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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-8570
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CIRCUS CIRCUS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0121916
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
3950 LAS VEGAS BOULEVARD SOUTH, LAS VEGAS, NEVADA 89119
(Address of principal executive offices)
(702) 632-6700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 31, 1999
Common Stock, $.01 2/3 par value 90,858,088 shares
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CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE NO.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at April 30, 1999
(Unaudited) and January 31, 1999.......................... 3-4
Condensed Consolidated Statements of Income (Unaudited) for
the Three Months Ended April 30, 1999 and 1998............ 5-6
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended April 30, 1999 and 1998........ 7
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 8-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16-22
Item 3. Quantitative and Qualitative Disclosures About Market
Risks..................................................... 22
Part II. OTHER INFORMATION........................................... 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
APRIL 30, JANUARY 31,
1999 1999
--------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents............. $ 90,558 $ 81,389
Receivables........................... 56,771 26,136
Inventories........................... 27,402 24,270
Prepaid expenses and other............ 31,027 29,483
--------------- ---------------
Total current assets............ 205,758 161,278
PROPERTY, EQUIPMENT AND LEASEHOLD
INTERESTS, at cost, less accumulated
depreciation and amortization of
$772,799 and $733,967, respectively... 3,173,544 3,000,822
EXCESS OF PURCHASE PRICE OVER FAIR
MARKET value of net assets acquired,
net................................... 364,511 367,076
NOTES RECEIVABLE........................ 17,758 10,895
INVESTMENTS IN UNCONSOLIDATED
AFFILIATES............................ 265,155 271,707
OTHER ASSETS............................ 42,257 57,929
--------------- ---------------
Total Assets.................... $ 4,068,983 $ 3,869,707
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
APRIL 30, JANUARY 31,
1999 1999
--------------- ---------------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of long-term debt..... $ 3,001 $ 3,481
Accounts payable--trade............... 32,361 23,745
Accounts payable--construction........ 50,809 75,030
Accrued liabilities................... 153,362 129,317
--------------- ---------------
Total current liabilities....... 239,533 231,573
LONG-TERM DEBT.......................... 2,463,836 2,259,149
DEFERRED INCOME TAX..................... 198,386 200,376
OTHER LONG-TERM LIABILITIES............. 21,578 20,981
--------------- ---------------
Total liabilities............... 2,923,333 2,712,079
STOCKHOLDERS' EQUITY:
Common stock, $.01 2/3 par value
Authorized--450,000,000 shares
Issued--113,634,013 and 113,622,508
shares............................ 1,894 1,894
Preferred stock, $.01 par value
Authorized--75,000,000 shares....... -- --
Additional paid-in capital............ 559,070 558,935
Retained earnings..................... 1,154,614 1,159,469
Treasury stock (23,375,925 and
22,959,425 shares), at cost......... (569,928) (562,670)
--------------- ---------------
Total stockholders' equity...... 1,145,650 1,157,628
--------------- ---------------
Total Liabilities and
Stockholders' Equity.......... $ 4,068,983 $ 3,869,707
--------------- ---------------
--------------- ---------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED APRIL
30,
------------------------
1999 1998
----------- -----------
REVENUES:.............................................
Casino.............................................. $ 216,815 $ 168,417
Rooms............................................... 130,610 87,799
Food and beverage................................... 81,355 60,089
Other............................................... 50,953 37,984
Earnings of unconsolidated affiliates............... 21,994 22,051
----------- -----------
501,727 376,340
Less-complimentary allowances....................... (30,468) (19,378)
----------- -----------
471,259 356,962
----------- -----------
COSTS AND EXPENSES:
Casino.............................................. 110,519 84,069
Rooms............................................... 41,965 31,422
Food and beverage................................... 64,134 51,094
Other operating expenses............................ 34,599 24,097
General and administrative.......................... 73,308 65,127
Depreciation and amortization....................... 41,090 33,966
Operating lease rent................................ 2,415 --
Preopening expenses................................. 33,610 --
----------- -----------
401,640 289,775
----------- -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSE............. 69,619 67,187
CORPORATE EXPENSE..................................... 7,120 6,128
----------- -----------
INCOME FROM OPERATIONS................................ 62,499 61,059
----------- -----------
OTHER INCOME (EXPENSE):
Interest, dividend and other income................. 522 920
Interest income and guarantee fees from
unconsolidated affiliate.......................... 715 798
Interest expense.................................... (33,507) (23,823)
Interest expense from unconsolidated affiliates..... (2,802) (3,160)
----------- -----------
(35,072) (25,265)
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAX................ 27,427 35,794
Provision for income tax............................ 10,288 14,187
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE................................ 17,139 21,607
Cumulative effect of change in accounting principle
for preopening expenses, net of tax benefit of
$11,843........................................... (21,994) --
----------- -----------
NET (LOSS) INCOME..................................... $ (4,855) $ 21,607
----------- -----------
----------- -----------
5
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED APRIL
30,
------------------------
1999 1998
----------- -----------
BASIC EARNINGS PER SHARE
Income before cumulative effect of change in
accounting principle.............................. $ 0.19 $ 0.23
----------- -----------
----------- -----------
Cumulative effect of change in accounting
principle......................................... $ (0.24) $ --
----------- -----------
----------- -----------
Net (loss) income per share......................... $ (0.05) $ 0.23
----------- -----------
----------- -----------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of change in
accounting principle.............................. $ 0.19 $ 0.23
----------- -----------
----------- -----------
Cumulative effect of change in accounting
principle......................................... $ (0.24) $ --
----------- -----------
----------- -----------
Net (loss) income per share......................... $ (0.05) $ 0.23
----------- -----------
----------- -----------
Average shares outstanding--basic................... 90,540,287 95,122,726
----------- -----------
----------- -----------
Average shares outstanding--diluted................. 91,583,038 95,294,160
----------- -----------
----------- -----------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
APRIL 30,
--------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................... $ (4,855) $ 21,607
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization......................... 43,262 35,983
Gain on disposition of fixed assets................... (19) (422)
(Increase) decrease in other current assets........... (35,311) 12,744
Decrease in other noncurrent assets................... 15,703 671
Increase in interest payable.......................... 13,658 5,060
Increase in other current liabilities................. 19,004 7,314
Increase (decrease) in deferred income tax............ (1,990) 1,811
Decrease in other noncurrent liabilities.............. (16) (16)
Unconsolidated affiliates' distributions in excess of
earnings (earnings in excess of distributions)...... 8,602 (9,050)
--------- ---------
Total adjustments..................................... 62,893 54,095
--------- ---------
Net cash provided by operating activities......... 58,038 75,702
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (213,547) (184,379)
Increase (decrease) in construction payable............. (24,221) 10,969
Increase in investments in unconsolidated affiliates.... (2,155) (1,510)
Proceeds from sale of equipment and other assets........ 251 528
(Increase) decrease in notes receivable................. (6,863) 61
--------- ---------
Net cash used in investing activities............. (246,535) (174,331)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net effect on cash of issuances and payments of debt
with original maturities of three months or less...... 204,515 251,434
Issuances of debt with original maturities in excess of
three months.......................................... 480 21,736
Principal payments of debt with original maturities
in excess of three months............................. (819) (159,015)
Exercise of stock options and warrants.................. 135 219
Purchases of treasury stock............................. (7,258) --
Other................................................... 613 (720)
--------- ---------
Net cash provided by financing activities......... 197,666 113,654
--------- ---------
Net increase in cash and cash equivalents................. 9,169 15,025
Cash and cash equivalents at beginning of period.......... 81,389 58,631
--------- ---------
Cash and cash equivalents at end of period................ $ 90,558 $ 73,656
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the period for:
Interest (net of amount capitalized).................... $ 18,946 $ 18,125
Income tax.............................................. $ 110 $ 120
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION--
Circus Circus Enterprises, Inc. (the "Company") was incorporated February
27, 1974. The Company owns and operates hotel and casino facilities in Las
Vegas, Reno, Laughlin, Jean and Henderson, Nevada and a hotel and dockside
casino in Tunica County, Mississippi. It is also an investor in several
unconsolidated affiliates, with operations that include a riverboat casino in
Elgin, Illinois, a hotel/casino in Reno, Nevada and a hotel/casino on the Las
Vegas Strip.
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Material intercompany accounts and
transactions have been eliminated.
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments (which include normal recurring
adjustments) necessary for a fair statement of results for the interim periods
have been made. The results for the three month period are not necessarily
indicative of results to be expected for the full fiscal year.
Certain reclassifications have been made to the financial statements for the
three months ended April 30, 1998 to conform to the financial statement
presentation for the three months ended April 30, 1999. These reclassifications
have no effect on net income.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on Form
10-K for the year ended January 31, 1999.
8
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(2) LONG-TERM DEBT--
Long-term debt consists of the following (in thousands):
APRIL 30, JANUARY 31,
1999 1999
--------------- ---------------
(UNAUDITED)
Amounts due under bank credit agreement
at floating interest rates, weighted
average of 5.8% and 6.0%.............. $ 1,335,000 $ 1,130,000
Amounts due under corporate debt program
at floating interest rates, weighted
average of 5.6% and 5.7%.............. 50,000 50,000
9 1/4% Senior Subordinated Notes due
2005.................................. 275,000 275,000
6.45% Senior Notes due 2006 (net of
unamortized discount of $297 and
$308)................................. 199,703 199,692
7 5/8% Senior Subordinated Debentures
due 2013.............................. 150,000 150,000
6 3/4% Senior Subordinated Notes due
2003 (net of unamortized discount of
$67 and $71).......................... 149,933 149,929
7.0% Debentures due 2036 (net of
unamortized discount of $129 and
$133)................................. 149,871 149,867
6.70% Debentures due 2096 (net of
unamortized discount of $219 and
$231)................................. 149,781 149,769
Other notes............................. 7,549 8,373
--------------- ---------------
2,466,837 2,262,630
Less--current portion................... (3,001) (3,481)
--------------- ---------------
$ 2,463,836 $ 2,259,149
--------------- ---------------
--------------- ---------------
The Company has established a corporate debt program whereby it can issue
commercial paper or similar forms of short-term debt. Although the debt
instruments issued under this program are short-term in tenor, they are
classified as long-term debt because (i) they are backed by a long-term debt
facility (see below) and (ii) it is management's intention to continue to
replace such borrowings on a rolling basis as various instruments come due and
to have such borrowings outstanding for longer than one year. To the extent that
the Company incurs debt under this program, it must maintain an equivalent
amount of credit available under its bank credit facility discussed more fully
below.
In May 1997, the Company renegotiated its $1.5 billion unsecured credit
facility, dated January 29, 1996. This agreement was replaced by a new $2.0
billion unsecured credit facility which matures on July 31, 2002 (the
"Facility"). The maturity date may be extended for an unlimited number of
one-year periods with the consent of the bank group. The Facility contains
financial covenants regarding senior and total debt and new venture capital
expenditures and investments. The Facility is for general corporate purposes.
The Company incurs commitment fees (currently 17.5 basis points) on the unused
portion of the Facility. As of April 30, 1999, the Company had $1.3 billion
outstanding under the Facility. At such date, the Company also had $50 million
issued under the corporate debt program thus reducing, by that amount, the
credit available under the Facility for purposes other than repayment of such
indebtedness.
In November 1998, the Company issued $275 million principal amount of 9 1/4%
Senior Subordinated Notes due December 2005 (the "9 1/4% Notes"), with interest
payable each June and December. The 9 1/4%
9
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(2) LONG-TERM DEBT--(CONTINUED)
Notes are redeemable at the option of the Company, in whole, at 100% of the
principal amount plus a make-whole premium at any time prior to December 1,
2002. A portion of the 9 1/4% Notes are also redeemable at the option of the
Company prior to December 1, 2001 with the proceeds of a public offering of
equity securities. The 9 1/4% Notes are also redeemable at the option of the
Company beginning December 1, 2002 at prices declining annually to 100% on or
after December 2004. The 9 1/4% Notes are not subject to any sinking fund
requirements. The net proceeds from this offering were used to repay borrowings
under the Company's credit facility.
In November 1996, the Company issued $150 million principal amount of 7.0%
Debentures due November 2036 (the "7.0% Debentures"). The 7.0% Debentures may be
redeemed at the option of the holder in November 2008. Also, in November 1996,
the Company issued $150 million principal amount of 6.70% Debentures due
November 2096 (the "6.70% Debentures"). The 6.70% Debentures may be redeemed at
the option of the holder in November 2003. Both the 7.0% Debentures, which were
discounted to $149.8 million, and the 6.70% Debentures, which were discounted to
$149.7 million, have interest payable each May and November, are not redeemable
by the Company prior to maturity and are not subject to any sinking fund
requirements. The net proceeds from these offerings were used primarily to repay
borrowings under the Company's corporate debt program.
In February 1996, the Company issued $200 million principal amount of 6.45%
Senior Notes due February 1, 2006 (the "6.45% Notes"), with interest payable
each February and August. The 6.45% Notes, which were discounted to $199.6
million, are not redeemable prior to maturity and are not subject to any sinking
fund requirements. The net proceeds from this offering were used primarily to
repay borrowings under the Company's corporate debt program.
In July 1993, the Company issued $150 million principal amount of 6 3/4%
Senior Subordinated Notes (the "6 3/4% Notes") due July 2003 and $150 million
principal amount of 7 5/8% Senior Subordinated Debentures (the "7 5/8%
Debentures") due July 2013, with interest payable each July and January. The
6 3/4% Notes, which were discounted to $149.8 million, and the 7 5/8% Debentures
are not redeemable prior to maturity and are not subject to any sinking fund
requirements. The net proceeds from these offerings were used primarily to repay
borrowings under the Company's corporate debt program.
The Company has a policy aimed at managing interest rate risk associated
with its current and anticipated future borrowings. This policy enables the
Company to use any combination of interest rate swaps, futures, options, caps
and similar instruments. To the extent the Company employs such financial
instruments pursuant to this policy, they are accounted for as hedging
instruments. In order to qualify for hedge accounting, the underlying hedged
item must expose the Company to risks associated with market fluctuations and
the financial instrument used must be designated as a hedge and must reduce the
Company's exposure to market fluctuation throughout the hedge period. If these
criteria are not met, a change in the market value of the financial instrument
is recognized as a gain or loss in the period of change. Otherwise, gains and
losses are not recognized except to the extent that the financial instrument is
disposed of prior to maturity. Net interest paid or received pursuant to the
financial instrument is included as interest expense in the period.
The Company has entered into various interest rate swaps, principally with
its bank group, to manage interest expense, which is subject to fluctuation due
to the variable-rate nature of the debt under the Company's corporate debt
program. The Company has interest rate swap agreements under which it pays a
10
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(2) LONG-TERM DEBT--(CONTINUED)
fixed interest rate (weighted average of approximately 6.2%) and receives a
variable interest rate (weighted average of approximately 5.0% at April 30,
1999) on $175 million notional amount of "initial" swaps, and pays a variable
interest rate of approximately 5.1% at April 30, 1999, and receives a fixed
interest rate of approximately 8.2% on $30 million notional amount of a
"reversing" swap. The net effect of all such swaps resulted in additional
interest expense, due to an interest rate differential which, at April 30, 1999,
was approximately 0.6% on the total notional amount of the swaps. Two of the
initial swaps with a combined notional amount of $150 million provide that the
swaps will terminate two business days after any date on which three-month LIBOR
is set at or above 9% on or after October 15, 2000 for $100 million notional
amount, and on or after January 15, 2001 for $50 million notional amount. These
swaps otherwise terminate in fiscal 2008. The remaining initial swap of $25
million terminates in fiscal 2000 while the reversing swap expires in fiscal
2002.
As of April 30, 1999, under its most restrictive loan covenants, the Company
was restricted as to the purchase of its own capital stock in excess of $403
million and was restricted from issuing additional debt in excess of
approximately $620 million.
(3) LEASE FACILITY--
On October 30, 1998, the Company entered into an operating lease with a
group of financial institutions (the "Lease Facility") pursuant to which it may
lease up to $200 million of equipment. The lease term consists of an interim
term commencing on the delivery date and ending June 30, 1999, plus a base term
of two years. On January 28, 1999, the Company leased $100 million of equipment
at Mandalay Bay pursuant to the Lease Facility and permanently reduced the
commitment under its bank credit facility by the amount of the lease financing,
thus reducing the commitment under the credit facility to $1.9 billion. An
additional $75 million was drawn under the Lease Facility in April and May 1999,
thus further reducing the commitment under the bank credit facility to $1.825
billion.
(4) STOCK OPTIONS--
The Company has various stock option plans for executive, managerial and
supervisory personnel as well as the Company's outside directors and
consultants. The plans permit grants of options relating to the Company's common
stock and one of the plans also permits grants of the Company's common stock as
performance share and restricted stock awards. The only awards granted pursuant
to such plans through April 30, 1999 are stock options, which are generally
exercisable in one or more installments beginning not less than six months after
the grant date.
11
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(4) STOCK OPTIONS--(CONTINUED)
Summarized information for stock options granted pursuant to the Company's
plans is as follows:
THREE MONTHS ENDED
APRIL 30, 1999
-------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
Outstanding at beginning of period......................... 3,896,674 $14.78
Granted.................................................... 2,989,833 13.10
Exercised.................................................. (11,505) 11.75
Cancelled.................................................. (4,500) 25.88
--------- --------
Outstanding at end of period............................... 6,870,502 $14.06
--------- --------
--------- --------
Options exercisable at end of period....................... 1,308,000 $21.28
Options available for grant at end of period............. 2,063,898
(5) STOCK RELATED MATTERS--
On July 14, 1994, the Company declared a dividend of one Common Stock
Purchase Right (the "Rights") for each share of common stock outstanding at the
close of business on August 15, 1994. Each Right entitles the holder to purchase
from the Company one share of common stock at an exercise price of $125, subject
to certain antidilution adjustments. The Rights generally become exercisable ten
days after the earlier of an announcement that an individual or group has
acquired 15% or more of the Company's outstanding common stock or the
announcement of commencement of a tender offer for 15% or more of the Company's
common stock.
In the event the Rights become exercisable, each Right (except the Rights
beneficially owned by the acquiring individual or group, which become void)
would entitle the holder to purchase, for the exercise price, a number of shares
of the Company's common stock having an aggregate current market value equal to
two times the exercise price. The Rights expire August 15, 2004, and may be
redeemed by the Company at a price of $.01 per Right any time prior to their
expiration or the acquisition of 15% or more of the Company's common stock. The
Rights should not interfere with any merger or other business combination
approved by the Company's Board of Directors and are intended to cause
substantial dilution to a person or group that attempts to acquire control of
the Company on terms not approved by the Board of Directors.
During the quarter ended April 30, 1999, the Company repurchased 416,500
shares of its common stock at a cost of $7.3 million.
The Company is authorized to issue up to 75 million shares of $.01 par value
preferred stock in one or more series having such respective terms, rights and
preferences as are designated by the Board of Directors. No such preferred stock
has yet been issued.
(6) EARNINGS PER SHARE--
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128--Earnings Per Share ("SFAS 128"). SFAS
128 is effective for periods ending after
12
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(6) EARNINGS PER SHARE--(CONTINUED)
December 15, 1997 and replaces earnings per share as previously reported with
"basic", or undiluted earnings per share, and "diluted" earnings per share.
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period, while diluted
earnings per share reflects the additional dilution for all potentially dilutive
securities, such as stock options.
The Company has adopted the provisions of SFAS 128 and all previously
reported earnings per share amounts have been restated. The table below
reconciles weighted average shares outstanding used to calculate basic earnings
per share with the weighted shares outstanding used to calculate diluted
earnings per share. There were no reconciling items for net income.
THREE MONTHS ENDED APRIL 30, (IN THOUSANDS, EXCEPT EARNINGS
PER SHARE) 1999 1998
- -------------------------------------------------------------- ------- -------
Net income (loss)............................................. $(4,855) $21,607
------- -------
------- -------
Weighted average shares outstanding used in computation of
basic earnings per share.................................... 90,540 95,123
Stock options................................................. 1,043 171
------- -------
Weighted average shares outstanding used in computation of
diluted earnings per share.................................. 91,583 95,294
------- -------
------- -------
Basic earnings per share...................................... $ (.05) $ 0.23
------- -------
------- -------
Diluted earnings per share.................................... $ (.05) $ 0.23
------- -------
------- -------
(7) INVESTMENTS IN UNCONSOLIDATED AFFILIATES--
The Company has investments in unconsolidated affiliates that are accounted
for under the equity method. Using the equity method, original investments are
recorded at cost and adjusted by the Company's share of earnings or losses of
these entities. The investment balance also includes interest capitalized during
construction (net of amortization). Investments in unconsolidated affiliates
consist of the following (in thousands):
APRIL 30, JANUARY 31,
1999 1999
--------------- ---------------
(UNAUDITED)
Circus and Eldorado Joint Venture (50%)
(Silver Legacy, Reno, Nevada)......... $ 76,209 $ 74,871
Elgin Riverboat Resort (50%) (Grand
Victoria, Elgin, Illinois)............ 39,137 42,461
Victoria Partners (50%) (Monte Carlo,
Las Vegas, Nevada).................... 141,094 141,658
Detroit Entertainment (45%) (Proposed
Hotel/Casino, Detroit, Michigan)...... 8,715 12,717
--------------- ---------------
$ 265,155 $ 271,707
--------------- ---------------
--------------- ---------------
13
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(7) INVESTMENTS IN UNCONSOLIDATED AFFILIATES--(CONTINUED)
The above unconsolidated affiliates operate with fiscal years ending on
December 31. Summarized results of operations of the unconsolidated affiliates
are as follows (unaudited, in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- --------
Revenues.................................................... $174,359 $163,513
Expenses.................................................... 145,933 125,132
Operating income............................................ 28,426 38,381
Net income.................................................. 23,186 32,015
Included in the above are revenues of the Grand Victoria of $67,581 and
$64,994 for the three months ended March 31, 1999 and 1998. The property's
operating margin during those periods was 24% and 27%, respectively.
(8) COMMITMENTS AND CONTINGENT LIABILITIES--
The Company has formed a joint venture with the Detroit-based Atwater Casino
Group to build, own and operate a hotel/casino in Detroit, Michigan. The Company
will own a 45% equity interest in the proposed project and receive a management
fee. The joint venture is one of three groups which negotiated development
agreements with the city. These agreements were approved by the city council on
April 9, 1998. The joint venture's ability to proceed with the proposed project
is contingent upon the receipt of all necessary gaming approvals and
satisfaction of other conditions. The joint venture is planning a $600 million
project. The Company is expected to contribute 20% of this amount in the form of
equity, and will seek project-specific financing for the balance. The
development agreement provides that the Company will guarantee completion of the
project and will enter into a keep-well guarantee with the city, pursuant to
which the Company could be required to contribute additional funds, if and as
needed, to continue operation of the project for a period of two years.
The Company has issued letters of credit in an aggregate amount of $50
million for the benefit of Bank of America to back letters of credit in an
aggregate amount of $50 milllion issued to secure payments of principle and
interest on bonds issued by the Economic Development Corporation of the City of
Detroit, the proceeds of which will be used to finance costs related to the
acquisition of and other activities on the land on which the permanent casinos
will be built.
The Detroit joint venture has commenced construction of a temporary casino
property in downtown Detroit. The property will contain approximately 75,000
square feet of gaming space, including approximately 2,600 slot machines and 130
table games, plus 5 restaurants and a 3,000-space parking facility. Construction
is expected to be completed in September 1999. The cost of the temporary casino,
including land and capitalized interest, is approximately $150 million. The
joint venture will shortly complete a $150 million credit facility secured by
the assets associated with the Detroit temporary casino. The Company will
guaranty the credit facility subject to the release of the guaranty if certain
performance measures are reached. The joint venture's ability to proceed with
the temporary casino facility is contingent upon the receipt of all necessary
gaming approvals and satisfaction of other customary conditions.
14
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL INFORMATION FOR THE THREE MONTHS ENDED APRIL 30, 1999 AND 1998 IS
UNAUDITED.)
(8) COMMITMENTS AND CONTINGENT LIABILITIES--(CONTINUED)
The City of Detroit's Casino Development Competitive Selection Process
ordinance has been challenged in a lawsuit brought by the Lac Vieux Band of Lake
Superior Chippewa Indians. No assurance can be given regarding the timing and
outcome of proceedings in this litigation. If the court determines that the
Detroit ordinance is defective and that determination is upheld, this may have
an impact upon the validity of the development agreement entered into between
the joint venture and the City of Detroit which, in turn, could have an impact
on the issuance of a certificate of suitability and a casino license to the
joint venture.
The Company is a defendant in various pending litigation. In management's
opinion, the ultimate outcome of such litigation will not have a material effect
on the results of operations or the financial position of the Company.
(9) RECENTLY ISSUED ACCOUNTING STANDARDS
Effective February 1, 1999, the Company adopted Statement of Position No.
98-5 ("SOP 98-5") "Reporting on the Costs of Start-up Activities." SOP 98-5
requires that the costs of all start-up activities, as defined, be expensed as
incurred. The Company previously capitalized preopening costs prior to the
opening of a specific project and charged them to expense at the commencement of
operations. As required by SOP 98-5, the Company wrote off $67.4 million in
preopening costs associated with Mandalay Bay and the development of its Detroit
and timeshare projects. This amount includes $33.6 million of costs incurred
during the first quarter of fiscal 2000, and $33.8 million of costs incurred in
the previous fiscal year. These previously capitalized costs are reflected, net
of income tax benefit of $11.8 million, as a cumulative effect of a change in
accounting principle for preopening expenses in the condensed consolidated
statements of income.
In June 1998, 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 financial instruments. The provisions of SFAS
No. 133 require that a company recognize derivatives as either assets or
liabilities on its balance sheet and that the instrument be valued at its fair
value. The statement also defines the criteria and conditions which govern the
recognition of subsequent changes in the fair value of the instrument as either
balance sheet or income statement events. SFAS No. 133 is effective for fiscal
years beginning after June 15, 2000. The Company does not expect the adoption of
this pronouncement to materially impact its results of operations or financial
position.
15
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
EARNINGS PER SHARE
For the quarter ended April 30, 1999, the Company reported a net loss of
$4.9 million, or $.05 per share, versus net income of $21.6 million, or $.23 per
share, in the prior year. Earnings per share before the write-off of $67.4
million of preopening expenses relating to Mandalay Bay, the Four Seasons at
Mandalay Bay, the Company's project in Detroit and its timeshare project in Las
Vegas were $.43 versus $.23 last year. This increase in earnings was due
primarily to the opening of Mandalay Bay on March 2, 1999 and improved operating
results at the Company's core Las Vegas properties.
The preopening expenses mentioned above were reflected in two categories.
Those expenses incurred prior to January 31, 1999 were treated as a cumulative
effect of a change in accounting principle and those incurred subsequent January
31, 1999 were expensed as incurred. See Note 9 of Notes to Condensed
Consolidated Financial Statements for a further explanation of the accounting
for preopening expenses.
REVENUES
Revenues for the Company increased $114.3 million, or 32%, versus the prior
year. All of the Company's wholly owned properties produced higher overall
revenues during the first quarter. The overall increase is primarily
attributable to four properties. Mandalay Bay opened on March 2, 1999 and
generated $80.5 million of revenues in its 59 days of operation. Gold
Strike-Tunica's revenues increased $9.2 million, or 37%, due primarily to
operation of the new 1,100-room hotel tower for the entire quarter in the
current year versus only a partial quarter a year ago. Increases in room and
occupancy rates drove up overall revenue at Circus Circus-Las Vegas by $6.6
million, or 12%, and at Luxor by $6.5 million, or 8%.
INCOME FROM OPERATIONS (EXCLUDING PREOPENING EXPENSES AND OTHER NONRECURRING
ITEMS)
For the quarter ended April 30, 1999, income from operations rose $35.1
million, or 57%, from the prior year. The Company's composite operating margin
was 20.4% versus 17.1% in the prior year quarter. A discussion of operating
results by market follows.
LAS VEGAS
The Company's Las Vegas properties posted an overall increase in operating
income of $28.1 million, or 63%. The largest contributor to the increase was
Mandalay Bay, which generated $11.7 million of operating income in approximately
two months of operation. All of the existing properties produced significant
increases in operating income led by Luxor, whose operating income rose $7.7
million, or 63%. The increase at Luxor was due primarily to a $14 increase in
the revenue per available room, offset by a 5% decrease in casino revenue that
was due primarily to an unusually low hold percentage on table games in the
month of February. Circus Circus-Las Vegas increased $5.6 million, or 94%, due
to a combination of higher room rates and a 4% increase in casino revenues.
Excalibur increased $2.1 million, or 12%, due to a combination of higher room
rates, higher hotel occupancy and a 6% increase in casino revenues.
RENO
In Reno, the Company's combined operating income (Circus Circus-Reno plus
the Company's 50% interest in Silver Legacy) declined $.5 million, or 10%,
versus the year ago quarter. Reno is the host to national bowling tournaments
two out of every three years, and this year the city was without a tournament.
The absence of a bowling tournament was partially offset by better weather
conditions
16
compared to the prior year, when travel in and out of the area was difficult.
Although the Company owns 50% of Silver Legacy, it currently receives
approximately two-thirds of Silver Legacy's operating income as a priority
return on its investment. Based upon current projections, the Company
anticipates that this priority return will continue approximately two years
beyond fiscal 1999, but will gradually decrease from the current two-thirds
allocation to a 50% allocation.
LAUGHLIN
The Company's two properties in Laughlin, Colorado Belle and Edgewater,
posted a combined increase in operating income of $1.6 million, or 22%. This
marks the fourth consecutive quarter in which the Laughlin properties have
posted positive comparisons from the prior year. The increases have stemmed from
a combination of increased visitor counts to Laughlin and additional casino
marketing efforts which have resulted in increased market share.
OTHER MARKETS
In Tunica County, Mississippi, operating income at Gold Strike rose $4.2
million, an almost four-fold increase over the prior year. The addition of a
1,100-room hotel tower and an extensive remodeling of the property, which were
completed during the first quarter last year, drove the increase in operating
income.
The contribution from Grand Victoria (a 50%-owned riverboat casino in Elgin,
Illinois) increased $.6 million, or 8%, as the introduction of credit play in
the casino during the quarter contributed to increased revenues and operating
income.
INTEREST EXPENSE
For the three months ended April 30, 1999, interest expense (excluding joint
venture interest expense and before capitalized interest) rose $10.2 million to
$41.2 million. The increase was due primarily to higher average borrowings
(approximately $2.4 billion in the current quarter against approximately $1.9
billion last year) related to the construction cost incurred to complete
Mandalay Bay and core components of Masterplan Mile. Capitalized interest was
$7.7 million for the quarter ended April 30, 1999 versus $7.1 million in the
year-ago quarter. Long-term debt at April 30, 1999 stood at nearly $2.5 billion
compared to $1.9 billion at April 30, 1998.
The Company also recorded interest expense related to joint venture projects
of $2.8 million in the quarter ended April 30, 1999 compared to $3.2 million in
the previous year. This reflects the Company's 50% share of the interest expense
of Silver Legacy and Monte Carlo.
INCOME TAX
For the three months ended April 30, 1999, the Company's effective tax rate
was 37.5% compared with 39.6% for the three months ended April 30, 1998. These
rates reflect the corporate statutory rate of 35% plus the effect of various
nondeductible expenses, including the amortization of goodwill associated with
the acquisition of Gold Strike Resorts.
FINANCIAL POSITION AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $90.6 million at April 30,
1999, representing normal daily operating requirements. The Company's pretax
cash flow from operations, before preopening expenses and rent (see "Lease
Facility" below), was $141.8 million for the three months ended April 30, 1999
versus $97.0 million in the prior year, an increase of 46%. In this context,
pretax cash flow from operations is defined as the Company's income from
operations plus noncash operating expenses (primarily depreciation and
amortization). The Company used its cash flow to fund the construction of
Mandalay Bay and other miscellaneous construction projects.
17
CAPITAL SPENDING
Capital expenditures for the quarter ended April 30, 1999 were $213.5
million, of which $124.1 million related to the construction of Mandalay Bay,
$39.7 million related to the construction of the convention center and arena,
$18.9 million related to the construction of the monorail and $4.8 million
related to room renovation at Excalibur.
LONG-TERM DEBT
In May 1997, the Company amended its unsecured credit facility with its bank
group, increasing the size of the facility from $1.5 billion to $2.0 billion at
more favorable terms and pricing (see Note 2 of Notes to Condensed Consolidated
Financial Statements). In order to allow for increased borrowing capacity during
the construction of Mandalay Bay, the credit facility was further amended in May
1998 to provide a more liberal test for total indebtedness during such period
and a new leverage test for senior debt. The Company also has a commercial paper
program, pursuant to which it may utilize up to $1 billion of its borrowing
capacity under the credit facility to issue commercial paper. As of April 30,
1999, the Company had aggregate borrowings of $1.3 billion outstanding under the
credit facility and an additional $50 million outstanding under its corporate
debt program.
LEASE FACILITY
On October 30, 1998, the Company entered into an operating lease with a
group of financial institutions (the "Lease Facility") pursuant to which it may
lease up to $200 million of equipment. The lease term consists of an interim
term commencing on the delivery date and ending June 30, 1999, plus a base term
of two years. On January 28, 1999, the Company leased $100 million of equipment
at Mandalay Bay pursuant to the Lease Facility and permanently reduced the
commitment under its bank credit facility by the amount of the lease financing,
thus reducing the commitment under the credit facility to $1.9 billion. An
additional $75 million was drawn under the Lease Facility in April and May 1999,
thus further reducing the commitment under the bank credit facility to $1.825
billion.
JOINT VENTURES
In July 1995, Silver Legacy, a 50/50 joint venture with the Eldorado
Hotel/Casino, opened in downtown Reno, Nevada. As a condition of the joint
venture's $230 million bank credit agreement, the Company is obligated under a
make-well agreement to make additional contributions to the joint venture as may
be necessary to maintain a minimum coverage ratio (as defined).
NEW PROJECTS
On March 2, 1999, the Company opened Mandalay Bay, a 43-story, hotel/casino
resort in Las Vegas, Nevada. The resort includes approximately 3,700 rooms and
135,000 square feet of gaming space and is situated on approximately 60 acres of
land just south of Luxor. Mandalay Bay's attractions include an 11-acre tropical
lagoon featuring a sand-and-surf beach, a three-quarter-mile lazy river ride, a
30,000-square-foot spa and other entertainment attractions. Inside, Mandalay Bay
offers internationally renowned restaurants; a House of Blues nightclub and
restaurant, including its signature Foundation Room sited on Mandalay Bay's
rooftop; and 100 "music-themed" hotel rooms in Mandalay Bay's tower.
Four Seasons operates approximately 400 rooms at Mandalay Bay, providing Las
Vegas visitors with a luxury "five-star" hospitality experience. The Four
Seasons Hotel, which is owned by the Company and managed by Four Seasons,
represents the first step in the Company's cooperative effort with Four Seasons
to identify strategic opportunities for development of hotel and casino
properties worldwide. The total cost of Mandalay Bay, including the Four Seasons
Hotel and including leased equipment, but excluding land, capitalized interest
and preopening expenses, is estimated at approximately $950 million.
18
During construction, Mandalay Bay's hotel tower experienced settling in
excess of the level contemplated in the building's original design. The settling
was greater in some portions of the structure than others. The Company retained
geotechnical, structural engineering and foundation consultants who evaluated
the situation and recommended remedial measures, which have been completed.
These remedial measures will be evaluated over a period of time to determine if
any further measures will be required.
As part of its development plan for Masterplan Mile, the Company is
constructing various core components of Masterplan Mile which will be
cross-marketed to guests at the Company's existing and future hotel/casinos
within Masterplan Mile. These components include a 125,000-square-foot
convention facility (which opened March 12) and a 12,000-seat arena (which
opened April 10). The total cost of the convention facility and arena (excluding
land, capitalized interest and preopening expenses) was approximately $115
million, of which $112.6 million had been incurred as of April 30, 1999.
Additional core components include a monorail system (which opened April 10)
linking the Company resorts Masterplan Mile, as well as a Sea of Predators
aquarium exhibit, which is currently under construction and is expected to open
in Spring 2000. The cost of the monorail (excluding land, capitalized interest
and preopening expenses) was approximately $35 million, of which $34.3 million
had been incurred as of April 30, 1999. The estimated cost of the aquarium
(excluding land, capitalized interest and preopening expenses) is approximately
$35 million, of which $5.8 million had been incurred as of April 30, 1999. The
Company may add other core components to its development plan for Masterplan
Mile in the future.
The Company has formed a joint venture with the Detroit-based Atwater Casino
Group to build, own and operate a hotel/casino in Detroit, Michigan. The Company
will own a 45% equity interest in the proposed project and receive a management
fee. The joint venture is one of three groups which negotiated development
agreements with the city. These agreements were approved by the city council on
April 9, 1998. The joint venture's ability to proceed with the proposed project
is contingent upon the receipt of all necessary gaming approvals and
satisfaction of other conditions. The joint venture is planning a $600 million
project. The Company is expected to contribute 20% of this amount in the form of
equity, and will seek project-specific financing for the balance. The
development agreement provides that the Company will guarantee completion of the
project and will enter into a keep-well guarantee with the city, pursuant to
which the Company could be required to contribute additional funds, if and as
needed, to continue operation of the project for a period of two years.
The Company has issued letters of credit in an aggregate amount of $50
million for the benefit of Bank of America to back letters of credit in an
aggregate amount of $50 milllion issued to secure payments of principle and
interest on bonds issued by the Economic Development Corporation of the City of
Detroit, the proceeds of which will be used to finance costs related to the
acquisition of and other activities on the land on which the permanent casinos
will be built.
The Detroit joint venture has commenced construction of a temporary casino
property in downtown Detroit. The property will contain approximately 75,000
square feet of gaming space, including approximately 2,600 slot machines and 130
table games, plus 5 restaurants and a 3,000-space parking facility. Construction
is expected to be completed in September 1999. The cost of the temporary casino,
including land and capitalized interest, is approximately $150 million. The
joint venture has arranged a $150 million credit facility secured by the assets
associated with the Detroit temporary casino. The Company will guaranty the
credit facility subject to the release of the guaranty if certain performance
measures are reached. The joint venture's ability to proceed with the temporary
casino facility is contingent upon the receipt of all necessary gaming approvals
and satisfaction of other customary conditions.
The City of Detroit's Casino Development Competitive Selection Process
ordinance has been challenged in a lawsuit brought by the Lac Vieux Band of Lake
Superior Chippewa Indians. No assurance can be given regarding the timing and
outcome of proceedings in this litigation. If the court determines that the
Detroit ordinance is defective and that determination is upheld, this may have
an impact upon the validity of the development agreement entered into between
the joint venture and the City of Detroit
19
which, in turn, could have an impact on the issuance of a certificate of
suitability and a casino license to the joint venture.
The Company has announced that it plans to develop a hotel/casino resort on
the Mississippi Gulf Coast at the north end of the Bay of St. Louis, near the
DeLisle exit on Interstate 10. It is currently anticipated that the resort will
include approximately 1,500 rooms and will involve an investment of
approximately $225 million. The Company has received all necessary approvals to
commence development. However, these approvals have been challenged in federal
court, and the Company anticipates that the design and construction of this
project will begin only after satisfactory resolution of all legal actions.
Present plans call for Circus to own 90% of the resort, with a partner
contributing land (up to 500 acres) in exchange for the remaining 10% interest.
LIQUIDITY
The Company believes that--through the combination of its operating cash
flows, credit facility and ability to raise additional funds through debt or
equity markets--it has sufficient capital resources to meet all of its existing
cash obligations, fund its capital commitments on the projects under way and
strategically repurchase shares of the Company's common stock. As of April 30,
1999, under its most restrictive loan covenant, the Company could issue
additional debt of approximately $620 million, and was restricted as to the
purchase of its own capital stock in excess of $403 million. The Company's Board
of Directors recently authorized a share repurchase program for up to 15% of the
outstanding shares, as market conditions and other factors warrant. This
authorization replaces a former 15% authorization that was utilized over a
four-year span.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, information
technology ("IT"), such as date-sensitive computer software, as well as non-IT
systems (such as equipment containing microcontrollers or other embedded
technology) may recognize a date using "00" as the year 1900 rather than the
year 2000. This is generally referred to as the Year 2000 issue. If the year is
recognized incorrectly, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
RISK FACTORS
Date-sensitive IT and non-IT systems and equipment are utilized throughout
the Company's wholly owned properties and its joint venture properties.
Consequently, the Company is exposed to the risk that Year 2000 problems could
disrupt operations at the affected properties and have a material adverse impact
upon the Company's operating results.
The Company is also exposed to the risk of possible failure of IT and non-IT
systems external to the Company's operations ("external risk factors"). These
external risk factors arise from the fact that the Company's operations, like
those of most businesses, are dependent upon numerous other private and public
entities. While such risk factors are not the responsibility of the Company and
their remediation is beyond the Company's control, we are attempting to monitor
these risks and form contingency plans as warranted. As a result of the external
risk factors, the Company may be materially and adversely impacted even if its
own IT and non-IT systems and equipment are Year 2000-compliant. The most
significant of these factors are as follows:
- One or more of the Company's suppliers or its joint ventures' suppliers
could experience Year 2000 problems that impact their ability to provide
goods and services. The Company believes that such a disruption would have
a limited impact due to the availability of alternative suppliers.
20
- One or more of the Company's utility providers (of electric, natural gas,
water, sewer, garbage collection and similar services) could experience
Year 2000 problems that impact their ability to provide their services.
Furthermore, the Company could be adversely impacted if utility services
were significantly disrupted in any of its key customer markets (e.g.,
southern California), as this could alter the customary flow of visitors
from the affected market.
- Airline service to and from the principal markets in which the Company
operates could be disrupted by Year 2000 problems, which would limit the
ability of potential customers to visit our properties.
- The possible disruption of banking services due to Year 2000 problems
could impair the Company's daily financial transactions, including the
deposit of monies and processing of checks. Furthermore, credit card
processing and customers' access to cash via automated teller machines
could also be disrupted.
The Company is developing contingency plans to address the identified risks.
However, given the nature of many of the external risk factors, the Company does
not believe viable alternatives would be available. For example, the Company
cannot develop a meaningful contingency plan to address a disruption in airline
service. Consequently, the occurrence of any of the aforementioned disruptions
could, depending upon their severity and duration, have a material adverse
impact on operating results.
APPROACH
The Company has established a task force to coordinate its response to the
Year 2000. This task force, which reports to the Audit Committee of the Board of
Directors, includes the Company's Chief Accounting Officer, the Chief Internal
Auditor, the Director of Information Services, as well as support staff.
Previously, the Company engaged an outside consultant who helped establish a
program for dealing with the Year 2000 issue. The Company is now implementing
this program at its wholly owned properties and at its joint venture properties.
The program consists of the following phases:
Phase 1 Compile an inventory of IT and non-IT systems that may be
sensitive to the Year 2000 problem.
Phase 2 Identify which of these systems are critical, and prioritize
them; identify third parties with whom the Company does
significant business (e.g., vendors) and inquire as to the
state of their Year 2000 readiness.
Phase 3 Analyze critical systems to determine which ones are not Year
2000-compliant, and evaluate the costs to repair or replace
them.
Phase 4 Repair or replace noncompliant critical systems; test those
systems for which information about Year 2000 compliance has
not been received or for which information has been received
but not confirmed.
STATUS
Phases 1 and 2 are substantially complete, though the Company has not
received all responses from significant third parties about their Year 2000
readiness. Phases 3 and 4 are ongoing and will continue into the third fiscal
quarter. It is the Company's goal to have this project substantially completed
by the end of that quarter. Based upon the analysis conducted to date, the
Company believes that all of the critical systems at its wholly owned and joint
venture properties are currently compliant or will be compliant by the end of
the third fiscal quarter. To date, the most significant Year 2000 requirement
that has been identified is the need to replace older personal computers whose
systems are not Year 2000 compatible.
21
COSTS
The Company currently estimates that the total cost to the Company of making
its systems and those of its joint venture properties Year 2000 compliant will
be in the range of $5 to $10 million, of which approximately $4.0 million had
been incurred as of April 30, 1999. Most of this cost relates to the acquisition
of new computer hardware to replace noncompliant personal computers and the
purchase of new software to replace noncompliant software. These costs are being
capitalized and the equipment and software depreciated over their expected
useful lives. To the extent existing hardware or software is replaced, the
Company will recognize a loss currently for the undepreciated balance. This loss
is included in the above cost estimate. Furthermore, all costs related to
software modification, as well as all costs associated with the Company's
administration of its Year 2000 project, are being expensed as incurred and are
likewise included in the cost estimate above.
CIRCUS CIRCUS ENTERPRISES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As of April 30, 1999 there were no material changes to the information
incorporated by reference in Item 7A of the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1999.
22
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits filed as part of this report are listed on the Index to
Exhibits accompanying this report.
(b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the period
covered by this report.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRCUS CIRCUS ENTERPRISES, INC.
---------------------------------------------
(Registrant)
Date: June 11, 1999 By /s/ GLENN SCHAEFFER
-----------------------------------------
Glenn Schaeffer
PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER
24
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ----- ----------------------------------------------------------------------
10(a) Conveyance Agreement, dated April 29, 1999, by and among the City of
Detroit, the Economic Development Corporation of the City of Detroit
and Detroit Entertainment, L.L.C.
27. Financial Data Schedule for the three months ended April 30, 1999 as
required under EDGAR.