated by the acquired operation during the anticipated period of benefit. As of December 31, 1998 and 1997, accumulated amortization was $13.5 million and $8.0 million, respectively. Debt Issuance Costs Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the terms of the related debt agreements. 59 62 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Revenue and Promotional Allowances Casino revenue represents the net win from gaming activities, which is the difference between gaming wins and losses. Revenues include the estimated retail value of rooms, food and beverage, and other goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is charged to the casino department in the following amounts: FISCAL YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------ 1998 1997 1997 1996 ------------ ----------------- ------- ------- (IN THOUSANDS) Room.............................. $12,190 $ 5,668 $11,704 $10,660 Food and beverage................. 71,663 33,397 58,120 59,254 Other............................. 5,123 2,638 3,168 3,116 ------- ------- ------- ------- Total............................. $88,976 $41,703 $72,992 $73,030 ======= ======= ======= ======= Preopening Expenses Expenses incurred prior to the opening of new facilities are capitalized as incurred and charged to expense upon commencement of operations. During the years ended June 30, 1997 and 1996, the Company expensed $3.5 million and $10.0 million, respectively, upon the opening of Main Street Station and Sam's Town Kansas City. There were no preopening expenses recorded during the year ended December 31, 1998 or the six month period ended December 31, 1997. The American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. The statement requires businesses to expense certain costs of start-up activities as incurred. The initial application of this statement in January 1999 requires the Company to expense certain previously capitalized items as a cumulative effect of a change in accounting principle. As such, the Company expects to report a charge of approximately $1.7 million, net of tax, to the consolidated statement of operations during the first quarter of the year ending December 31, 1999 as the cumulative effect of the change in accounting principle. 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 and disclosure of contingent 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 in assessing the recoverability of long-lived assets. Actual results could differ from those estimates. Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the December 31, 1998 presentation. These reclassifications had no effect on the Company's net income. Change in Fiscal Year Effective July 1, 1997, the Company changed its fiscal year from a June 30 year end to a December 31 year end. 60 63 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Recently Issued Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments for fiscal years beginning after June 15, 1999. Management believes that this statement could have a material impact on the consolidated financial statements depending on the London Interbank Offered Rate ("LIBOR") at the time of adoption of this standard. The AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement, effective for fiscal years beginning after December 15, 1998, requires the Company to capitalize certain internal-use software costs once certain criteria are met. Management intends to comply with this statement during the year ending December 31, 1999 and does not expect the adoption of this statement to have a material impact on the Company's consolidated financial statements. NOTE 2. ACQUISITIONS 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, was approximately $85 million. Treasure Chest owns the Treasure Chest Casino, a riverboat casino operation on Lake Pontchartrain in Kenner, Louisiana. The Company has been managing the Treasure Chest since its opening in September 1994. The Company's pro forma consolidated results of operations, as if the acquisition had occurred on July 1, 1995, are as follows: SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, -------------------- -------------------------- 1997 1996 1997 1996 -------- -------- ----------- ----------- Pro forma (in thousands, except per share data): Net revenues.......................... $489,715 $435,733 $923,072 $872,446 Income (loss) before extraordinary items.............................. 12,335 3,682 (69,275) 30,860 Net income (loss)..................... 5,095 (2,387) (75,344) 29,425 -------- -------- -------- -------- Basic and diluted net income (loss) per common share: Income (loss) before extraordinary items.............................. $ 0.20 $ 0.06 $ (1.15) $ 0.54 Net income (loss)..................... 0.08 (0.04) (1.25) 0.52 -------- -------- -------- -------- On December 4, 1996, the Company acquired Par-A-Dice Gaming Corporation, owner and operator of the Par-A-Dice riverboat casino in East Peoria, Illinois, and East Peoria Hotel, Inc., the general partner of a partnership which opened a 208 room hotel adjacent to the Par-A-Dice casino. The purchase price of the acquisition was approximately $171 million. Intangible license rights, representing the excess of the purchase 61 64 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) price over the fair value of the net assets acquired, was approximately $116 million. The Company's pro forma consolidated results of operations, as if the acquisition had occurred on July 1, 1995, are as follows: FISCAL YEAR ENDED JUNE 30, -------------------------- 1997 1996 ----------- ----------- Pro forma (in thousands, except per share data): Net revenues.............................................. $861,563 $869,819 Income (loss) before extraordinary items.................. (66,644) 40,828 Net income (loss)......................................... (72,713) 39,393 -------- -------- Basic and diluted net income (loss) per common share: Income (loss) before extraordinary items.................. $ (1.11) $ 0.72 Net income (loss)......................................... (1.21) 0.69 -------- -------- NOTE 3. IMPAIRMENT AND RESTRUCTURING CHARGES During the fiscal year ended June 30, 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 in the Kansas City gaming market with the January 1997 addition of a significantly larger facility and a history of operating losses at the Company's Sam's Town Kansas City gaming establishment. The fair value of the impaired assets 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 $3 million for substantially all of the property's 646 employees were paid and included as part of the restructuring charge. Other costs to exit the Kansas City gaming market of approximately $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. The Company paid approximately $2 million related to the long term commitments during the year ended December 31, 1998. At December 31, 1998, the $0.2 million current portion and the $0.5 million non-current portion of the remaining restructuring charge liabilities are included in "Interest and other" and "Deferred income taxes and other liabilities," respectively, on the accompanying 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. The net loss, after adjusting for current year taxable income generated by the Company's other subsidiaries, 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 net tax loss carry back created an income tax receivable of $11.1 million and a current deferred income tax asset of $5.9 million. The remaining tax loss carry forward is netted in the non-current deferred income tax liability on the accompanying consolidated balance sheet at December 31, 1998. During the fiscal year ended June 30, 1997, the Company recorded a $5.3 million impairment loss related to its 17.4% ownership interest in the Fremont Street Experience, Limited Liability Company ("FSE"). 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 expected this trend to continue and, therefore, did not expect to recover its investment in this entity. 62 65 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. ACCOUNTS RECEIVABLE Accounts receivable consists of the following: DECEMBER 31, ------------------ 1998 1997 ------- ------- (IN THOUSANDS) Casino...................................................... $10,614 $ 9,612 Hotel....................................................... 2,926 2,563 Other....................................................... 12,541 10,951 ------- ------- Total....................................................... 26,081 23,126 Less allowance for doubtful accounts........................ 4,093 3,754 ------- ------- Accounts receivable, net.................................... $21,988 $19,372 ======= ======= NOTE 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following: ESTIMATED DECEMBER 31, LIFE ------------------------ (YEARS) 1998 1997 --------- ---------- ---------- (IN THOUSANDS) Land............................................. -- $ 124,186 $ 115,439 Buildings and leasehold improvements............. 3 - 40 634,922 632,094 Furniture and equipment.......................... 3 - 30 376,758 341,759 Riverboats and barges............................ 15 - 40 64,368 66,646 Construction in progress......................... -- 18,756 14,570 ---------- ---------- Total............................................ 1,218,990 1,170,508 Less accumulated depreciation and amortization... 455,783 399,273 ---------- ---------- Property and equipment, net...................... $ 763,207 $ 771,235 ========== ========== NOTE 6. INVESTMENT IN JOINT VENTURE On July 14, 1998, the Company, through a wholly-owned subsidiary, entered into an amended and restated joint venture agreement with Mirage Resorts, Incorporated to jointly develop and own a casino hotel entertainment facility in Atlantic City, New Jersey that has been named The Borgata. The Company holds a 50% interest in the joint venture and accounts for its share of the joint venture's net income or loss under the equity method of accounting. The Borgata is expected to cost approximately $750 million and contemplates a hotel of over 1,400 rooms and a casino and related amenities adjacent and connected to Mirage's planned wholly-owned resort. The joint venture agreement requires capital contributions by the Company of $150 million, $90 million of which is expected to be contributed during 1999. At December 31, 1998, the Company had contributed or advanced $1.3 million to the joint venture. 63 66 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Bank Credit Facility........................................ $317,000 $390,000 9.25% Senior Notes.......................................... 200,000 200,000 9.50% Senior Subordinated Notes............................. 250,000 250,000 Other....................................................... 9,851 4,760 -------- -------- Total long-term debt.............................. 776,851 844,760 Less current maturities..................................... 1,961 1,828 -------- -------- Total............................................. $774,890 $842,932 ======== ======== The Company has a reducing revolving bank credit facility which matures in June 2001 (the "Bank Credit Facility"). On December 19, 1998, total availability under the Bank Credit Facility was reduced by $25 million to $475 million and will be reduced by an additional $50 million at the end of each six-month period thereafter until December 2000. As of December 31, 1998, the Company had unused availability of $158 million under the Bank Credit Facility. Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or LIBOR rate, at the discretion of the Company. The blended interest rate under the Bank Credit Facility at December 31, 1998 was 7.3%. The Company incurs a commitment fee on the unused portion of the Bank Credit Facility which ranges from 0.375% to 0.50% per annum, depending upon the level of a certain predefined ratio. The Bank Credit Facility is collateralized by the real and personal property comprising eight casino properties owned by the Company and by related security agreements with assignment of rents. The Bank Credit Facility contains certain financial covenants, limitations on the incurrence of debt and limitations on the incurrence of capital expenditures and investments, all as defined in the Bank Credit Facility. In connection with the closing of the Bank Credit Facility in June 1996, the Company recorded a $1.4 million extraordinary loss (net of $.9 million in tax benefits) related to the write-off of unamortized fees. On October 4, 1996, the Company issued $200 million of 9.25% Senior Notes (the "9.25% Notes") due October 1, 2003. The 9.25% Notes require semi-annual interest payments in April and October of each year through October 2003, at which time the entire principal balance becomes due and payable. The 9.25% Notes contain certain restrictive covenants regarding, among other things, incurrence of debt, sales of assets, mergers and consolidations and limitations on restricted payments (as defined in the indenture relating to the 9.25% Notes). In addition, the 9.25% Notes are guaranteed by a majority of the Company's existing significant subsidiaries. The guaranties are full, unconditional, and joint and several. (See Note 15 for a presentation of 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). The net proceeds from this offering were used to reduce outstanding indebtedness under the Company's Bank Credit Facility. Subsequently, the Company used amounts available under its Bank Credit Facility to redeem $150 million principal amount of 10.75% Senior Subordinated Notes on November 4, 1996. As a result, the Company recognized an extraordinary loss of $6.1 million (net of $3.3 million in tax benefits) related to the early extinguishment of debt. On July 22, 1997, the Company issued $250 million principal amount of 9.50% Senior Subordinated Notes (the "9.50% Notes") due July 2007. The 9.50% Notes require semi-annual interest payments in January and July of each year through July 2007, at which time the entire principal balance becomes due and payable. The 9.50% Notes contain certain restrictive covenants regarding, among other things, incurrence of debt, sales of assets, mergers and consolidations and limitations on restricted payments (as defined in the indenture relating to the 9.50% Notes). The 9.50% Notes may be redeemed at the Company's option anytime 64 67 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) after July 15, 2002 at redemption prices ranging from 104.75% in 2002 to 100% in 2005 and thereafter. The net proceeds from this offering were used to reduce outstanding indebtedness under the Company's Bank Credit Facility. On December 1, 1997, the Company redeemed the $185 million principal amount of 11% Senior Subordinated Notes. In connection with the redemption, the Company incurred an extraordinary loss on the early extinguishment of debt of $7.2 million (net of $3.9 million in tax benefits). The Company funded the redemption with borrowings under the Bank Credit Facility. The estimated fair value of the Company's long-term debt at December 31, 1998 was approximately $788 million, versus its book value of $777 million. At December 31, 1997, the estimated fair value of the Company's long-term debt was approximately $867 million, versus its book value of $845 million. The estimated fair value amounts were based on quoted market prices on or about December 31, 1998 and 1997 for the Company's debt securities that are traded. For the debt securities that are not traded, fair value was based on estimated discounted cash flows using current rates offered to the Company for debt securities having the same remaining maturities. Interest rates on the Company's other long-term debt range from 6.9% to 10.0%. Management believes the Company and its subsidiaries are in compliance with all covenants contained in its long-term debt agreements at December 31, 1998. The scheduled maturities during the year ended December 31, 1998 of long-term debt for the years ending December 31 are as follows: (IN THOUSANDS) 1999........................... $ 1,961 2000........................... 775 2001........................... 317,452 2002........................... 455 2003........................... 200,487 Thereafter..................... 255,721 -------- Total................ $776,851 ======== NOTE 8. INTEREST RATE SWAP AGREEMENT On December 31, 1997, the Company entered into an interest rate swap agreement for a notional amount of $100 million. The agreement calls for the Company to swap its variable LIBOR rate (5.31% at December 31, 1998) for a fixed LIBOR rate of 5.54%, which resulted in an initial gain of approximately $0.1 million which was deferred and is being amortized over the life of the agreement. The variable LIBOR rate readjusts each quarter and the agreement is cancelable should the LIBOR rate exceed 5.99%. Any subsequent differential between the amounts to be paid or received, as a result of this swap agreement, is recorded as interest expense or an offset to interest expense during the period of settlement. The swap agreement terminates on December 31, 2000. Net swap settlements during the year ended December 31, 1998 had virtually no impact on interest expense. 65 68 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. COMMITMENTS AND CONTINGENCIES Future minimum lease payments required under noncancelable operating leases (principally for land) as of December 31, 1998 are as follows: (IN THOUSANDS) 1999........................... $ 3,635 2000........................... 2,580 2001........................... 2,310 2002........................... 2,259 2003........................... 2,259 Thereafter..................... 75,855 ------- Total................ $88,898 ======= Rent expense for the year ended December 31, 1998, the six month period ended December 31, 1997 and the fiscal years ended June 30, 1997 and 1996 was $3.2 million, $1.8 million, $3.2 million and $2.9 million respectively, and is included in selling, general and administrative expenses on the consolidated statements of operations. The Company is required to pay, to the City of Kenner, Louisiana, a boarding fee of $2.50 for each passenger boarding the Company's Treasure Chest riverboat casino during the year. The future minimum payment due in 1999 to the City of Kenner, based upon a portion of actual passenger counts from the prior year, is approximately $4.3 million. The Company is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse impact on the Company's consolidated financial statements. NOTE 10. EMPLOYEE BENEFIT PLANS The Company contributes to multi-employer pension plans under various union agreements. Contributions, based on wages paid to covered employees, totaled approximately $2.4 million, $1.2 million, $2.2 million and $2.2 million for the year ended December 31, 1998, the six month period ended December 31, 1997 and for the fiscal years ended June 30, 1997 and 1996, respectively. The Company's share of the unfunded liability related to multi-employer plans, if any, is not determinable. The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 15% of their income on a pre-tax basis through contributions to the plan. On January 1, 1996 the Company combined its profit sharing plan into the 401(k) plan. The Company expensed voluntary contributions of $2.8 million, $1.4 million, $2.6 million and $1.4 million for the year end December 31, 1998, the six month period ended December 31, 1997 and for the fiscal years ended June 30, 1997 and 1996, respectively, to the Company's 401(k) profit-sharing plan and trust. 66 69 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. INCOME TAXES A summary of the provision (benefit) for income taxes is as follows: YEAR ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, FISCAL YEAR ENDED JUNE 30, 1998 1997 1997 1996 ------------ ---------------- ----------- ---------- (IN THOUSANDS) Current Federal........................ $(7,021) $5,671 $ 7,009 $15,301 State.......................... 1,465 1,091 1,045 817 ------- ------ -------- ------- (5,556) 6,762 8,054 16,118 ------- ------ -------- ------- Deferred Federal........................ 25,532 1,833 (43,899) 4,119 State.......................... 1,315 141 1,820 (216) ------- ------ -------- ------- 26,847 1,974 (42,079) 3,903 ------- ------ -------- ------- Total.................. $21,291 $8,736 $(34,025) $20,021 ======= ====== ======== ======= The following table provides a reconciliation between the federal statutory rate and the effective income tax rate from continuing operations where both are expressed as a percentage of income. DECEMBER 31, JUNE 30, ------------ ------------- 1998 1997 1997 1996 ---- ---- ----- ---- Tax provision at statutory rate........................ 35.0% 35.0% (35.0)% 35.0% Increase/(decrease) resulting from: State income tax, net of federal benefit............. 3.6 3.8 1.7 0.8 Company provided benefits............................ 1.9 1.8 0.9 2.5 Licensing expenditures for new jurisdictions......... 1.1 0.5 0.3 0.5 Other, net........................................... 1.1 0.8 (0.2) 1.6 ---- ---- ----- ---- Total........................................ 42.7% 41.9% (32.3)% 40.4% ==== ==== ===== ==== 67 70 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax items comprising the Company's net deferred tax liability (asset) are as follows: DECEMBER 31, ------------------ 1998 1997 ------- ------- (IN THOUSANDS) Deferred tax assets: Net operating loss carryforward........................... $17,131 $ -- Tax credit carryforward................................... 6,407 9,234 Preopening expense amortized for tax purposes............. 1,370 2,611 Provision for doubtful accounts........................... 1,376 1,495 Reserve differential for gaming activities................ 1,392 -- Separate state loss attributes............................ -- 5,575 Other..................................................... 1,590 2,934 ------- ------- Subtotal.................................................. 29,266 21,849 Valuation allowance....................................... -- (5,575) ------- ------- Gross deferred tax asset.................................. 29,266 16,274 ------- ------- Deferred tax liabilities: Difference between book and tax basis of property......... 38,113 354 Difference between book and tax basis of amortizable assets................................................. 9,385 5,445 Reserve differential for gaming activities................ -- 1,030 Other..................................................... 1,469 2,887 ------- ------- Gross deferred liability.................................. 48,967 9,716 ------- ------- Net deferred tax liability (asset)................ $19,701 $(6,558) ======= ======= At December 31, 1998, the Company had approximately $58.0 million of federal tax net operating loss carryforwards which begin to expire in the year 2018 and $8.0 million of losses which may be carried back to the fiscal year ended June 30, 1997. Additionally, the Company has approximately $6.0 million of state tax net operating loss carryforwards which begin to expire in the year 2018. The Company charged off a state tax operating loss carryforward generated in connection with its operations in Kansas City, Missouri. The Company is no longer conducting business in Missouri and will not utilize the carryforward in future years. The carryforward was fully reserved in prior years and the charge will have no effect on the current or future tax provision. NOTE 12. STOCKHOLDERS' EQUITY AND STOCK INCENTIVE PLANS Equity Offering In October 1996, the Company completed a public offering of 4,000,000 shares of common stock at $9.00 per share. Net proceeds for this offering, after deducting costs paid by the Company, were $33.5 million. The net proceeds from the offering were used to reduce outstanding indebtedness under the Company's Bank Credit Facility. Employee Stock Purchase Plan Under the terms of the Company's Employee Stock Purchase Plan (the "Plan"), eligible employees may purchase the Company's common stock, semi-annually, through payroll deductions, at 85% of the market price either on the purchase date or the offering date, whichever price is lower. The Company had provided 68 71 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1,500,000 shares for issuance under the Plan and 254,771 shares remain available for future issuance. The Company will cancel the Plan on July 1, 1999. Stock Options As of December 31, 1998, the Company had in effect various stock option plans. Stock options awarded under these plans are granted primarily to employees and directors of the Company. The maximum number of shares of common stock available for issuance under these plans is 7,050,000 shares. Options granted under the plans generally become exercisable ratably over a three or four year period from the date of grant. Options granted under the plans have an exercise price equal to the market price of the Company's common stock on the date of grant and expire no later than ten years after the date of grant. In May 1997, the Board of Directors of the Company authorized the repricing of certain options. The effect of the repricing resulted in the cancellation of 2,274,033 options and the reissuance of 1,277,971 options with a price equal to the market value of the common stock at the date of repricing. All repriced options became fully vested and exercisable on December 31, 1998. Summarized information for the stock options plans is as follows: OPTION OPTIONS PRICES ---------- --------------- Options outstanding at July 1, 1995..................... 3,916,618 $13.63 - $18.50 Options granted......................................... 63,000 13.25 - 14.38 Options canceled........................................ (72,697) 13.63 - 17.00 Options exercised....................................... (2,334) 13.63 ---------- --------------- Options outstanding at June 30, 1996.................... 3,904,587 $13.25 - $18.50 Options granted......................................... 2,841,671 5.50 - 11.50 Options canceled........................................ (2,677,087) 13.25 - 17.00 ---------- --------------- Options outstanding at June 30, 1997.................... 4,069,171 $ 5.50 - $18.50 Options granted......................................... 706,000 5.75 - 8.25 Options canceled........................................ (73,161) 5.75 - 18.50 ---------- --------------- Options outstanding at December 31, 1997................ 4,702,010 $ 5.50 - $17.00 Options granted......................................... 1,112,600 4.56 - 7.50 Options canceled........................................ (115,400) 4.56 - 13.63 ---------- --------------- Options outstanding at December 31, 1998................ 5,699,210 $ 4.56 - $17.00 ========== =============== Exercisable options at December 31, 1998................ 3,656,652 ========== Options available for grant at December 31, 1998........ 1,348,456 ========== The following table summarizes the information about stock options outstanding at December 31, 1998: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ----------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE PRICE --------------- ----------- ---------------- -------------- ----------- -------- $4.56 - $ 5.50 1,098,300 9.71 $4.58 3,750 $ 5.50 5.75 - 5.75 1,931,508 6.48 5.75 1,471,511 5.75 6.88 - 17.00 2,669,402 6.56 12.15 2,181,391 12.95 --------- ---- ----- --------- ------ 5,699,210 7.14 $8.52 3,656,652 $10.05 ========= ==== ===== ========= ====== 69 72 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the fiscal year ended June 30, 1997, the Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 provides, among other things, that companies may elect to account for employee stock options using a fair value-based method or continue to apply the intrinsic value-based method prescribed by Accounting Principal Board Opinion No. 25 ("APB No. 25"). The Company has elected to continue to account for employee stock options in accordance with APB No. 25. The following table discloses the Company's pro forma net income (loss) and net income (loss) per share assuming compensation cost for employee stock options had been recognized under SFAS No. 123. In addition, the table includes the excess of the compensation cost under SFAS No. 123 over the cost recognized related to the Employee Stock Purchase Plan. The table also discloses the weighted-average assumptions used in estimating the fair value of each option grant on the date of grant using the Black-Scholes option pricing model and the estimated weighted-average fair value of the options granted. The model assumes no expected future dividend payments on the Company's common stock for the options granted in the year ended December 31, 1998, the six months ended December 31, 1997 or the years ended June 30, 1997 and 1996. FISCAL YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------ 1998 1997 1997 1996 ------------ ---------------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income (loss) before extraordinary item As reported........................ $28,600 $12,100 $(71,423) $29,579 Pro forma.......................... 26,694 10,904 (72,555) 29,561 Net income (loss) As reported........................ $28,600 $ 4,860 $(77,492) $28,144 Pro forma.......................... 26,694 3,664 (78,624) 28,126 Basic and diluted income (loss) per share before extraordinary items As reported........................ $ 0.46 $ 0.20 $ (1.19) $ 0.52 Pro forma.......................... 0.43 0.18 (1.20) 0.52 Basic and diluted net income (loss) per share As reported........................ $ 0.46 $ 0.08 $ (1.29) $ 0.49 Pro forma.......................... 0.43 0.06 (1.31) 0.49 Weighted-average assumptions Expected stock price volatility.... 57.16% 38.48% 38.48% 38.48% Risk-free interest rate............ 5.02% 6.05% 6.05% 6.20% Expected option lives (years)...... 3.39 2.02 2.54 2.72 Estimated fair value of options granted......................... $ 1.83 $ 1.79 $ 2.13 $ 4.15 Because the accounting method prescribed by SFAS No. 123 is not applicable to options granted prior to July 1, 1995, the compensation cost reflected in the pro forma amounts shown above may not be representative of that to be expected in future years. NOTE 13. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ended December 31, 1998. This statement redefines how operating segments are determined and requires qualitative disclosure of certain financial and descriptive information about a company's operating segments. 70 73 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's management reviews the results of operations, certain assets, and additions to property and equipment based on four distinct geographic gaming market segments: the Stardust Resort and Casino on the Las Vegas Strip, Boulder Strip Properties, Downtown Properties and Central Region Properties. As used herein, "Boulder Strip Properties" consist of Sam's Town Hotel and Gambling Hall, the Eldorado Casino, and Jokers Wild Casino; "Downtown Properties" consist of the California Hotel and Casino, the Fremont Hotel and Casino, Main Street Station Casino, Brewery and Hotel and Vacations Hawaii; "Central Region Properties" consist of Sam's Town Hotel and Gambling Hall located in Tunica, Mississippi, Sam's Town Kansas City (through July 15, 1998), Par-A-Dice Hotel and Casino, Treasure Chest Casino, and management fee income from Silver Star Resort and Casino. SIX MONTHS FISCAL YEAR ENDED YEAR ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, -------------------- 1998 1997 1997 1996 ------------ ------------ --------- -------- (IN THOUSANDS) Casino Revenue Stardust............................... $107,857 $ 53,974 $ 114,571 $125,223 Boulder Strip Properties............... 147,104 69,188 142,264 139,219 Downtown Properties.................... 127,948 56,812 109,739 106,399 -------- -------- --------- -------- Nevada Region............................ 382,909 179,974 366,574 370,841 Central Region........................... 339,215 143,733 207,208 177,326 -------- -------- --------- -------- Total casino revenue........... $722,124 $323,707 $ 573,782 $548,167 ======== ======== ========= ======== EBITDA(1) Stardust............................... $ 22,114 $ 14,061 $ 35,028 $ 49,673 Boulder Strip Properties............... 39,500 17,824 41,717 38,607 Downtown Properties.................... 28,314 8,886 21,067 26,441 -------- -------- --------- -------- Nevada Region............................ 89,928 40,771 97,812 114,721 Central Region........................... 133,086 61,603 84,157 81,038 -------- -------- --------- -------- Property EBITDA........................ 223,014 102,374 181,969 195,759 -------- -------- --------- -------- Other Costs and Expenses Corporate expense...................... 19,994 9,131 24,333 24,343 Depreciation and amortization.......... 73,407 35,097 67,242 60,626 Impairment and restructuring charges... 5,925 -- 131,339 -- Preopening expense..................... -- -- 3,481 10,004 Other expense, net..................... 73,797 37,310 61,022 51,186 -------- -------- --------- -------- Total other costs and expenses..................... 173,123 81,538 287,417 146,159 -------- -------- --------- -------- Income (loss) before provision (benefit) for income taxes and extraordinary items............................... 49,891 20,836 (105,448) 49,600 Provision (benefit) for taxes............ 21,291 8,736 (34,025) 20,021 -------- -------- --------- -------- Income (loss) before extraordinary items.................................. 28,600 12,100 (71,423) 29,579 Extraordinary items, net of tax.......... -- 7,240 6,069 1,435 -------- -------- --------- -------- Net income (loss)........................ $ 28,600 $ 4,860 $ (77,492) $ 28,144 ======== ======== ========= ======== 71 74 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, -------------------- 1998 1997 -------- -------- Assets(2) Stardust.................................................. $160,697 $158,017 Boulder Strip Properties.................................. 159,930 157,697 Downtown Properties....................................... 166,272 174,818 -------- -------- Nevada Region............................................... 486,899 490,532 Central Region.............................................. 432,566 460,551 -------- -------- Total properties' assets.......................... 919,465 951,083 Corporate Entities.......................................... 46,356 28,163 -------- -------- Total assets...................................... $965,821 $979,246 ======== ======== SIX MONTHS FISCAL YEAR ENDED YEAR ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------ 1998 1997 1997 1996 ------------ ------------ ------- ------- Additions to Property and Equipment Stardust............................ $14,705 $ 1,418 $ 3,630 $ 1,446 Boulder Strip Properties............ 16,076 1,806 5,084 11,984 Downtown Properties................. 7,683 7,432 41,410 25,794 ------- ------- ------- ------- Nevada Region......................... 38,464 10,656 50,124 39,224 Central Region........................ 11,658 6,051 34,820 51,396 ------- ------- ------- ------- Total properties' additions................. 50,122 16,707 84,944 90,620 Corporate Entities.................... 20,726 1,109 14,263 357 ------- ------- ------- ------- Total additions to property and equipment............. $70,848 $17,816 $99,207 $90,977 ======= ======= ======= ======= - --------------- (1) EBITDA is earnings before interest, taxes, depreciation and amortization expense, preopening expense and impairment and restructuring charges. (2) Assets represent property and equipment, net and goodwill and other intangible assets, net. NOTE 14. EARNINGS PER SHARE A reconciliation of income and shares for basic and diluted earnings per share is as follows: YEAR ENDED DECEMBER 31, 1998 ---------------------------------------- WEIGHTED AVERAGE PER SHARE INCOME SHARES AMOUNT ------- ---------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE Net income............................ $28,600 61,749 $0.46 ======= ====== ===== DILUTED EARNINGS PER SHARE Net income...................................... $28,600 61,749 Effect of dilutive securities-stock options..... -- 101 ------- ------ Net income............................ $28,600 61,850 $0.46 ======= ====== ===== Options to purchase approximately 5.7 million shares of common stock at December 31, 1998 at prices of $4.56 - $17.00 were outstanding during the period but not included in the computation of diluted earnings per share because their exercise price was in excess of the average market price of the common stock for the period presented. 72 75 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SIX MONTHS ENDED DECEMBER 31, --------------------------------------------------------------- 1997 1996 ------------------------------ ------------------------------ WEIGHTED WEIGHTED AVERAGE PER SHARE INCOME/ AVERAGE PER SHARE INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT ------- -------- --------- ------- -------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE Income before extraordinary items....... $12,100 61,525 $ 0.20 $ 2,852 59,150 $ 0.05 Extraordinary items, net................ (7,240) 61,525 (0.12) (6,069) 59,150 (0.10) ------- ------ ------ ------- ------ ------ Net income (loss)............. $ 4,860 61,525 $ 0.08 $(3,217) 59,150 $(0.05) ======= ====== ====== ======= ====== ====== DILUTED EARNINGS PER SHARE Income before extraordinary items....... $12,100 61,525 $ 2,852 59,150 Effect of dilutive securities-stock options............................... -- 261 -- 9 ------- ------ ------- ------ Income before extraordinary items....... 12,100 61,786 $ 0.20 2,852 59,159 $ 0.05 Extraordinary items, net................ (7,240) -- (0.12) (6,069) -- (0.10) ------- ------ ------ ------- ------ ------ Net income (loss)............. $ 4,860 61,786 $ 0.08 $(3,217) 59,159 $(0.05) ======= ====== ====== ======= ====== ====== Options to purchase approximately 2.8 million and 3.7 million shares of common stock at December 31, 1997 and 1996, respectively, at prices of $7.75 - $17.00 and $13.63 - $18.50, respectively, were outstanding during the period but not included in the computation of diluted earnings per share because their exercise price was in excess of the average market price of the common stock for the periods presented. FISCAL YEAR ENDED JUNE 30, ---------------------------------------------------------------- 1997 1996 ------------------------------- ------------------------------ WEIGHTED WEIGHTED INCOME/ AVERAGE PER SHARE AVERAGE PER SHARE (LOSS) SHARES AMOUNT INCOME SHARES AMOUNT -------- -------- --------- ------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EARNINGS PER SHARE Income before extraordinary items...... $(71,423) 60,248 $(1.19) $29,579 57,058 $ 0.52 Extraordinary items, net............... (6,069) 60,248 (0.10) (1,435) 57,058 (0.03) -------- ------ ------ ------- ------ ------ Net income (loss)............ $(77,492) 60,248 $(1.29) $28,144 57,058 $ 0.49 ======== ====== ====== ======= ====== ====== DILUTED EARNINGS PER SHARE Income before extraordinary items...... $(71,423) 60,248 $29,579 57,058 Effect of dilutive securities-stock options.............................. -- -- -- -- -------- ------ ------- ------ Income before extraordinary items...... (71,423) 60,248 $(1.19) 29,579 57,058 $ 0.52 Extraordinary items, net............... (6,069) -- (0.10) (1,435) -- (0.03) -------- ------ ------ ------- ------ ------ Net income (loss)............ $(77,492) 60,248 $(1.29) $28,144 57,058 $ 0.49 ======== ====== ====== ======= ====== ====== Options to purchase approximately 2.8 million and 3.8 million shares of common stock at June 30, 1997 and 1996, respectively, at prices of $8.38 - $18.50 and $13.63 - $18.50, respectively, were outstanding during the period but not included in the computation of diluted earnings per share because their exercise price was in excess of the average market price of the common stock for the periods presented. Options to purchase approximately 18,000 shares of common stock at June 30, 1997 are not included in diluted earnings per share due to the net loss before extraordinary item that was incurred during that year. 73 76 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15. GUARANTOR INFORMATION The Company's 9.25% Notes (see Note 7) are guaranteed by a majority of the Company's wholly-owned existing significant subsidiaries. These guaranties are full, unconditional, and joint and several. In connection with the October 1997 acquisition of Treasure Chest, 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 and for the year ended December 31, 1998 and as of and for the six month period ended December 31, 1997. Comparative financial information for the fiscal years ended June 30, 1997 and 1996 is not presented since management believes such information is not material to investors. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1998 COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- ---------- ---------- ----------- ------------ (IN THOUSANDS) ASSETS Current assets...................... $ 23,193 $ 97,564 $ 22,533 $ (1,545)(1) $ 141,745 Property and equipment, net......... 36,490 687,740 38,977 -- 763,207 Other assets and deferred charges... 919,264 (515,630) 153,170 (518,114)(1)(2) 38,690 Goodwill and other intangible assets, net....................... -- 119,365 83,249 -- 202,614 -------- --------- -------- --------- ---------- Total assets.............. $978,947 $ 389,039 $297,929 $(519,659) $1,146,256 ======== ========= ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities................. $ 35,301 $ 69,217 $ 15,575 $ (2,440)(1) $ 117,653 Long-term debt, net of current maturities........................ 706,373 68,484 33 -- 774,890 Deferred income taxes and other liabilities....................... 9,984 16,382 41 -- 26,407 Stockholders' equity................ 227,289 234,956 282,280 (517,219)(2) 227,306 -------- --------- -------- --------- ---------- Total liabilities and stockholders' equity.... $978,947 $ 389,039 $297,929 $(519,659) $1,146,256 ======== ========= ======== ========= ========== - --------------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 74 77 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1997 COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- ---------- ---------- ----------- ------------ (IN THOUSANDS) ASSETS Current assets...................... $ 7,559 $ 106,127 $ 18,620 $ (7,607)(1) $ 124,699 Property and equipment, net......... 19,153 708,235 43,847 -- 771,235 Other assets and deferred charges... 807,630 (389,658) 125,707 (495,209)(1)(2) 48,470 Goodwill and other intangible assets, net....................... -- 122,622 85,389 -- 208,011 -------- --------- -------- --------- ---------- Total assets.............. $834,342 $ 547,326 $273,563 $(502,816) $1,152,415 ======== ========= ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities................. $ 28,136 $ 75,740 $ 16,425 $ (7,959)(1) $ 112,342 Long-term debt, net of current maturities........................ 605,675 237,190 67 -- 842,932 Stockholders' equity................ 200,531 234,396 257,071 (494,857)(2) 197,141 -------- --------- -------- --------- ---------- Total liabilities and stockholders' equity.... $834,342 $ 547,326 $273,563 $(502,816) $1,152,415 ======== ========= ======== ========= ========== - --------------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 75 78 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1998 COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- ---------- ---------- ----------- ------------ (IN THOUSANDS) Revenues Casino.............................. $ -- $601,781 $120,343 $ -- $ 722,124 Food and beverage................... -- 151,837 9,745 -- 161,582 Room................................ -- 74,053 -- -- 74,053 Other............................... 9,517 37,903 35,180 (11,697)(1) 70,903 Management fees..................... 106,903 47,439 20,174 (134,310)(1) 40,206 -------- -------- -------- --------- ---------- Gross revenues........................ 116,420 913,013 185,442 (146,007) 1,068,868 Less promotional allowances........... -- 86,740 7,032 -- 93,772 -------- -------- -------- --------- ---------- Net revenues................ 116,420 826,273 178,410 (146,007) 975,096 -------- -------- -------- --------- ---------- Costs and expenses Casino.............................. -- 322,186 44,560 -- 366,746 Food and beverage................... -- 96,040 10,155 -- 106,195 Room................................ -- 24,724 -- -- 24,724 Other............................... -- 77,071 38,424 (49,869)(1) 65,626 Selling, general and administrative................... -- 122,759 24,888 -- 147,647 Maintenance and utilities........... -- 35,625 5,519 -- 41,144 Depreciation and amortization....... 642 63,718 9,047 -- 73,407 Corporate expense................... 28,528 1,514 1,649 (11,697)(1) 19,994 Restructuring charge................ -- 5,925 -- -- 5,925 -------- -------- -------- --------- ---------- Total....................... 29,170 749,562 134,242 (61,566) 851,408 -------- -------- -------- --------- ---------- Operating income...................... 87,250 76,711 44,168 (84,441) 123,688 Other income (expense), net........... (68,204) (6,572) 979 -- (73,797) -------- -------- -------- --------- ---------- Income before income taxes............ 19,046 70,139 45,147 (84,441) 49,891 Provision (benefit) for income taxes............................... (9,539) 30,825 5 -- 21,291 -------- -------- -------- --------- ---------- Net income............................ $ 28,585 $ 39,314 $ 45,142 $ (84,441) $ 28,600 ======== ======== ======== ========= ========== - --------------- Elimination Entries (1) To eliminate intercompany revenue and expense. 76 79 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- ---------- ---------- ----------- ------------ (IN THOUSANDS) Revenues Casino................................ $ -- $303,250 $20,457 $ -- $323,707 Food and beverage..................... -- 77,104 1,554 -- 78,658 Room.................................. -- 38,330 -- -- 38,330 Other................................. 120 22,473 17,444 (963)(1) 39,074 Management fees and joint venture..... 62,865 21,849 3,729 (68,133)(1) 20,310 -------- -------- ------- -------- -------- Gross revenues.......................... 62,985 463,006 43,184 (69,096) 500,079 Less promotional allowances............. -- 43,198 1,110 -- 44,308 -------- -------- ------- -------- -------- Net revenues..................... 62,985 419,808 42,074 (69,096) 455,771 -------- -------- ------- -------- -------- Costs and expenses Casino................................ -- 159,464 7,312 -- 166,776 Food and beverage..................... -- 52,036 1,721 -- 53,757 Room.................................. -- 12,958 -- -- 12,958 Other................................. -- 38,129 17,057 (22,393)(1) 32,793 Selling, general and administrative... -- 63,760 4,701 -- 68,461 Maintenance and utilities............. -- 18,227 425 -- 18,652 Depreciation and amortization......... 208 33,276 1,613 -- 35,097 Corporate expense..................... 3,703 4,668 760 -- 9,131 -------- -------- ------- -------- -------- Total............................ 3,911 382,518 33,589 (22,393) 397,625 -------- -------- ------- -------- -------- Operating income........................ 59,074 37,290 8,485 (46,703) 58,146 Other expense, net...................... (24,736) (12,574) -- -- (37,310) -------- -------- ------- -------- -------- Income before provision (benefit) for income taxes.......................... 34,338 24,716 8,485 (46,703) 20,836 Provision (benefit) for income taxes.... (2,258) 10,991 3 -- 8,736 -------- -------- ------- -------- -------- Income before extraordinary item........ 36,596 13,725 8,482 (46,703) 12,100 Extraordinary item, net................. -- 7,240 -- -- 7,240 -------- -------- ------- -------- -------- Net income.............................. $ 36,596 $ 6,485 $ 8,482 $(46,703) $ 4,860 ======== ======== ======= ======== ======== - --------------- Elimination Entries (1) To eliminate intercompany revenue and expense. 77 80 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1998 COMBINED COMBINED NON- PARENT GUARANTORS GUARANTORS CONSOLIDATED -------- ---------- ---------- ------------ (IN THOUSANDS) Cash flows from operating activities................ $ 64,427 $ 37,873 $ 19,449 $121,749 -------- -------- -------- -------- Cash flows from investing activities Proceeds from sale of Sam's Town Kansas City's assets......................................... -- 10,500 -- 10,500 Acquisition of property, equipment and other assets......................................... (11,514) (54,467) (2,030) (68,011) -------- -------- -------- -------- Net cash used in investing activities............... (11,514) (43,967) (2,030) (57,511) -------- -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt.......... -- 8,000 -- 8,000 Payments on long-term debt........................ (2,218) (562) (129) (2,909) Receipt/(payment) of dividends.................... 19,196 (4,169) (15,027) -- Net borrowings under credit agreements............ (73,000) -- -- (73,000) Proceeds from issuance of common stock............ 1,331 -- -- 1,331 -------- -------- -------- -------- Net cash provided by (used in) financing activities........................................ (54,691) 3,269 (15,156) (66,578) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents....................................... (1,778) (2,825) 2,263 (2,340) Cash and cash equivalents, beginning of period............................................ 2,832 58,317 17,128 78,277 -------- -------- -------- -------- Cash and cash equivalents, end of period............ $ 1,054 $ 55,492 $ 19,391 $ 75,937 ======== ======== ======== ======== 78 81 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- ---------- ---------- ----------- ------------ (IN THOUSANDS) Cash flows from operating activities..... $(314,554) $ 249,131 $ 115,280 $ 7,615(1) $ 57,472 --------- --------- --------- ------- --------- Cash flows from investing activities Net cash paid for Treasure Chest Casino L.L.C............................... -- -- (103,040) -- (103,040) Acquisition of property, equipment and other assets........................ (1,183) (20,489) (514) -- (22,186) --------- --------- --------- ------- --------- Net cash used in investing activities.... (1,183) (20,489) (103,554) -- (125,226) --------- --------- --------- ------- --------- Cash flows from financing activities Proceeds from issuance of long-term debt................................ 244,525 -- -- -- 244,525 Payments on long-term debt............. (346) (462) (95) -- (903) Early retirement of long-term debt..... -- (192,631) -- -- (192,631) Net borrowings (payments) under credit agreements.......................... 73,469 (26,854) -- (7,615)(1) 39,000 Proceeds from issuance of common stock............................... 820 -- -- -- 820 --------- --------- --------- ------- --------- Net cash provided by (used in) financing activities............................. 318,468 (219,947) (95) (7,615) 90,811 --------- --------- --------- ------- --------- Net increase in cash and cash equivalents............................ 2,731 8,695 11,631 -- 23,057 Cash and cash equivalents, beginning of period................................. 101 49,622 5,497 -- 55,220 --------- --------- --------- ------- --------- Cash and cash equivalents, end of period................................. $ 2,832 $ 58,317 $ 17,128 $ -- $ 78,277 ========= ========= ========= ======= ========= - --------------- Elimination Entries (1) To eliminate intercompany payments of debt. 79 82 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------- FIRST SECOND THIRD FOURTH TOTAL -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues................................ $250,042 $245,485 $234,593 $244,976 $975,096 Operating income............................ 35,235 25,733 28,772 33,948 123,688 Net income.................................. $ 9,324 $ 4,034 $ 5,937 $ 9,305 $ 28,600 -------- -------- -------- -------- -------- Basic and diluted net income per common share: Net income.................................. $ 0.15 $ 0.07 $ 0.10 $ 0.15 $ 0.46 ======== ======== ======== ======== ======== SIX MONTHS ENDED DECEMBER 31, 1997 --------------------------------------- FIRST SECOND TOTAL ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues................................................ $217,748 $238,023 $455,771 Operating income............................................ 28,011 30,135 58,146 Income before income tax and extraordinary item............. 9,878 10,958 20,836 Extraordinary item, net of tax.............................. -- 7,240 7,240 Net income (loss)........................................... $ 5,876 $ (1,016) $ 4,860 -------- -------- -------- Basic and diluted net income (loss) per common share: Income before extraordinary item............................ $ 0.10 $ 0.10 $ 0.20 Extraordinary item, net of tax.............................. -- (0.12) (0.12) -------- -------- -------- Net income (loss)........................................... $ 0.10 $ (0.02) $ 0.08 ======== ======== ======== FISCAL YEAR ENDED JUNE 30, 1997 ------------------------------------------------------ FIRST SECOND THIRD FOURTH TOTAL -------- -------- --------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues.............................. $185,891 $198,267 $ 219,154 $215,947 $ 819,259 Operating income (loss)................... 11,121 20,360 (98,740) 22,833 (44,426) Income (loss) before income tax and extraordinary item...................... (1,960) 6,714 (115,941) 5,739 (105,448) Extraordinary item, net of tax............ -- 6,069 -- -- 6,069 Net income (loss)......................... $ (1,215) $ (2,002) $ (77,712) $ 3,437 $ (77,492) -------- -------- --------- -------- --------- Basic and diluted net income (loss) per common share: Income (loss) before extraordinary item... $ (0.02) $ 0.07 $ (1.27) $ 0.06 $ (1.19) Extraordinary item, net of tax............ -- (0.10) -- -- (0.10) -------- -------- --------- -------- --------- Net income (loss)......................... $ (0.02) $ (0.03) $ (1.27) $ 0.06 $ (1.29) ======== ======== ========= ======== ========= 80 83 (C) EXHIBITS. EXHIBIT NUMBER DOCUMENT ---------- -------- 2.1(5) Stock Purchase Agreement, dated as of April 26, 1996, by and among the Company, Par-A-Dice Gaming Corporation, East Peoria Hotel, Inc., and the Owners of all the Capital Stock of Par-A-Dice Gaming Corporation and East Peoria Hotel. 2.2(2) Agreement and Plan of Reorganization dated as of June 25, 1993, by and among Eldorado, Inc., the Company, CH&C and certain stockholders and noteholders of Eldorado, Inc. 2.4(12) Purchase Agreement, dated as of July 11, 1997, by and among the Company, Boyd Kenner, Inc., Boyd Louisiana, L.L.C., Treasure Chest Casino, L.L.C., and certain members of Treasure Chest Casino, L.L.C. 2.5(13) First Amendment to Purchase Agreement, dated as of September 9, 1997 among the Company, Boyd Kenner, Inc., Boyd Louisiana, L.L.C., Treasure Chest Casino, L.L.C. and the Selling members. 3.1(9) Restated Articles of Incorporation. 3.2(9) Restated Bylaws. 4.1(13) Registration Agreement, dated July 17, 1997, among the Company, Salomon Brothers Inc., UBS Securities LLC and CIBC Wood Gundy Securities Corp. 4.2(14) Form of Indenture relating to $200,000,000 aggregate principal amount of 9.25% Senior Subordinated Notes due 2003, including the Form of Note. 4.3(13) Form of Indenture relating to 9.50% Senior Subordinated Notes due 2007, dated as of July 22, 1997, between the Company and State Street Bank and Trust Company, including the Form of Note. 4.4(13) First Supplemental Indenture, among the Company, as Issuer, certain subsidiaries of the Company, as Guarantors, and the Bank of New York, as Trustee, dated as of December 31, 1996. 10.1(1) Ninety-Nine Year Lease dated June 30, 1954, by and among Fremont Hotel, Inc., and Charles L. Ronnow and J.L. Ronnow, and Alice Elizabeth Ronnow. 10.2(1) Lease Agreement dated October 31, 1963, by and between Fremont Hotel, Inc. and Cora Edit Garehime. 10.3(1) Lease Agreement dated December 31, 1963, by and among Fremont Hotel, Inc., Bank of Nevada and Leon H. Rockwell, Jr. 10.4(1) Lease Agreement dated June 7, 1971, by and among Anthony Antonacci, Margaret Fay Simon and Bank of Nevada, as Co-Trustees under Peter Albert Simon's Last Will and Testament, and related Assignment of Lease dated February 25, 1985 to Sam-Will, Inc. and Fremont Hotel, Inc. 10.5(4) Lease Agreement dated July 25, 1973, by and between CH&C and William Peccole, as Trustee of the Peter Peccole 1970 Trust. 10.6(1) Lease Agreement dated July 1, 1974, by and among Fremont Hotel, Inc. and Bank of Nevada, Leon H. Rockwell, Jr. and Margorie Rockwell Riley. 81 84 EXHIBIT NUMBER DOCUMENT ---------- -------- 10.7(1) Ground Lease Agreement dated July 5, 1978, by and between CH&C, and Irene Elizabeth Carey, as Trustee of the Carey Survivor's Trust U/A October 18, 1972 and Irene Elizabeth Carey, as Trustee of the Carey Family Trust U/A October 18, 1972. 10.8(1) Ninety-Nine Year Lease dated December 1, 1978 by and between Matthew Paratore, and George W. Morgan and LaRue Morgan, and related Lease Assignment dated November 10, 1987 to Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino. 10.9(1) Implemented Proposal dated June 15, 1992, by and between Stardust Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.10(1) Implemented Proposal dated June 15, 1992, by and between Fremont Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.11(2) Management Agreement dated March 11, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.12(4) Addendum to Management Agreement dated November 24, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.13(2) Casino Management Agreement dated August 30, 1993, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.14(4) Amended and Restated Operating Agreement dated August 5, 1994, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.15(4) Development Agreement dated June 6, 1994, by and among the Company, Boyd Kansas City, Inc. and Port Authority of Kansas City, Missouri. 10.16(2) Form of Indemnification Agreement. 10.17(2)* 1993 Flexible Stock Incentive Plan and related agreements. 10.18(2)* 1993 Directors Non-Qualified Stock Option Plan and related agreements. 10.19(2)* 1993 Employee Stock Purchase Plan and related agreement. 10.20(1) 401(k) Profit Sharing Plan and Trust. 10.21(6) Joint Venture Agreement of Stardust A.C., dated as of May 29, 1996, by and between MAC, Corp., a New Jersey Corporation, which is a wholly-owned subsidiary of Mirage Resorts Incorporated, a Nevada Corporation, and Grand K, Inc., a Nevada Corporation, which is a wholly-owned subsidiary of the Company. (Certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment for this Agreement.) 10.22(3) Amended and Restated Joint Venture Agreement of Stardust A.C. 10.23(7) Credit Agreement dated as of June 19, 1996, by and among the Company and California Hotel and Casino as the Borrowers, certain commercial lending institutions as the Lenders, Canadian Imperial Bank of Commerce as the Agent, Bank of America National Trust Savings Association and Wells Fargo Bank N.A. as Co-Managing Agents and Bankers Trust Company, Credit Lyonnais and Societe Generale as Co-Agents. 10.24(8) Property Purchase Agreement dated as of August 9, 1996, by and between Steamboat Station Company, a Nevada general partnership, and Boyd Reno, Inc., a Nevada corporation and wholly-owned subsidiary of the Company. 10.25(10)* Boyd Gaming Corporation 1996 Stock Incentive Plan. 82 85 EXHIBIT NUMBER DOCUMENT ---------- -------- 10.26(11) First Amendment to Credit Agreement, dated as of March 28, 1997, among Boyd Gaming Corporation and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Savings Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais, Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 10.27(13) Second Amendment to Credit Agreement, dated as of June 11, 1997, among the Company and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Saving Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 10.28(13) Third Amendment to Credit Agreement, dated as of June 24, 1997, among the Company and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Saving Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 21.1 (15) Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 24(15) Powers of Attorney. 27 Financial Data Schedule - --------------- * Management contracts or compensatory plans or arrangements. (1) Incorporated by reference to the Registration Statement on Form S-1, File No. 33-51672, of California Hotel and Casino and California Hotel Finance Corporation, which became effective on November 18, 1992. (2) Incorporated by reference to the Company's Statement on Form S-1, File No. 33-64006, which became effective on October 15, 1993. (3) Incorporated by reference to the Company's Current Report on Form 8-K dated July 14, 1998. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (5) Incorporated by reference to the Company's Current Report on Form 8-K dated April 26, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K dated June 7, 1996. (7) Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated June 19, 1996. (8) Incorporated by reference to the Company's Exhibit 2.1 of Current Report on Form 8-K dated August 16, 1996. (9) Incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (10) Incorporated by reference to Appendix A of the Company's October 22, 1996 Proxy Statement for the 1996 Annual Meeting of Stockholders. (11) Incorporated by reference to Exhibit 10.59 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. 83 86 (12) Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 11, 1997. (13) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1997. (14) Incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-0555. (15) Incorporated by reference to the Company's Annual Report on Form 10-K for the transition period from July 1, 1997 to December 31, 1997. 84 87 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 31, 1999. BOYD GAMING CORPORATION By: /s/ ELLIS LANDAU ------------------------------------ Ellis Landau Executive Vice President, Chief Financial Officer, Treasurer (Principal Financial Officer) 85 88 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William S. Boyd and Ellis Landau, and each of them, his of her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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 in the capacities and on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM S. BOYD Chairman of the Board of March 31, 1999 - -------------------------------------------------------- Directors, Chief Executive William S. Boyd Officer and Director (Principal Executive Officer) /s/ ELLIS LANDAU Executive Vice President, March 31, 1999 - -------------------------------------------------------- Chief Financial Officer and Ellis Landau Treasurer (Principal Financial Officer) /s/ DONALD D. SNYDER President and Director March 31, 1999 - -------------------------------------------------------- Donald D. Snyder /s/ ROBERT L. BOUGHNER Senior Executive Vice March 31, 1999 - -------------------------------------------------------- President & Chief Operating Robert L. Boughner Officer and Director /s/ WILLIAM R. BOYD Director March 31, 1999 - -------------------------------------------------------- William R. Boyd /s/ MARIANNE BOYD JOHNSON Director March 31, 1999 - -------------------------------------------------------- Marianne Boyd Johnson /s/ PERRY B. WHITT Director March 31, 1999 - -------------------------------------------------------- Perry B. Whitt /s/ WARREN L. NELSON Director March 31, 1999 - -------------------------------------------------------- Warren L. Nelson /s/ PHILIP J. DION Director March 31, 1999 - -------------------------------------------------------- Philip J. Dion /s/ MICHAEL O. MAFFIE Director March 31, 1999 - -------------------------------------------------------- Michael O. Maffie /s/ MAJ. GEN. BILLY G. MCCOY, RET. USAF Director March 31, 1999 - -------------------------------------------------------- Maj. Gen. Billy G. McCoy, Ret. USAF /s/ WILLIAM G. YATES Director March 31, 1999 - -------------------------------------------------------- William G. Yates 86 89 EXHIBIT INDEX EXHIBIT NUMBER DOCUMENT - ---------- -------- 2.1(5) Stock Purchase Agreement, dated as of April 26, 1996, by and among the Company, Par-A-Dice Gaming Corporation, East Peoria Hotel, Inc., and the Owners of all the Capital Stock of Par-A-Dice Gaming Corporation and East Peoria Hotel. 2.2(2) Agreement and Plan of Reorganization dated as of June 25, 1993, by and among Eldorado, Inc., the Company, CH&C and certain stockholders and noteholders of Eldorado, Inc. 2.4(12) Purchase Agreement, dated as of July 11, 1997, by and among the Company, Boyd Kenner, Inc., Boyd Louisiana, L.L.C., Treasure Chest Casino, L.L.C., and certain members of Treasure Chest Casino, L.L.C. 2.5(13) First Amendment to Purchase Agreement, dated as of September 9, 1997 among the Company, Boyd Kenner, Inc., Boyd Louisiana, L.L.C., Treasure Chest Casino, L.L.C. and the Selling members. 3.1(9) Restated Articles of Incorporation. 3.2(9) Restated Bylaws. 4.1(13) Registration Agreement, dated July 17, 1997, among the Company, Salomon Brothers Inc., UBS Securities LLC and CIBC Wood Gundy Securities Corp. 4.2(14) Form of Indenture relating to $200,000,000 aggregate principal amount of 9.25% Senior Subordinated Notes due 2003, including the Form of Note. 4.3(13) Form of Indenture relating to 9.50% Senior Subordinated Notes due 2007, dated as of July 22, 1997, between the Company and State Street Bank and Trust Company, including the Form of Note. 4.4(13) First Supplemental Indenture, among the Company, as Issuer, certain subsidiaries of the Company, as Guarantors, and the Bank of New York, as Trustee, dated as of December 31, 1996. 10.1(1) Ninety-Nine Year Lease dated June 30, 1954, by and among Fremont Hotel, Inc., and Charles L. Ronnow and J.L. Ronnow, and Alice Elizabeth Ronnow. 10.2(1) Lease Agreement dated October 31, 1963, by and between Fremont Hotel, Inc. and Cora Edit Garehime. 10.3(1) Lease Agreement dated December 31, 1963, by and among Fremont Hotel, Inc., Bank of Nevada and Leon H. Rockwell, Jr. 10.4(1) Lease Agreement dated June 7, 1971, by and among Anthony Antonacci, Margaret Fay Simon and Bank of Nevada, as Co-Trustees under Peter Albert Simon's Last Will and Testament, and related Assignment of Lease dated February 25, 1985 to Sam-Will, Inc. and Fremont Hotel, Inc. 10.5(4) Lease Agreement dated July 25, 1973, by and between CH&C and William Peccole, as Trustee of the Peter Peccole 1970 Trust. 10.6(1) Lease Agreement dated July 1, 1974, by and among Fremont Hotel, Inc. and Bank of Nevada, Leon H. Rockwell, Jr. and Margorie Rockwell Riley. 10.7(1) Ground Lease Agreement dated July 5, 1978, by and between CH&C, and Irene Elizabeth Carey, as Trustee of the Carey Survivor's Trust U/A October 18, 1972 and Irene Elizabeth Carey, as Trustee of the Carey Family Trust U/A October 18, 1972. 10.8(1) Ninety-Nine Year Lease dated December 1, 1978 by and between Matthew Paratore, and George W. Morgan and LaRue Morgan, and related Lease Assignment dated November 10, 1987 to Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino. 90 EXHIBIT NUMBER DOCUMENT - ---------- -------- 10.9(1) Implemented Proposal dated June 15, 1992, by and between Stardust Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.10(1) Implemented Proposal dated June 15, 1992, by and between Fremont Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.11(2) Management Agreement dated March 11, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.12(4) Addendum to Management Agreement dated November 24, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.13(2) Casino Management Agreement dated August 30, 1993, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.14(4) Amended and Restated Operating Agreement dated August 5, 1994, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.15(4) Development Agreement dated June 6, 1994, by and among the Company, Boyd Kansas City, Inc. and Port Authority of Kansas City, Missouri. 10.16(2) Form of Indemnification Agreement. 10.17(2)* 1993 Flexible Stock Incentive Plan and related agreements. 10.18(2)* 1993 Directors Non-Qualified Stock Option Plan and related agreements. 10.19(2)* 1993 Employee Stock Purchase Plan and related agreement. 10.20(1) 401(k) Profit Sharing Plan and Trust. 10.21(6) Joint Venture Agreement of Stardust A.C., dated as of May 29, 1996, by and between MAC, Corp., a New Jersey Corporation, which is a wholly-owned subsidiary of Mirage Resorts Incorporated, a Nevada Corporation, and Grand K, Inc., a Nevada Corporation, which is a wholly-owned subsidiary of the Company. (Certain portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment for this Agreement.) 10.22(3) Amended and Restated Joint Venture Agreement of Stardust A.C. 10.23(7) Credit Agreement dated as of June 19, 1996, by and among the Company and California Hotel and Casino as the Borrowers, certain commercial lending institutions as the Lenders, Canadian Imperial Bank of Commerce as the Agent, Bank of America National Trust Savings Association and Wells Fargo Bank N.A. as Co-Managing Agents and Bankers Trust Company, Credit Lyonnais and Societe Generale as Co-Agents. 10.24(8) Property Purchase Agreement dated as of August 9, 1996, by and between Steamboat Station Company, a Nevada general partnership, and Boyd Reno, Inc., a Nevada corporation and wholly-owned subsidiary of the Company. 10.25(10)* Boyd Gaming Corporation 1996 Stock Incentive Plan. 10.26(11) First Amendment to Credit Agreement, dated as of March 28, 1997, among Boyd Gaming Corporation and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Savings Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais, Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 91 EXHIBIT NUMBER DOCUMENT - ---------- -------- 10.27(13) Second Amendment to Credit Agreement, dated as of June 11, 1997, among the Company and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Saving Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 10.28(13) Third Amendment to Credit Agreement, dated as of June 24, 1997, among the Company and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, ("CIBC") as letter of credit issuer, Bank of America National Trust and Saving Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and CIBC as administrative agent and collateral agent. 21.1 (15) Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 24(15) Powers of Attorney. 27 Financial Data Schedule - --------------- * Management contracts or compensatory plans or arrangements. (1) Incorporated by reference to the Registration Statement on Form S-1, File No. 33-51672, of California Hotel and Casino and California Hotel Finance Corporation, which became effective on November 18, 1992. (2) Incorporated by reference to the Company's Statement on Form S-1, File No. 33-64006, which became effective on October 15, 1993. (3) Incorporated by reference to the Company's Current Report on Form 8-K dated July 14, 1998. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (5) Incorporated by reference to the Company's Current Report on Form 8-K dated April 26, 1996. (6) Incorporated by reference to the Company's Current Report on Form 8-K dated June 7, 1996. (7) Incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K dated June 19, 1996. (8) Incorporated by reference to the Company's Exhibit 2.1 of Current Report on Form 8-K dated August 16, 1996. (9) Incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1996. (10) Incorporated by reference to Appendix A of the Company's October 22, 1996 Proxy Statement for the 1996 Annual Meeting of Stockholders. (11) Incorporated by reference to Exhibit 10.59 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (12) Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated July 11, 1997. (13) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended June 30, 1997. (14) Incorporated by reference to the Company's Registration Statement on Form S-3, File No. 333-0555. (15) Incorporated by reference to the Company's Annual Report on Form 10-K for the transition period from July 1, 1997 to December 31, 1997.