1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from July 1, 1997 to December 31, 1997. 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. [ ]
2 As of February 27, 1998, 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 $207,073,000. 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 27, 1998, the Registrant had outstanding 61,669,628 shares of Common Stock. Documents Incorporated by Reference into Parts I-III: Portions of the definitive Proxy Statement for the Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2
3 BOYD GAMING CORPORATION 1997 TRANSITION REPORT ON FORM 10-K TABLE OF CONTENTS <TABLE> <CAPTION> PART I PAGE NO. -------- <S> <C> <C> Item 1. Business............................................................................. 4 Item 2. Properties........................................................................... 32 Item 3. Legal Proceedings.................................................................... 32 Item 4. Submission of Matters to a Vote of Security-Holders.................................. 32 Item 4A. Executive Officers of the Registrant................................................. 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 33 Item 6. Selected Consolidated Financial Data................................................. 35 Item 7. Management's Discussion and Analysis of Financial Condition and...................... Results of Operations.............................................................. 37 Item 7A. Quantitative and Qualitative Disclosure about Market Risk............................ 47 Item 8. Financial Statements and Supplementary Data.......................................... 47 Item 9. Changes in and Disagreements with Accountants on Accounting and...................... Financial Disclosure............................................................... 47 PART III Item 10 Directors and Executive Officers of the Registrant................................... 48 Item 11. Executive Compensation............................................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 48 Item 13. Certain Relationships and Related Transactions....................................... 48 PART IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.................... 49 </TABLE> 3
4 PART I ITEM 1. BUSINESS GENERAL Boyd Gaming Corporation is a multi-jurisdictional gaming company which currently owns or operates twelve casino entertainment facilities. The Company has operated successfully for more than two decades in the highly competitive Las Vegas market and has entered five other gaming jurisdictions in the past four 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 five facilities in other gaming jurisdictions, all opened during the last four years. 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"), Sam's Town Kansas City, a riverboat gaming and entertainment complex in Kansas City, Missouri and the Par-A-Dice riverboat casino and hotel in East Peoria, Illinois ("Par-A-Dice"). In October 1997, the Company completed the acquisition of Treasure Chest Casino (the "Treasure Chest"), a riverboat casino in Kenner, Louisiana, which the Company had previously managed and partially owned. The Company manages for the Mississippi Band of Choctaw Indians the Silver Star Resort and Casino (the "Silver Star"), a land-based gaming and entertainment complex located near Philadelphia, Mississippi. The Company currently owns or operates an aggregate of approximately 590,000 square feet of casino space, containing 16,886 slot machines and 555 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 eight 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"); Boyd Kansas City, Inc. ("Boyd Kansas City"), 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 the Treasure Chest and owns a 15% equity interest in Treasure Chest, L.L.C., the owner of the Treasure Chest; Boyd Louisiana owns the remaining 85% equity interest in Treasure Chest, L.L.C.; Boyd Mississippi operates Silver Star; and Boyd Kansas City owns and operates Sam's Town Kansas City. 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 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 entertainment, 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. 4
5 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 and print and broadcast 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 six month period ended December 31, 1997, the Company distributed approximately 7 million pieces of mail to its database customers. The Company also provides complimentary rooms, food 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 five properties outside the State of Nevada: Sam's Town Tunica, in Tunica County, Mississippi; Sam's Town Kansas City, in Kansas City, Missouri; 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, pai gow, Caribbean stud 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 2,300 guest rooms, 1,500 in its 32-story hotel tower. The Stardust complex, which is distinguished by dramatic building lighting, has seven restaurants, a shopping arcade, two swimming pools and parking spaces for approximately 2,900 cars. The occupancy rate and average room rate at the Stardust during the six month period ended December 31, 1997 were 91% and $46, respectively. 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 5
6 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 Company is analyzing various alternatives to utilize the 61-acre Stardust site, including additional hotel rooms and other amenities to more effectively compete with the new generation of Las Vegas properties. Boulder Strip Properties Sam's Town Las Vegas is situated on 56 acres of land owned and 7 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 56-lane bowling center and the 25,000-square foot Western Emporium retail store. The gaming facilities now include approximately 2,900 slot machines and 53 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, 16 restaurants, 500 spaces for recreational vehicles and approximately 3,200 parking spaces, including two parking garages which together can accommodate up to 2,000 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 91% and $47, respectively, during the six month period ended December 31, 1997. Sam's Town Las Vegas has a western theme and features an informal, friendly atmosphere that appeals to both local residents and visitors. Gaming and bowling tournaments, paycheck sweepstakes, 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, the Company attracts 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. 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 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 640 slot machines and 11 table games, including tables featuring "21," craps, roulette, pai gow, Caribbean stud and poker, as well as keno and a sports book. The facility also offers a buffet restaurant, a coffee shop, an entertainment lounge, 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 was the Company's first property and 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 1,122 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 91% and $30, respectively, during the six month period ended December 31, 1997. The Fremont is situated on 1.4 acres of land owned and 0.9 acres of land leased by the Company on the principal thoroughfare in downtown Las Vegas. The property offers 32,000 square feet of casino space, including 1,064 slot machines and 27 table games, including tables featuring "21," craps, roulette, pai gow, poker and Caribbean stud, as well as keno and a race and sports book. The hotel has 423 guest rooms and five restaurants including the Second Street Grill, an upscale contemporary restaurant, and the Paradise 6
7 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. During the six month period ended December 31, 1997, the Fremont completed a $4.5 million rooms remodel project. The occupancy rate and average room rate at the Fremont were 95% and $30, respectively, during the six month period ended December 31, 1997. Main Street Station was acquired by the Company in December 1993 and was used to augment the rooms base for the California and Fremont prior to its opening as a full service hotel casino in November 1996. 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 a 28,500-square foot, newly-equipped casino with 22 table games and 869 slot machines. The property also includes 406 renovated hotel rooms and expanded and renovated food facilities, including a 500-seat buffet, a 130-seat specialty restaurant, a 100-seat cafe, a 200-seat brew pub and oyster bar and expanded parking to include 2,000 spaces. The occupancy rate and average room rate at Main Street Station were 91% and $31, respectively, during the six month period ended December 31, 1997. The Company coordinates marketing efforts, 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 will significantly reduce costs and provide it 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 stable, 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 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 85,000 households, primarily in Hawaii. During the six month period ended December 31, 1997, patrons from Hawaii comprised approximately 73% of the room nights at the California, 57% of the room nights at the Fremont and 57% of the room nights at Main Street Station. The Company, together with other downtown casino operators and the City of Las Vegas, developed the downtown attraction known as the Fremont Street Experience. While the FSE has increased visitation to the downtown area, it has not translated into increased gaming revenue for the Company's Downtown Properties. In addition, the entity which operates the Fremont Street Experience (Fremont Street Experience, Limited Liability Company or "FSE") has experienced significant levels of operating loss and cash deficiency during its first full year of operation. Management expects this trend to continue and, therefore, does not expect to recover its investment in this entity. For these reasons, the Company recorded a $5.3 million impairment loss in fiscal 1997 to write-off its entire investment in FSE. See Note 3 of Notes to Consolidated Financial Statements. 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 on May 25, 1994. Since its opening, Sam's Town Tunica has undergone several 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 new hotel tower brings the total room count to 857, and the garage is the first enclosed parking structure at a Tunica County casino. The complex offers a two-story casino of approximately 75,000 square feet featuring 1,885 slot machines and 74 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 other operators in the area by developing a major casino entertainment complex with extensive amenities including a 857-room hotel, an entertainment lounge featuring country-western music, six 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. 7
8 The occupancy rate and average room rate at Sam's Town Tunica were 84% and $47, respectively, during the six month period ended December 31, 1997. The Company extended its Sam's Town theme to the Kansas City, Missouri market with the opening of Sam's Town Kansas City on September 13, 1995. Sam's Town Kansas City was completed at a cost of approximately $145 million, including land, capitalized interest and preopening costs. The facility, which is situated on 34 acres located on the Missouri River and Interstate 435, features a continuously docked riverboat housing a 28,000-square foot casino on three decks with 1,099 slot machines and 49 table games. The 80,000-square foot land-based facility contains five food facilities, including a 7,000-square foot sports bar, and ticketing services, all surrounding a turn-of-the-century Kansas City streetscape. The facility also features a 1,350-space garage, connected to the main facilities by an enclosed moving walkway. Including surface parking, the property offers a total of 2,000 parking spaces. The Kansas City metropolitan area has an adult population of over one million. In connection with the operation of Sam's Town Kansas City, the Company will pay the City of Kansas City approximately $250,000 per year for a period of ten years ending in September 2004. During fiscal 1997, the Company recorded a $126 million impairment loss in accordance with SFAS No. 121 to write down the carrying value of the Company's Missouri fixed and intangible assets, including Sam's Town Kansas City, to fair value. See Note 3 of Notes to Consolidated Financial Statements. In light of the historical operating performance at Sam's Town Kansas City, management is considering various strategic alternatives to mitigate its impact on the Company, which may include, among other things, the possible sale of the property. In October 1997, the Company completed the acquisition of the Treasure Chest, a riverboat casino operation located on Lake Pontchartrain in Kenner, Louisiana. Treasure Chest opened in September 1994 and is located near the New Orleans International Airport. The 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 three restaurants, a gift shop and snack bar. The gaming operation features a classic 18th century Victorian-style paddle-wheel riverboat with a total capacity of 2,000 persons, approximately 24,000 square feet of casino space, over 900 slot machines and 56 table games, including tables for "21," craps, roulette and poker. Each of the riverboat's three decks has a different theme, with one featuring contemporary Las Vegas-style decor, one offering a nautical environment and one providing a festive Mardi Gras setting. Prior to the October 1997 acquisition, the Company managed and owned a 15% equity interest in Treasure Chest. Pursuant to an agreement with the Mississippi Band of Choctaw Indians, the Company operates the 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. 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, over 2,800 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, four restaurants, a 28,000-square foot conference center, more than 2,700 parking spaces, and an 18-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 July 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 amount was repaid during fiscal 1995 from the enterprise's cash flow. The Company loaned the tribe an additional $10 million for a casino expansion project which was completed in December 1994. This loan is scheduled to be repaid over five years. On December 4, 1996, the Company completed the acquisition of Par-A-Dice. Par-A-Dice is a riverboat casino operation located along the Illinois River in East Peoria, Illinois, approximately 170 miles from Chicago. The Par-A-Dice Riverboat Casino initially commenced operations in November 1991, operating from a temporary facility in downtown Peoria. In May 1993, the facility was relocated across the Illinois River to a newly constructed land-based pavilion, containing two restaurants, a bar, gift shop, ticketing area and surface parking for 750 cars, located on 19 acres in East Peoria. In May 1994, the original Par-A-Dice Riverboat Casino replica paddle-wheel riverboat was replaced with a new, state-of-the-art, twin hull cruise ship. The new boat measures 238 feet long and 66 feet wide and since the recent completion of an expansion in March 1996, features 33,000 square feet of gaming space on four 8
9 levels with over 1,000 slot machines and 42 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 84% and $55, respectively, during the six month period ended December 31, 1997. 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 May 29, 1996, the Company, through a wholly-owned subsidiary, and Mirage Resorts, Incorporated, through a wholly-owned subsidiary (collectively "Mirage"), executed a joint venture agreement (the "Joint Venture Agreement"), to jointly develop and own a casino hotel entertainment facility in Atlantic City, New Jersey (the "Mirage Joint Venture"). The Mirage Joint Venture would 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 at least $500 million. The Mirage Joint Venture would fund $300 million of the project cost with non-recourse third-party financing. The remaining $200 million would be funded equally by capital contributions from the partners, including, in the case of Mirage, contribution of the land. Pursuant to the Joint Venture Agreement, the Company would control the development and operation of the Mirage Joint Venture. The Mirage Joint Venture contemplates a hotel of at least 1,000 rooms and a casino and related amenities (the "Atlantic City Project") 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. Once such improvements are assured and other requisite approvals are received, the Company estimates that environmental remediation will take at least six months and construction of the Atlantic City Project would thereafter take at least two years. Accordingly, the Company is unable to estimate, when, if at all, the Atlantic City Project will be completed. The Company has submitted its petition for a statement of compliance to the New Jersey Casino Control Commission ("NJCCC"). This petition has been forwarded to the New Jersey Division of Gaming Enforcement ("NJDGE") for investigation. Upon commencement of construction, the Company would be in a position to submit its application for casino licensure to the NJCCC. With a statement of compliance for the Company in place, the investigation by the NJCCC and NJDGE in connection with the casino license application would focus on issues concerning operations, the facility and equal employment and business opportunity. See "Investment Considerations -- Expansion." The Atlantic City Project would give the Company a presence in Atlantic City, the primary casino gaming market serving the eastern United States. In January 1998, Mirage attempted to unilaterally terminate the Joint Venture Agreement citing the passage of a December 31, 1997 deadline for the transfer of title of certain land in the Marina district to Mirage. On February 2, 1998, the Company filed a lawsuit against Mirage in the Superior Court of New Jersey to enforce its rights under the Joint Venture Agreement. The lawsuit alleges, among other things, that Mirage attempted to unilaterally terminate the Joint Venture Agreement and misappropriate the Mirage Joint Venture's business opportunity for its own benefit. As a result, there can be no assurance that the Atlantic City Project will be completed according to the terms contemplated by the Joint Venture Agreement, or at all. 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. 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 may 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 9
10 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 also 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 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 18 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. A number of marquee properties have opened in the last several years, and several others are currently under construction or planned for the Las Vegas Strip, including the 3,000-room Paris Casino-Resort, the 3,000-room Bellagio, the 6,000-room Venetian, the 3,700-room Mandalay Bay and the 2,600-room Aladdin 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 County, 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. 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. Sam's Town Kansas City competes primarily with four other riverboat gaming operations in the Kansas City area. Some of these gaming facilities are operated by companies that have significantly greater financial resources than the Company, some have been operating for a longer time than the Company's facility and some may possess more locations. Sam's Town Kansas City reported an operating loss of $5.0 million (before the write-off of preopening expenses) in fiscal 1996, a $10.9 million operating loss (before impairment loss) in fiscal 1997 and a $3.7 million operating loss during the six month period ended December 31, 1997. During fiscal 1997, the Company recorded an impairment loss of approximately $126 million related to the Company's Missouri gaming assets, including Sam's Town Kansas City. See Note 3 of Notes to the Consolidated Financial Statements. No assurance can be given that the Company will be able to compete successfully in the future. In light of the historical operating performance at Sam's Town Kansas City, management is considering various strategic alternatives to mitigate its impact on the Company, which may include, among other things, the possible sale of the property. The Treasure Chest competes primarily with other riverboat gaming operations in the New Orleans metropolitan area. A large land-based casino is planned for downtown New Orleans but the project is presently in bankruptcy reorganization. If the land-based project opens, it will compete directly with the Treasure Chest. There are presently 14 licenses issued and 13 riverboats in operation in the State of Louisiana with three of these projects (including the Treasure Chest) operating in the New Orleans metropolitan area. Some of these riverboats are operated by companies with significantly greater financial resources and some may possess more desirable locations. No assurance can be given that the 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. 10
11 EXPANSION On May 29, 1996, the Company entered into the Joint Venture Agreement with Mirage to jointly develop the Atlantic City Project. The Atlantic City Project is subject to a number of contingencies, including, but not limited to, final approval and funding 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. Once the necessary highway improvements are assured and other requisite approvals are received, the Company estimates that environmental remediation would take at least six months and construction of the Atlantic City Project would thereafter take at least two years. In January 1998, Mirage attempted to unilaterally terminate the Joint Venture Agreement citing the passage of a December 31, 1997 deadline for the transfer of title of certain land in the Marina district to Mirage. On February 2, 1998, the Company filed a lawsuit against Mirage in the Superior Court of New Jersey to enforce its rights under the Joint Venture Agreement. The lawsuit alleges, among other things, that Mirage attempted to unilaterally terminate the Joint Venture Agreement and misappropriate the Mirage Joint Venture's business opportunity for its own benefit. Accordingly, there can be no assurance that the Atlantic City Project will be completed according to the terms contemplated by the Joint Venture Agreement, or at all. In addition, the Atlantic City market is very competitive and no assurance can be given that, if completed, the Atlantic City Project will be successful. See "Business -- Mirage Joint Venture." The Company, as part of its ongoing strategic planning process, is currently establishing its priorities for future growth. In Nevada, the Company has intensified its efforts to develop alternatives for the enhancement and development of the 61-acre Stardust site on the Las Vegas Strip and is exploring opportunities that may exist in the locals market for expansion of its Sam's Town concept. 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 under its five-year, $500 million reducing revolving credit facility (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, restructuring debt, obtaining additional equity or debt financing or joint venture partners. 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, 1997, the Company had total consolidated long-term debt of approximately $843 million, which represents approximately 81% 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. Beginning in December 1998, the total principal amount available under the Bank Credit Facility will be reduced by $25 million and reduced by an additional $50 million at the end of each six-month period thereafter until maturity in June 2001. 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 Atlantic City Project goes forward, the Company expects to fund its subsidiary's required capital contributions to the Mirage Joint Venture, currently expected to be $100 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 11
12 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." 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. 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 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 12
13 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. 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 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 13
14 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 21, 1997, 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 Registered Exchange Offer or the offering under the Shelf Registration Statement will be made pursuant to the Shelf Approval. 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 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. 14
15 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 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 July 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, 1997. 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 15
16 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 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 16
17 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 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. The Illinois Gaming Board has currently granted ten licenses, one license to riverboat operations in each of Alton, East Peoria, Rock Island, East Dubuque, Metropolis, East St. Louis, Aurora, and Elgin, and two licenses to riverboat operators in Joliet. 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 and in February 1997, and 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. 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 17
18 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 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; any reason set forth in Section 3000.241(d) or resulting from an event set forth in Section 3000.243; and (viii) 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 18
19 acquisition or 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 Form and be investigated and approved by the Illinois Gaming Board. For a publicly held Business Entity, a Key Person is any person directly or indirectly holding a legal or beneficial interest of 5% or more of an applicant or owner licensee and officers, directors, trustees, partners, and managing agents of a gaming enterprise, and any person identified by the Board as a person able to control or exercise significant influence over the management or operating policies of licensee. 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. 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 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 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. 19
20 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 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 shall be 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) 20
21 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, it shall provide not less than 30 days' prior notice of such intent and shall 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 conditions that, if a holder thereof is found to be disqualified by the NJCCC, such holder shall dispose of such securities. 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. 21
22 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 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 and 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. These monies will be held to fund up to 35% of the cost to casino licensees of expanding their hotel facilities to provide additional hotel rooms, a portion of which will be required to be available upon the opening of the new Atlantic City convention center and dedicated to convention events. The CRDA has determined at this time that eligible casino licensees will 22
23 receive up to 27% of the cost of additional hotel rooms out of these monies set aside and may, in the future, increase the percentage to no greater than 35%. 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. 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, integrity and responsibility, good character, honesty and 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 23
24 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 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 the Treasure Chest. The 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 Treasure Chest license is valid for a term of five years and will expire on May 18, 1999. Prior to such time, the Company expects to file an application for renewal of the Treasure Chest license for an additional five year period. However, there can be no assurance that such application will be approved. 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 5% of 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 24
25 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 such 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 remains 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 and the regulatory control of the Mississippi State Tax Commission (the "Mississippi Gaming Authorities"). The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized dockside casino gaming in Mississippi, was enacted on June 29, 1990. Although not identical, the Mississippi Act is similar to the Nevada Gaming Control Act. The Mississippi Gaming 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 Gaming Commission seek to: (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Gaming 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 Gaming Commission. Changes in Mississippi law or regulations or their interpretation 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 Mississippi Gulf Coast or the Mississippi River provided that voters in such counties have not voted to prohibit gaming in that county. As of February 1, 1997, dockside gaming was permissible in 9 of the 14 eligible counties in the State and gaming operations had commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space which may be utilized for gaming. There are no limitations on the number of gaming licenses which may be issued in Mississippi. 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 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 Gaming Control Act, and the Mississippi Gaming Commission later approved the location of the barges on the Sam's Town site as legal under the opinion of the Mississippi Attorney General. A competitor subsequently filed a letter with the Mississippi Gaming Commission requesting a reconsideration with respect to the Mississippi Gaming Commission's approval of the placement of the barges on the Sam's Town Tunica site and other prospective gaming operators' sites adjacent thereto. No official action was ever taken regarding this request. In December 1993, the Mississippi Gaming Commission voted to issue a license to Boyd Tunica, the entity through which the Company operates Sam's Town Tunica. 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 25
26 that the barges at the Sam's Town Tunica site, as well as similarly situated barges belonging to operators whose facilities have opened and other prospective gaming operators, are located on navigable waters within the meaning of Mississippi law. However, no assurance can be given that a court would ultimately conclude that such sites constitute 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 Sam's Town Tunica. The Company has been registered with the Mississippi Gaming Commission as a publicly traded holding company for Boyd Tunica. The Company is required periodically to submit detailed financial and operating reports to the Mississippi Gaming Commission and furnish any other information which the Gaming Commission may require. The Company, Boyd Tunica and any other subsidiary of the Company that operates a casino (other than Silver Star) in Mississippi (such a subsidiary, including Boyd Tunica, a "Mississippi Gaming Subsidiary"), are subject to the licensing and regulatory control of the Mississippi Gaming Authorities. If the Company is unable to continue to satisfy the registration requirements of the Mississippi Act, the Company and its Mississippi Gaming Subsidiaries cannot own or operate gaming facilities in Mississippi. Each Mississippi Gaming Subsidiary must obtain gaming licenses from the Mississippi Gaming Commission to operate casinos in Mississippi. A gaming license is issued by the Mississippi Gaming Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations and physical inspection of the casinos prior to opening. The Mississippi Gaming Commission granted a gaming license to Boyd Tunica in December 1993 which was renewed in November of 1995, and again on December 1, 1997. Gaming licenses are non-transferable, are initially issued for a two-year period and must be renewed periodically thereafter. Boyd Tunica was granted a renewal of its gaming license by the Mississippi Gaming Commission on November 30, 1995 and again on December 1, 1997. The gaming license for Boyd Tunica must be renewed in December of 1999. No person may become a stockholder of or receive any percentage of profits from a gaming licensee subsidiary of a holding company without first obtaining approvals from the Mississippi Gaming Commission. The Company obtained such approvals in connection with the licensing of Boyd Tunica. Certain officers and employees of the Company and the officers, directors and certain key employees of the Company's Gaming Subsidiaries must be found suitable by the Mississippi Gaming Commission. The Company believes it has obtained or applied for all necessary findings of suitability with respect to such persons associated with the Company or Boyd Tunica, although the Mississippi Gaming Commission, in its discretion, may require additional persons to file applications for findings of suitability. Employees associated with gaming must also obtain work permits that are subject to immediate suspension under certain circumstances. In addition, any person having a material relationship or involvement with the Company may be required to be found suitable or licensed, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Gaming Commission may deny an application for a license or finding of suitability for any cause that it deems reasonable. Changes in licensed positions must be reported to the Mississippi Gaming Commission. Besides its authority to deny an application for a license or finding of suitability, the Mississippi Gaming Commission has jurisdiction to disapprove a change in licensed position. The Mississippi Gaming Commission has the power to require any Mississippi Gaming Subsidiary and the Company to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities. Substantially all loans, leases, sales of securities and similar financing transactions by a Mississippi Gaming Subsidiary must be reported to or approved by the Mississippi Gaming Commission. A Mississippi Gaming Subsidiary may not make an issuance or a public offering of its securities, but may pledge or mortgage casino facilities, if it obtains the prior approval of the Mississippi Gaming Commission. The Company may not make an issuance or a public offering of its securities without the prior approval of the Mississippi Gaming 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. Any representation to the contrary is unlawful. If the Mississippi Gaming Commission decides that a Mississippi Gaming Subsidiary violated a gaming law or regulation, the Mississippi Gaming Commission could limit, condition, suspend or revoke the license of the Mississippi Gaming Subsidiary. In addition, a Mississippi Gaming Subsidiary, the Company and the persons involved could be subject to substantial fines for each separate violation. Because of such a violation, the Mississippi Gaming Commission could seek to appoint a supervisor to operate the casino facilities. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's and the Gaming Subsidiary's gaming operations. 26
27 At any time, the Mississippi Gaming Commission has the power to investigate and require the finding of suitability of any record or beneficial owner of the Company's shares. Mississippi law requires any person who acquires more than 5% of the Company's common stock to report the acquisition to the Mississippi Gaming 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 Company's common stock, as reported to the Securities and Exchange Commission, must apply for a finding of suitability by the Mississippi Gaming Commission and must pay the costs and fees that the Mississippi Gaming Commission incurs in conducting the investigation. The Mississippi Gaming Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a public company's common stock. 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. The Mississippi Gaming Commission has adopted a policy with respect to certain institutional investors which may permit such investors to purchase and hold up to 10% of a public company's common stock without a suitability finding. Such institutional investors may be required to file certain information with the Mississippi Gaming Commission under the policy and the Mississippi Gaming Commission retains discretion to require a finding of suitability at any time. To date, all stockholders of the Company required to be found suitable by the Mississippi Gaming Commission have been found suitable. 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 Gaming Commission may be found unsuitable. Management believes that compliance by the Company with the licensing procedures and regulatory requirements of the Mississippi Gaming Commission will not affect the marketability of its 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 Gaming Commission prescribes, may be guilty of a misdemeanor. The Company is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or its Mississippi Gaming Subsidiaries, 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 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 Gaming Commission, upon request, the identities of the security holders including holders of debt securities of the Company. In addition, the Mississippi Gaming Commission under the Mississippi Act may, in its discretion, require holders of debt securities of registered corporations to file applications, investigate such holders, and require such holders to be found suitable to own such debt securities. Although the Mississippi Gaming Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Gaming 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 Gaming Commission in connection with such an investigation. If the Mississippi Gaming Commission determines that a person is unsuitable to own such security, then it is unlawful for the unsuitable person; (i) to receive any dividend or interest whatsoever from the Company; (ii) to exercise any voting right conferred by such securities or interest; or (iii) to receive any remuneration in any form from the Company. Boyd Tunica must maintain a current stock ledger in its principal office in Mississippi and the Company must maintain a current list of stockholders in the principal offices of the Gaming Subsidiary which must reflect the record ownership of each outstanding share of any class of equity security issued by the Company. The stockholder list may thereafter be maintained by adding reports regarding the ownership of such securities that it receives from the Company's transfer agent. The ledger and stockholder lists must be available for inspection by the Mississippi Gaming 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 Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. The Company must also render maximum assistance in determining the identity of the beneficial owner. The Mississippi Gaming Commission has the power to require that the Company's securities bear a legend to the general effect that such securities are subject to the Mississippi Act and the regulations of the Mississippi Gaming Commission. The Mississippi Gaming Commission has the power, through the power to regulate licensees, to impose additional restrictions on the holders of the Company's securities at any time. The Company received a waiver from the legend requirement in connection with the licensing of Boyd Tunica. 27
28 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 Gaming 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 Gaming Commission before the Company may make exceptional repurchases of voting securities above the current market price of its common stock or before a corporate acquisition opposed by management may be consummated. Mississippi's gaming regulations will also require prior approval by the Mississippi Gaming Commission if the Company adopts a plan of recapitalization proposed by its Board of Directors opposing a tender offer made directly to the shareholders for the purpose of acquiring control of the Company. Neither the Company nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Gaming Commission or a waiver of such approval. The Mississippi Gaming Authorities may require determinations that, among other things, there are means for the Mississippi Gaming Authorities to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. The Company and its affiliates obtained the approval of the Mississippi Gaming Commission to engage in gaming operations in Nevada, Louisiana, Illinois and Missouri. 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 Mississippi Gaming Subsidiary's respective operations will be conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon (i) a percentage of the gross gaming revenues received by the casino operation, (ii) the number of slot machines operated by the casino, (iii) the number of table games operated by the casino or (iv) the number of patrons entering the casino. The license fees payable to the State of Mississippi are based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings) and are equal to 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 per month. The foregoing license fees are allowed as a credit against the Company's Mississippi income tax liability for the year paid. In October 1994, the Mississippi Gaming Commission adopted a regulation which requires as a condition of licensure or license renewal that a gaming establishment's plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities which will amount to at least 25% of the casino cost. Such facilities may include any of the following: a 250-room hotel of at least a two star rating as defined by the current edition of the Mobil Travel Guide, a theme park, golf courses, marinas, tennis complex, entertainment facilities, or any other such facility as approved by the Mississippi Gaming Commission as infrastructure. Parking facilities, roads, sewage and water systems, or facilities normally provided by cities and/or counties are excluded. The Commission may in its discretion reduce the number of rooms required, where it is shown to the Commission's satisfaction that sufficient rooms are available to accommodate the anticipated visitor load. The Company believes that Boyd Tunica, with an 857-room hotel and other amenities, currently satisfies these requirements. Missouri Gaming was originally authorized in the State of Missouri in November 1992. On April 29, 1993, new legislation (the "Missouri Act") was enacted which replaced the 1992 legislation. Subsequent to adoption, the Missouri Act has been amended from time to time. There can be no assurances that the Missouri Act will not be further amended and interpreted in a manner that would limit or otherwise adversely affect the Company and its Missouri gaming operations. The Missouri Act provides for the licensing and regulation of riverboat and dockside gaming operations on the Mississippi and Missouri Rivers in the State of Missouri and the licensing and regulation of persons who distribute gaming equipment and supplies to gaming licensees. The Missouri Act limits the loss per individual on each excursion to $500, but does not otherwise limit the amount which may be wagered on any bet or the amount of space in the vessel which may be utilized for gaming. In November 1994, a constitutional amendment was passed which permits certain games of chance such as traditional slot machines on riverboats and floating gaming facilities. The Missouri Act is implemented and enforced by the five-member Missouri Gaming Commission (the "Missouri Commission"). This Commission is empowered to issue such number of riverboat gaming licenses as it determines to be appropriate. A gaming license cannot be granted to any gaming operator unless the voters in such operator's "home dock" city or county have authorized 28
29 gaming activities on gaming riverboats. On February 2, 1993, voters in Kansas City, Missouri approved a riverboat gaming ballot measure. On September 13, 1995, Boyd Kansas City was issued a Missouri gaming license for its Sam's Town Kansas City facility. Boyd Kansas City's home dock city is Kansas City, Missouri. Gaming boats in Missouri must generally resemble boats from Missouri's riverboat history and must contain nongaming areas, food service and a Missouri-themed gift shop. The boats must cruise unless the Missouri Commission approves a petition for continuous docking. On April 25, 1995, the Missouri Commission approved Boyd Kansas City's petition for continuous docking for its riverboat at Sam's Town Kansas City. The Missouri Act also imposes a tax of 20% of adjusted gross receipts from gaming activities and a $2.00 per person per excursion fee. Annual license fees are set by the Missouri Commission but may not be less than $25,000. Each licensee also must post a bond or other form of surety (in an amount determined by the Missouri Commission) to secure performance of its obligations under the Missouri Act and the regulations of the Missouri Commission. On September 1, 1993, the Missouri Commission adopted rules and regulations (the "Missouri Regulations") governing the licensing, operation and administration of riverboat gaming in the state of Missouri and the form of application for such licensure. Subsequent to adoption, the Missouri Regulations have been amended from time to time. There can be no assurance that the Missouri Regulations will not be further amended and interpreted in a manner that would limit or otherwise adversely affect the Company and its Missouri gaming operations. Directors and certain officers and key persons of the Company and Boyd Kansas City must file personal disclosure forms with the gaming license application and must be found suitable by the Missouri Commission. Owners of 5% or more of the Company or Boyd Kansas City are considered key persons for purposes of the gaming application disclosure and finding of suitability. The Company, Boyd Kansas City and the Port Authority of Kansas City, Missouri are parties to a development agreement dated April 25, 1995. In the development agreement, Boyd Kansas City and the Company agreed that, within 6 months after the opening of Sam's Town Kansas City, Boyd Kansas City and the Company would seek to identify qualified minority and women investors acceptable to them and to offer such investors an opportunity to purchase up to 10% of the stock of Boyd Kansas City; 7% of said stock is to be offered to minority investors and 3% is to be offered to women investors which Boyd Kansas City and the Company find to be qualified and acceptable. Boyd Kansas City subsequently requested, and the Port Authority approved, multiple extensions of the time period for Boyd Kansas City to attempt to complete such offering, including the last extension, which was in effect through September 13, 1997. Rather than granting further extensions, the Port Authority advised Boyd Kansas City that it was going to evaluate the status of the minority offering requirements for all licensees having development agreements with the Port Authority. By letter dated February 16, 1998, counsel for the Port Authority advised counsel for Boyd Kansas City that the Port Authority did not consider Boyd in default of its obligation to complete such minority offering. Such offering has not been completed at this time, and due to the performance of Sam's Town Kansas City, the Company does not anticipate that the offering will be completed. The Missouri Commission's staff advised the Company that it will consider all minority or women investors who are offered the right to purchase the stock of Boyd Kansas City to be key persons, even if any such investor's ownership is less than 5% of the common stock of Boyd Kansas City. Further, the Missouri Regulations require that all employees of Boyd Kansas City who are involved in gaming operations must file applications for and receive Missouri gaming occupational licenses. Presently, the Missouri Commission staff has required all employees at Sam's Town Kansas City to obtain occupational licenses, even if those employees are not involved in gaming operations. The Missouri Regulations require disclosure by the Company and Boyd Kansas City of any person or entity holding any direct or indirect ownership interest in the Company or Boyd Kansas City. The Company is also required to disclose the names of the holders of all of the Company's debt, including a description of the nature and terms of such debt. The Missouri Commission may, in its sole discretion, request additional information with respect to such holders. The Company and Boyd Kansas City are required to update the Missouri gaming license application any time there is a material change in the information submitted on such license application within seven business days after the date of any such change. Missouri gaming licenses must be renewed annually during the first two years of an entity's licensure and every two years thereafter. Under Missouri law, gaming licenses are not transferable. The Missouri Regulations require that the Missouri Commission be notified at least 60 days prior to the transfer or issuance of any ownership interest in a gaming licensee which is not a publicly-held entity, such as Boyd Kansas City. Upon receipt of such 60-day notice, the Missouri Commission may disapprove the transaction or require 29
30 the transaction to be delayed pending further investigation. The pledge or hypothecation of any ownership interest in a gaming licensee which is not a publicly-held entity is prohibited. The Missouri Regulations permit a gaming licensee to consummate issuance of ownership interests in publicly-held gaming licensees or publicly-held holding companies, such as the Company, and permit a gaming licensee or holding company to incur debt or publicly issue debt, at any time after 15 days following notice to the Missouri Commission by the gaming licensee of its intent to consummate such a transaction. The Missouri Regulations authorize the Missouri Commission to reopen a license hearing at any time to consider the effect of the transaction in question on the gaming licensee's suitability. The Missouri Regulations require that the Missouri Commission be notified not later than seven days after the consummation of any pledge or hypothecation of an ownership interest equaling 5% or more of the ownership of a publicly-held gaming licensee or publicly-held holding company or any transfer or issuance of ownership interest in a publicly-held gaming licensee or publicly-held holding company if such transfer or issuance resulted in an entity or group of entities acting in concert owning, directly or indirectly, a total amount of ownership interest equaling 5% or more of the ownership of such gaming licensee or holding company. If any part of such ownership interest is transferred voluntarily or involuntarily pursuant to such a pledge or hypothecation, separate notice to the Missouri Commission is required not later than seven days after the consummation of such transfer. The Missouri Regulations also require that the Missouri Commission be notified not later than seven days after the consummation of any transaction that involves or relates to a gaming licensee and has a dollar value equal to or greater than one million dollars. Further, without the prior approval of the Missouri Gaming Commission, the Missouri Regulations prohibit withdrawals of capital, loans, advances or distribution of any assets in excess of 5% of accumulated earnings by a gaming licensee to anyone with an ownership interest in the gaming licensee. The Missouri Regulations specifically provide that any action of the Missouri Commission shall not indicate or suggest that the Missouri Commission has considered or passed in any way on the marketability of the applicant or licensee's securities or on any other matter other than the applicant or licensee's suitability for licensure under Missouri law. A Missouri gaming license holder can be disciplined in Missouri for gaming-related acts occurring in another jurisdiction which results in disciplinary action in such other jurisdiction. The Missouri Commission has broad powers to require additional disclosure by an applicant during the processing of a gaming application, to deny gaming licensure and to administratively fine or suspend or revoke a gaming license for failure to comply with or for violation of the Missouri Act or Missouri Regulations. Under the Missouri Regulations, a licensee is required to provide all requested information immediately upon request by the Missouri Commission, and to advise the Missouri Commission of any material changes in the information submitted by a licensee on its license application within seven business days after the occurrence of such change. Further, in certain situations, the Missouri Commission can appoint a supervisor to continue the operations of a license holder after lapse, suspension or revocation of a gaming license. The supervisor may operate or sell the facility with earnings or proceeds being paid to the former owners only after deduction of the costs and expenses of the supervisorship and establishment of reserves. On November 26, 1997, the Supreme Court of Missouri held that the part of the Missouri Act that authorizes games of chance to be conducted in artificial spaces within one thousand feet of the channel of the Mississippi or Missouri Rivers is invalid to the extent it conflicts with Article III, section 39(e) of the Missouri Constitution, which authorizes games of chance to be conducted solely upon the Mississippi and Missouri Rivers. The Missouri Supreme Court, however, clarified that games of chance may occur in artificial spaces that are contiguous to the surface streams of the Mississippi and Missouri Rivers. Boyd Kansas City has been advised by the Missouri Gaming Commission that it, along with five other licensees in Missouri who collectively hold 10 gaming licenses, may not be authorized to conduct games of chance due to the configuration of their respective gaming facilities. Boyd Kansas City believes that it is in full compliance with the Missouri Act, as interpreted by the Missouri Supreme Court, but an adverse ruling could result in the closure of Sam's Town Kansas City. 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 30
31 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. Currently, the closest such facility to Sam's Town Kansas City is located in St. Louis, Missouri. The travel to and from such docking facility, as well as the time required for inspections of the Sam's Town Kansas City, 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. CONTROL BY BOYD FAMILY William S. Boyd, Chairman and Chief Executive Officer of the Company, together with his immediate family, beneficially own approximately 51% of the outstanding shares of Common Stock of the Company as of December 31, 1997. 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 the Silver Star, which is owned by the Mississippi Band of Choctaw Indians, expires in July 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 six month period ended December 31, 1997, patrons from Hawaii comprised approximately 73% of the room nights at the California, 57% at the Fremont and 57% 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. Sam's Town Tunica draws patrons from northern Mississippi, western Tennessee (principally Memphis) and Arkansas. The Treasure Chest appeals primarily to local market patrons and attracts patrons from the western suburbs of New Orleans. The Silver Star draws customers from central Mississippi, including the greater Jackson area, and central Alabama, including Birmingham, Montgomery and Tuscaloosa. Sam's Town Kansas City draws customers from the greater Kansas City metropolitan area, as well as from other parts of Missouri and Kansas. The 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. 31
32 EMPLOYEES At December 31, 1997, the Company employed approximately 15,500 persons. On such date, the Company had collective bargaining relationships with eleven unions covering approximately 2,600 employees, substantially all of whom are employed at the Stardust and the Fremont. 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. ITEM 2. PROPERTIES The following table sets forth certain information regarding the properties owned or operated by the Company as of December 31, 1997. <TABLE> <CAPTION> YEAR BUILT CASINO SPACE SLOT TABLE HOTEL LAND OR ACQUIRED (SQ. FT.) MACHINES GAMES ROOMS RESTAURANTS (ACRES) ----------- ------------ -------- ------ ------ ----------- --------- <S> <C> <C> <C> <C> <C> <C> <C> LAS VEGAS STRIP Stardust Resort and Casino............. 1985 87,000 1,966 79 2,300 7 61 BOULDER STRIP Sam's Town Las Vegas................... 1979 118,000 2,898 53 642 16 63 Eldorado Casino........................ 1993 16,000 600 11 -- 3 4 Jokers Wild Casino..................... 1993 22,500 640 11 -- 2 13 DOWNTOWN LAS VEGAS California Hotel and Casino............ 1975 36,000 1,122 35 781 5 16 Fremont Hotel and Casino............... 1985 32,000 1,064 27 423 5 2 Main Street Station Casino, Brewery and Hotel ............................ 1993 28,500 869 22 406 4 15 CENTRAL REGION Sam's Town Tunica...................... 1994 75,000 1,885 74 857 6 150 Sam's Town Kansas City................. 1995 28,000 1,099 49 -- 5 34 Par-A-Dice Hotel and Casino............ 1996 33,000 1,023 42 208 3 19 Silver Star Resort and Casino.......... 1994 90,000 2,816 96 505 6 20 Treasure Chest Casino.................. 1994 24,000 904 56 -- 4 -- ------- ------ ---- ----- --- --- Total.......................... 590,000 16,886 555 6,122 66 397 ======= ====== ==== ===== === === </TABLE> ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are also parties to various legal proceedings arising in the ordinary course of business. See "Business -- Mirage Joint Venture". 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 32
33 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the non-director executive officers of Boyd Gaming Corporation as of February 27, 1998: <TABLE> <CAPTION> NAME AGE POSITION - ---- --- -------- <S> <C> <C> Ellis Landau 54 Executive Vice President, Chief Financial Officer and Treasurer James W. Hippler 51 Senior Vice President-Administration Keith E. Smith 37 Senior Vice President and Controller Brian A. Larson 42 Senior Vice President and General Counsel Charles E. Huff 52 Vice President, Secretary and Senior Gaming Counsel </TABLE> 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. Prior to joining the Company, Mr. Landau held various management positions with Ramada, Inc., a gaming and hospitality company whose gaming operations were transferred to Aztar Corporation, including Vice President and Treasurer of that company from 1978 to February 1990. 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. Keith E. Smith became Senior Vice President in January 1997. Mr. Smith served as Vice President and Controller from June 1993 to January 1997 and, from September 1990 to June 1993, he served as Corporate Controller of the Company. From May 1989 to September 1990, Mr. Smith was Vice President-Finance of the Dunes Hotel, Casino and Country Club in Las Vegas. From 1982 to May 1989, he was employed by Ramada, Inc. in a variety of positions, including Controller of the Tropicana Resort and Casino in Las Vegas. 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. From 1987 through February 1993, Mr. Larson was associated with the law firm of Snell & Wilmer in Phoenix, Arizona, in which he became a partner on January 1, 1992. 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. Prior to joining CH&C, Mr. Huff practiced law in Las Vegas for 13 years. 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: 33
34 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. <TABLE> <CAPTION> HIGH LOW ------ ------ <S> <C> <C> 1995 First Quarter.......................................... 14 1/4 10 1/2 Second Quarter......................................... 18 5/8 13 1/8 Third Quarter.......................................... 16 3/4 13 1/2 Fourth Quarter......................................... 15 1/8 10 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 (through February 27, 1998).............. 8 3/8 5 1/2 </TABLE> On February 27, 1998, the closing sales price of the Common Stock on the NYSE was $7.94 per share. On that date, the Company had approximately 2,562 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. 34
35 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below as of December 31, 1997, June 30, 1997 and June 30, 1996 and for the six month period ended December 31, 1997 and for the fiscal years ended June 30, 1997, 1996 and 1995, 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, 1995 and as of and for the fiscal years ended June 30, 1994 and 1993 have been derived from audited consolidated financial statements of the Company not contained herein. Operating results for the six month period and fiscal years shown below are not necessarily indicative of the results that may be expected for future fiscal years. <TABLE> <CAPTION> SIX MONTH FISCAL YEAR ENDED JUNE 30, PERIOD ENDED ---------------------------------------------------------------------- DECEMBER 31, 1997 1997 1996 1995 1994 1993 ----------------- --------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Net revenues $ 455,771 $ 819,259 $775,857 $660,340 $468,219 $431,174 Operating expense (a) 397,625 863,685 675,071 549,770 413,971 368,255 ---------- --------- -------- -------- -------- -------- Operating income (loss) 58,146 (44,426) 100,786 110,570 54,248 62,919 Interest expense, net (b) 37,310 61,022 51,186 46,371 36,093 32,378 Gain on investment -- -- -- -- -- (1,062) ---------- --------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes, cumulative effect of a change in accounting principle and extraordinary items 20,836 (105,448) 49,600 64,199 18,155 31,603 Provision (benefit) for income taxes 8,736 (34,025) 20,021 27,950 7,505 11,469 ---------- --------- -------- -------- -------- -------- Income (loss) before cumulative effect of a change in accounting principle and extraordinary items 12,100 (71,423) 29,579 36,249 10,650 20,134 Cumulative effect of a change in accounting for income taxes -- -- -- -- 2,035 -- ---------- --------- -------- -------- -------- -------- Income (loss) before extraordinary items 12,100 (71,423) 29,579 36,249 12,685 20,134 Extraordinary items, net of tax 7,240 6,069 1,435 -- -- 7,397 ---------- --------- -------- -------- -------- -------- Net income (loss) 4,860 (77,492) 28,144 36,249 12,685 12,737 Dividends on preferred stock -- -- -- -- 467 1,881 ---------- --------- -------- -------- -------- -------- Net income (loss) applicable to common stock $ 4,860 $ (77,492) $ 28,144 $ 36,249 $ 12,218 $ 10,856 ========== ========= ======== ======== ======== ======== </TABLE> - ------------ (a) Includes $131,339 of impairment loss recorded during the year ended June 30, 1997. See Note 3 to Notes to Consolidated Financial Statements. (b) Net of interest income and amounts capitalized. 35
36 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (continued) <TABLE> <CAPTION> SIX MONTH FISCAL YEAR ENDED JUNE 30, PERIOD ENDED ---------------------------------------------------------------------- DECEMBER 31, 1997 1997 1996 1995 1994 1993 ----------------- --------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> <C> 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 $ 0.20 $ (1.19) $ 0.52 $ 0.64 $ 0.19 $ 0.37 Cumulative effect of a change in accounting for income taxes -- -- -- -- 0.04 -- Extraordinary items (0.12) (0.10) (0.03) -- -- (0.15) ---------- ----------- ------- -------- -------- -------- Net income (loss) $ 0.08 $ (1.29) $ 0.49 $ 0.64 $ 0.23 $ 0.22 ========== =========== ======= ======== ======== ======== Dividends on common stock -- -- -- -- -- -- Weighted average common shares: Basic 61,525 60,248 57,058 56,870 54,297 48,582 Diluted 61,786 60,248 57,058 56,870 54,297 48,582 OTHER OPERATING DATA Depreciation and amortization $ 35,097 $ 67,242 $ 60,626 $ 54,518 $ 42,136 $ 39,450 Preopening expense -- 3,481 10,004 -- 4,605 -- Capital expenditures 17,816 99,207 90,977 183,299 326,829 24,485 BALANCE SHEET DATA Total assets $1,152,415 $1,030,185 $953,425 $ 949,513 836,297 $500,123 Long-term debt (excluding current maturities) 842,932 739,792 590,808 587,957 525,637 364,927 Stockholders' equity 197,141 191,316 233,257 202,613 164,405 72,686 </TABLE> 36
37 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" consists 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), 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 exclude corporate expense, including related depreciation and amortization, preopening expense and impairment loss. <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, ---------------------------------------- --------------------------------------------------------- (IN THOUSANDS) 1997 1996 1997 1996 1995 ---------------- ---------------- ---------------- ---------------- ------------ (UNAUDITED) <S> <C> <C> <C> <C> <C> Net revenues Stardust $ 83,626 $ 91,290 $ 180,387 $ 194,513 $ 193,563 Boulder Strip Properties 93,419 96,757 193,004 189,315 168,036 Downtown Properties(a) 96,369 76,679 167,330 146,825 135,232 Central Region Properties 182,357 119,432 278,538 245,204 163,509 ---------- ---------- ---------- ---------- ---------- Total Properties $ 455,771 $ 384,158 $ 819,259 $ 775,857 $ 660,340 ========== ========== ========== ========== ========== Operating income Stardust $ 6,981 $ 8,342 $ 19,086 $ 30,748 $ 30,688 Boulder Strip Properties 10,464 11,419 26,766 23,904 15,551 Downtown Properties 1,574 5,623 8,763(b) 17,431 22,561 Central Region Properties 49,343 21,781 62,935(c) 66,683(b) 68,486 ---------- ---------- ---------- ---------- ---------- Total Properties $ 68,362 $ 47,165 $ 117,550 $ 138,766 $ 137,286 ========== ========== ========== ========== ========== </TABLE> - ----------- (a) Includes revenues related to Vacations Hawaii, a Honolulu Travel Agency, of $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 loss. 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 Stardust, Boulder Strip Properties and Downtown Properties (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. 37
38 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% 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 periods 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 majority 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 38
39 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. In light of the historical operating performance at Sam's Town Kansas City, management is considering various strategic alternatives to mitigate its impact on the Company, which may include, among other things, the possible sale of the property. 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 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 average 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 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. 39
40 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, 1996 and 1995, is the period beginning on July 1 and ending on June 30. 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 a 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. 40
41 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 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 majority 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. 41
42 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 continues 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. FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO THE FISCAL YEAR ENDED JUNE 30, 1995 Revenues Consolidated net revenues increased 17.5% for fiscal 1996 compared to fiscal 1995. The increase in net revenues for fiscal 1996 resulted primarily from the opening of Sam's Town Kansas City in September 1995, increased revenues at Sam's Town Las Vegas of 14.9% and increased revenues at Sam's Town Tunica of 8.2%. In the Company's Central Region, revenue increased 50% for fiscal 1996 compared to fiscal 1995 while in the Company's Nevada Region, revenue increased 5.4% for fiscal 1996 compared to fiscal 1995. Revenue growth on a consolidated basis in fiscal 1996 was achieved in all major revenue categories, with casino revenue increasing 18.3%, room revenue increasing 5.7%, food and beverage revenue increasing 12.7% and management fee and joint venture income increasing 16.3% compared to fiscal 1995. Slot revenue, which continued to account for more than 70% of casino revenue, increased 22% in fiscal 1996 compared to fiscal 1995. The increase in slot revenue was primarily attributable to the opening of Sam's Town Kansas City in September 1995 and to a 24% increase in slot revenue at Sam's Town Las Vegas. Table games revenue, the only 42
43 other significant component of casino revenue, increased 10.6% in fiscal 1996 compared to fiscal 1995 primarily as a result of the opening of Sam's Town Kansas City. Company-wide room revenue increased 5.7% in fiscal 1996 compared to fiscal 1995 as a result of a 5.9% increase in occupied rooms and a 6.3% increase in the average daily room rate. The increase in occupied rooms was attributable to the openings of the Sam's Town Tunica rooms expansion (300 rooms opened in December 1994) and the California rooms expansion (146 rooms opened in December 1994). Both of these rooms expansion projects were open for the entire fiscal 1996 but were only open for the last six months of fiscal 1995. Occupancy statistics do not include rooms at Main Street Station which the Company used until the November 1996 opening of Main Street Station to augment the rooms base at the California and the Fremont. The Main Street Station property was purchased in December 1993 as a closed casino hotel facility. In November 1996, the Company completed a major renovation of the facility and opened Main Street Station for business. Operating Income Consolidated operating income declined 8.8% for fiscal 1996 as compared to fiscal 1995 while consolidated operating income margins declined to 13.0% from 16.7%. This decline in consolidated operating income and consolidated operating income margins was primarily attributable to the write-off of preopening expenses related to the opening of Sam's Town Kansas City on September 13, 1995. This preopening charge, which amounted to $10 million, was taken in the first quarter of fiscal 1996. Consolidated operating income for fiscal 1996 before the write-off of preopening expenses increased slightly compared to fiscal 1995 while consolidated operating income margins was 14.3% in fiscal 1996 compared to 16.7% in fiscal 1995. In the Company's Nevada Region, operating income increased 6.2% for fiscal 1996 compared to fiscal 1995 while consolidated operating income margins increased to 14.0% for fiscal 1996 from 13.8% in fiscal 1995. This increase in operating income and operating income margins was primarily attributable to increases at Sam's Town Las Vegas of 83% and 4.3 percentage points, respectively, offset by declines at the Downtown Properties of 18.2% and 3.5 percentage points, respectively. In the Company's Central Region, operating income before the write-off of preopening expenses related to Sam's Town Kansas City decreased 2.6% in fiscal 1996 compared to fiscal 1995 while operating income margins declined to 27% primarily as a result of an operating loss at Sam's Town Kansas City and a decline in operating income margin at Sam's Town Tunica to 21.8% in fiscal 1996. Stardust Net revenues at the Stardust increased 0.5% for fiscal 1996 as compared to the prior fiscal year. Casino and food and beverage revenues declined 0.5% and 1.6%, respectively, while room revenue increased 3.4% and showroom revenue increased 9.3% for fiscal 1996 as compared to fiscal 1995. Slot revenue declined 1.3% in fiscal 1996 with a 2.3% increase in wagering offset by lower net winnings. Table games revenue declined 4.1% for fiscal 1996 as compared to fiscal 1995 as a result of an increase of 4.3% in wagering offset by lower net winnings. Other casino revenues increased 11.9% for fiscal 1996 primarily as a result of a 28% increase in revenue in the sports book. Room revenue at the Stardust increased 3.4% for fiscal 1996 compared to fiscal 1995 with a 1.3% decline in occupied rooms offset by a 7.9% increase in average daily room rate. Operating income increased slightly in fiscal 1996 compared to fiscal 1995 and operating income margin was 15.8% compared to 15.9%, respectively, for fiscal 1996 versus fiscal 1995. The slight decline in operating income margin was primarily the result of higher advertising and promotional expenses not fully offset by increased operating income and operating income margin in the room department. Boulder Strip Properties Net revenues for the Boulder Strip Properties increased 12.7% for fiscal 1996 versus fiscal 1995 primarily as a result of increased revenues at Sam's Town Las Vegas. Sam's Town Las Vegas revenue increased 14.9% for fiscal 1996 while revenues increased 6.8% at Jokers Wild and declined slightly at the Eldorado. Casino revenue at the Boulder Strip Properties increased 16.7% for fiscal 1996 versus fiscal 1995, while room revenue increased 4.7% and food and beverage revenue increased 4.8%. Operating income at the Boulder Strip Properties increased 54% for fiscal 1996 compared to fiscal 1995 while operating income margin increased 3.3 percentage points to 12.6% for fiscal 1996. Sam's Town Las Vegas posted increases in operating income and operating income margin of 83% and 4.3 percentage points, respectively for the 1996 fiscal year. Operating income margins increased 2.5 percentage points at the Eldorado and declined 2.3 percentage points at Jokers Wild for fiscal 1996 versus fiscal 1995. The increase in operating income margin at the Eldorado was a result of increased casino revenue while the decline in operating income margin at Jokers Wild was primarily a result of increased expenses in the food and beverage department for fiscal 1996 versus fiscal 1995. Management believes that the significant increases in revenues, operating income and operating 43
44 income margin at Sam's Town Las Vegas for fiscal 1996 versus fiscal 1995 were primarily attributable to the implementation of successful marketing programs creating increased customer awareness and visitation. Downtown Properties Net revenues at the Downtown Properties increased 3.2% for fiscal 1996 compared to fiscal 1995. Net revenues at the California increased 1.4% while net revenues at the Fremont increased 5.2%. Casino revenues at the Downtown Properties were up slightly while food and beverage revenue increased 20% and room revenue declined slightly. Operating income and operating income margins at the Downtown Properties declined 18.2% and 3.5 percentage points, respectively in fiscal 1996 as compared to fiscal 1995. Operating income at the California declined 20% while operating income margin at the California declined 3.7 percentage points for fiscal 1996. The decline in operating income and operating income margin at the California was primarily the result of increased operating costs in the room and food and beverage departments and increased advertising and promotional costs. Operating income and operating income margin at the Fremont declined 15.6% and 3.1 percentage points, respectively, for fiscal 1996 compared to fiscal 1995 primarily as a result of increased advertising and promotional costs. Construction of the Fremont Street Experience project, which was completed and opened to the public in December 1995, negatively impacted the Downtown Properties for the majority of the first and second fiscal quarter. Central Region Net revenues at the Central Region Properties increased 50% for fiscal 1996 versus 1995. The opening of Sam's Town Kansas City on September 13, 1995 accounted for the majority of the increase in fiscal 1996. Sam's Town Tunica revenues increased 8.2% for the 1996 fiscal year versus fiscal 1995 while management fees and joint venture income related to the Silver Star and the Treasure Chest operations increased 16.3%. Operating income in the Central Region (before the write-off of preopening expenses related to Sam's Town Kansas City) declined 2.6% to $66.7 million for fiscal 1996. The decline in operating income was primarily a result of a $5 million operating loss at Sam's Town Kansas City and an 8.0% decline in operating income at Sam's Town Tunica, partially offset by a 16.3% increase in operating income from management fees and joint venture income. The operating loss at Sam's Town Kansas City was primarily attributable to revenues not sufficient to cover the high level of fixed costs associated with the operation of the facility and higher levels of advertising and promotional expenses aimed at increasing customer awareness and revenues. Results from Sam's Town Tunica were weakened due to severe weather during the third quarter of fiscal 1996, the effects of a new competitor opening at the beginning of the fourth fiscal quarter and the impact of construction disruption related to the 350-room hotel expansion project and construction of a 1,000-car parking garage which commenced in the second half of fiscal 1996. Other Expenses Interest expense, net of amounts capitalized, increased $3.9 million or 8.1% for fiscal 1996 compared to fiscal 1995 primarily as a result of less capitalized interest related to projects under development. Depreciation and amortization expense for fiscal 1996 increased $6.1 million or 11.2% compared to fiscal 1995 primarily as a result of the opening of Sam's Town Kansas City in September 1995 and a full year of depreciation of the Sam's Town Las Vegas expansion and the California rooms expansion projects which opened in December 1994. Provision for Income Taxes The Company's tax rate for fiscal 1996 was 40% compared to 44% in fiscal 1995. The Company's 1995 tax rate was affected by the increase in certain non-deductible expenses related to the Company's development efforts during that year. Extraordinary Item The Company recorded an extraordinary loss, net of tax, of $1.4 million in fiscal 1996. This extraordinary loss resulted from the write-off of unamortized bank loan fees in connection with its recent bank refinancing which was completed on June 19, 1996. Net Income As a result of these factors, the Company reported net income of $28.1 million for fiscal 1996 compared to net income of $36.2 million in fiscal 1995. 44
45 LIQUIDITY AND CAPITAL RESOURCES Cash Flow and Working Capital The Company's policy is to use operating cash flow in combination with debt and equity financing to fund renovations of its properties and expansion of its business. During the six month period ended December 31, 1997, the Company acquired the remaining 85% of Treasure Chest which it did not already own for $103 million plus the assumption of debt. During fiscal 1997, the Company completed the expansion and renovation of Main Street Station, the acquisition of Par-A-Dice and the construction of a 350-room hotel tower and 1,000 space parking garage at Sam's Town Tunica. The aggregate cost of these expansion and renovation projects was approximately $255 million over the course of fiscal 1997 and 1996. During the six month period ended December 31, 1997, the Company's generated operating cash flows of $57.5 million compared to $41.7 million during the six month period ended December 31, 1996. The increase in operating cash flows is primarily attributable to the operations of Par-A-Dice and Treasure Chest, which were acquired in December 1996 and October 1997, respectively. As of December 31, 1997 and 1996, the Company had balances of cash and cash equivalents of $78.3 million and $70.4 million, respectively, and working capital of $12.4 million and $1.1 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. The working capital deficits, if any, are funded through cash generated from operations as well as borrowings under the Bank Credit Facility. Capital Expenditures 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 for these purposes were approximately $22.2 million and $15.1 million, respectively, during the six month periods ended December 31, 1997 and 1996. Approximately $4.5 million of the $22.2 million in capital expenditures related to the Fremont rooms remodel, which was substantially completed in December 1997. During the six month period ended December 31, 1997, net cash used in investing activities was $125.2 million compared to $229.9 million during the six month period ended December 31, 1996. Investing activities during the current period consisted primarily of the $103 million acquisition of the remaining 85% of the Treasure Chest and maintenance capital expenditures at the Company's properties. In comparison, investing activities during the prior period consisted primarily of the $171 million acquisition of Par-A-Dice, the expansion and renovation of Main Street Station, the construction of a new 350-room hotel tower and parking garage facility at Sam's Town Tunica, as well as maintenance capital expenditures at the Company's properties. Debt Facilities and Equity Financing 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. Cash flows provided by financing activities totalled $90.8 million during the six month period ended December 31, 1997 compared to $209.6 million during the corresponding period in 1996. Financing activities during the December 31, 1997 period consisted primarily of proceeds from the issuance of $250 million principal amount of 9.50% Senior Subordinated Notes (the "9.50% Notes") described below, offset by the redemption of $185 million principal amount of 11% Senior Subordinated Notes (the "11% Notes"). In addition, net borrowings under the Bank Credit Facility for the six month period ended December 31, 1997 were $39 million and were used primarily to assist in the acquisition of the remaining 85% equity interest in Treasure Chest. At December 31, 1997, outstanding borrowings and unused availability under the Bank Credit Facility were $390 million and $110 million, respectively. Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or the London Interbank Offered Rate, at the discretion of the Company. The blended rate under the Bank Credit Facility at December 31, 1997 was 8.2%. 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. 45
46 In July 1997, Company issued, through a private placement, $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 Company's Bank Credit Facility. Subsequently, in December 1997, the Company used its availability under the Bank Credit Facility to redeem the Company's $185 million principal amount of 11% Senior Subordinated Notes (the "11% Notes") prior to their scheduled maturity. On October 31, 1997, the Company completed the exchange of the 9.50% Notes for identical notes that were registered with the Securities and Exchange Commission. 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 the term of the Bank Credit Facility, and (vii) imposing restrictions on investments, the purchase or redemption of subordinated debt prior to its stated maturity (except for a redemption of the 11% Notes, which is permitted), dividends and other distributions, and the redemption or purchase of capital stock of the Company. The 9.25% and 9.50% Notes contain limitations on, among other things, (a) the ability of the Company and its Restricted Subsidiaries (as defined in the Indenture Agreements) to incur additional indebtedness, (b) the payment of dividends and other distributions with respect to the capital stock of the Company and its Restricted Subsidiaries and the purchase, redemption or retirement of capital stock of the Company and its Restricted Subsidiaries, (c) the making of certain investments, (d) asset sales, (e) the incurrence of liens, (f) transactions with affiliates, (g) payment restrictions affecting restricted subsidiaries, and (h) certain consolidations, mergers and transfers of assets. 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. New Expansion Projects The Company, as part of its ongoing strategic planning process, is currently establishing its priorities for future growth. In Nevada, the Company has intensified its efforts to develop alternatives for the enhancement and development of the 61-acre Stardust site on the Las Vegas Strip and is exploring opportunities that may exist in the locals market for expansion of its Sam's Town concept. Outside of Nevada, the Company continues to monitor acquisition opportunities in many of the newer gaming markets as the industry continues to consolidate. In addition, the Company has been focusing its efforts on the Mirage Joint Venture. On May 29, 1996, the Company, through a wholly-owned subsidiary, executed the Joint Venture Agreement with Mirage to develop the Atlantic City Project. The Joint Venture Agreement provides for at least $100 million in capital contributions by the Company. Funding of the Company's Mirage Joint Venture capital contributions would come from cash flow from operations and availability under the Company's Bank Credit Facility. In January 1998, Mirage attempted to unilaterally terminate the Joint Venture Agreement. On February 2, 1998, the Company filed a lawsuit against Mirage alleging, among other things, that Mirage attempted to unilaterally terminate the Joint Venture Agreement and misappropriate the Mirage Joint Venture's business opportunity for its own benefit. As a result, there can be no assurance that the Atlantic City Project will be completed according to the terms contemplated by the Joint Venture Agreement, or at all. Substantial funds would be required for the expansion projects discussed above. 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. See "Investment Considerations -- Leverage and Debt Service," "-- Expansion," and "-- Additional Financing Requirements." -46-
47 Year 2000 Project The Company is conducting a review of its computer systems to identify those areas that could be affected by the "Year 2000" issue and is in the process of replacing many of its existing systems to improve overall business performance and to accommodate business for the "Year 2000". However, given the inherent risks for a project of this magnitude and the resources required, actual results could differ materially from those anticipated by the Company. The Company expects its "Year 2000" date conversion project to be completed on a timely basis. However, there can be no assurance that the systems of other companies on which the Company may rely also will be timely converted or that such failure to convert by another company would not have an adverse impact of the Company's systems. The estimated costs directly or indirectly associated with the project is currently expected to be approximately $16 million. At December 31, 1997, the Company had directly or indirectly expended $1.7 million on the "Year 2000" project. 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 Not required of the Company at this time. 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. -47-
48 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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders and is incorporated herein by reference. 48
49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K <TABLE> <CAPTION> PAGE NO. -------- <S> <C> 1. FINANCIAL STATEMENTS. The following financial statements for the six month period ended December 31, 1997 and December 31, 1996 (unaudited) and for the fiscal years ended June 30, 1997, 1996 and 1995 are filed as part of this report: Independent Auditors' Report................................................. 51 Consolidated Balance Sheets at December 31, 1997, June 30, 1997 and June 30, 1996................................................................... 52 Consolidated Statements of Operations for the Six Month Periods Ended December 31, 1997 and December 31, 1996 (unaudited) and for the Fiscal Years Ended June 30, 1997, 1996 and 1995................................... 53 Consolidated Statements of Changes in Stockholders' Equity for the Six Month Period Ended December 31, 1997 and for the Fiscal Years Ended June 30, 1997, 1996 and 1995.................................................... 54 Consolidated Statements of Cash Flows for the Six Month Period Ended December 31, 1997 and December 31, 1996 (unaudited) and for the Fiscal Years Ended June 30, 1997, 1996 and 1995................................... 55 Notes to Consolidated Financial Statements................................... 57 2. REPORTS ON FORM 8-K. (a) Company's current report on Form 8-K dated November 13, 1997 relating to Item 2 --"Acquisition or Disposition of Assets." 3. EXHIBITS. Refer to (c) on page 69. </TABLE> 49
50 BOYD GAMING CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> PAGE ---- <S> <C> Independent Auditors' Report 51 Consolidated Financial Statements Consolidated Balance Sheets 52 Consolidated Statements of Operations 53 Consolidated Statements of Changes in Stockholders' Equity 54 Consolidated Statements of Cash Flows 55 Notes to Consolidated Financial Statements 57 </TABLE> 50
51 INDEPENDENT AUDITORS' REPORT 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, 1997, June 30, 1997 and June 30, 1996, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the six month period ended December 31, 1997 and for each of the three 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 the 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, 1997, June 30, 1997 and June 30, 1996 and the results of their operations and their cash flows for the six month period ended December 31, 1997 and for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada February 18, 1998 51
52 CONSOLIDATED BALANCE SHEETS Boyd Gaming Corporation and Subsidiaries (IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, JUNE 30, 1997 1997 1996 ------------ ---------- -------- ASSETS <S> <C> <C> <C> Current assets Cash and cash equivalents $ 78,277 $ 55,220 $ 48,980 Accounts receivable, net 19,372 16,946 16,040 Inventories 9,906 8,501 6,531 Prepaid expenses 14,357 14,873 15,265 Income taxes receivable 2,787 -- -- ---------- ---------- -------- Total current assets 124,699 95,540 86,816 Property and equipment, net 771,235 744,038 796,093 Other assets and deferred charges 41,912 56,944 59,989 Deferred income taxes 6,558 8,533 -- Goodwill and other intangible assets, net 208,011 125,130 10,527 ---------- ---------- -------- Total assets $1,152,415 $1,030,185 $953,425 ========== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 1,828 $ 1,841 $ 4,031 Accounts payable 28,535 30,760 31,936 Accrued liabilities Payroll and related 26,100 24,648 22,956 Interest and other 55,879 40,725 36,213 Income taxes payable -- 1,103 678 ---------- ---------- -------- Total current liabilities 112,342 99,077 95,814 Long-term debt, net of current maturities 842,932 739,792 590,808 Deferred income taxes -- -- 33,546 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; 5,000,000 shares authorized -- -- -- Common stock, $.01 par value; 200,000,000 shares authorized; 61,669,628, 61,523,988 and 57,213,720 shares outstanding 617 615 572 Additional paid-in capital 139,054 138,091 102,583 Retained earnings 57,470 52,610 130,102 ---------- ---------- -------- Total stockholders' equity 197,141 191,316 233,257 ---------- ---------- -------- Total liabilities and stockholders' equity $1,152,415 $1,030,185 $953,425 ========== ========== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 52
53 CONSOLIDATED STATEMENTS OF OPERATIONS Boyd Gaming Corporation and Subsidiaries (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, ---------------------- -------------------------------------- 1997 1996 1997 1996 1995 -------- -------- --------- -------- -------- UNAUDITED <S> <C> <C> <C> <C> <C> Revenues Casino $323,707 $268,208 $ 573,782 $548,167 $463,179 Food and Beverage 78,658 73,387 151,261 142,420 123,527 Room 38,330 35,449 74,209 69,645 62,300 Other 39,074 26,883 58,311 49,895 37,563 Management fees and joint venture 20,310 20,406 42,747 41,576 35,763 -------- -------- --------- -------- -------- Gross revenues 500,079 424,333 900,310 851,703 722,332 Less promotional allowances 44,308 40,175 81,051 75,846 61,992 -------- -------- --------- -------- -------- Net revenues 455,771 384,158 819,259 775,857 660,340 -------- -------- --------- -------- -------- Costs and expenses Casino 166,776 145,928 298,081 273,545 221,844 Food and beverage 53,757 50,885 106,729 99,213 90,670 Room 12,958 12,044 25,210 25,842 24,578 Other 32,793 21,574 50,695 36,830 25,567 Selling, general and administrative 68,461 58,860 120,538 114,497 79,785 Maintenance and utilities 18,652 18,327 36,037 30,171 28,452 Depreciation and amortization 35,097 30,834 67,242 60,626 54,518 Corporate expense 9,131 10,744 24,333 24,343 24,356 Preopening expense -- 3,481 3,481 10,004 -- Impairment loss -- -- 131,339 -- -------- -------- --------- -------- -------- Total 397,625 352,677 863,685 675,071 549,770 -------- -------- --------- -------- -------- Operating income (loss) 58,146 31,481 (44,426) 100,786 110,570 -------- -------- --------- -------- -------- Other income (expense) Interest income 261 342 650 1,174 2,072 Interest expense, net of amounts capitalized (37,571) (27,069) (61,672) (52,360) (48,443) -------- -------- --------- -------- -------- Total (37,310) (26,727) (61,022) (51,186) (46,371) -------- -------- --------- -------- -------- Income (loss) before provision (benefit) for income taxes and extraordinary items 20,836 4,754 (105,448) 49,600 64,199 Provision (benefit) for income taxes 8,736 1,902 (34,025) 20,021 27,950 -------- -------- --------- -------- -------- Income (loss) before extraordinary items 12,100 2,852 (71,423) 29,579 36,249 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) $ 4,860 $ (3,217) $ (77,492) $ 28,144 $ 36,249 ======== ======== ========= ======== ======== Basic and diluted net income (loss) per common share: Income (loss) before extraordinary items $ 0.20 $ 0.05 $ (1.19) $ 0.52 $ 0.64 Extraordinary items, net of tax (0.12) (0.10) (0.10) (0.03) -- -------- -------- --------- -------- -------- Net income (loss) $ 0.08 $ (0.05) $ (1.29) $ 0.49 $ 0.64 ======== ======== ========= ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 53
54 CONSOLIDATED STATEMENTS OF Boyd Gaming Corporation and Subsidiaries CHANGES IN STOCKHOLDERS' EQUITY For the six month period ended December 31, 1997 and fiscal years ended June 30, 1997, 1996 and 1995 <TABLE> <CAPTION> COMMON STOCK ADDITIONAL TOTAL ----------------------- PAID-IN RETAINED STOCKHOLDERS' (IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- ------ ---------- -------- ------------- <S> <C> <C> <C> <C> <C> Balances, July 1, 1994 56,816,895 $568 $ 98,128 $ 65,709 $ 164,405 Net income 36,249 36,249 Stock issued in connection with employee stock purchase plan 182,123 2 1,957 1,959 ---------- ---- -------- --------- --------- Balances, June 30, 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 ========== ==== ======== ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 54
55 CONSOLIDATED STATEMENTS OF CASH FLOWS Boyd Gaming Corporation and Subsidiaries (IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, ------------------------ ------------------------------------------ 1997 1996 1997 1996 1995 -------- -------- --------- -------- -------- UNAUDITED <S> <C> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 4,860 $ (3,217) $ (77,492) $ 28,144 $ 36,249 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 35,097 30,834 67,242 60,626 54,518 Loss on early retirement of debt 11,139 9,337 9,337 3,759 -- Deferred income taxes 1,975 171 (42,079) 3,903 14,148 Impairment loss -- -- 131,339 -- -- Other -- 301 -- 185 84 Changes in assets and liabilities: Accounts receivable, net (2,426) (9,836) (906) 95 (3,089) Inventories (1,405) (2,319) (1,970) 117 (180) Prepaid expenses 516 (3,855) 392 (1,800) 1,940 Other assets (5) (4,902) (4,853) (6,736) (2,032) Other current liabilities 11,611 33,016 574 15,504 (19,146) Income taxes receivable (2,787) (7,144) -- -- -- Income taxes payable (1,103) (678) 425 82 596 -------- -------- --------- -------- -------- Net cash provided by operating activities 57,472 41,708 82,009 103,879 83,088 -------- -------- --------- -------- -------- 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) -- -- Acquisition of property, equipment and other assets (22,186) (79,132) (99,586) (107,734) (181,212) Proceeds from loans receivable -- -- -- 2,000 30,667 Proceeds from sale of riverboat -- 20,000 20,000 -- -- Decrease in short-term investments -- -- -- -- 5,000 -------- -------- --------- -------- -------- Net cash used in investing activities (125,226) (229,857) (250,311) (105,734) (145,545) -------- -------- --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 244,525 200,000 200,148 230,934 86,025 Payments on long-term debt (903) (18,334) (19,354) (265,149) (22,027) Early retirement of long-term debt (192,631) (157,500) (157,500) -- -- Net borrowings (payments) under credit agreements 39,000 150,850 116,000 (250) 13,000 Proceeds from issuance of common stock 820 34,579 35,248 2,131 1,664 -------- -------- --------- -------- -------- Net cash provided by (used in) financing activities 90,811 209,595 174,542 (32,334) 78,662 -------- -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents 23,057 21,446 6,240 (34,189) 16,205 Cash and cash equivalents, beginning of year 55,220 48,980 48,980 83,169 66,964 -------- -------- --------- -------- -------- Cash and cash equivalents, end of year $ 78,277 $ 70,426 $ 55,220 $ 48,980 $ 83,169 ======== ======== ========= ======== ======== </TABLE> 55
56 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Boyd Gaming Corporation and Subsidiaries (IN THOUSANDS) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, ---------------------- -------------------------------------- 1997 1996 1997 1996 1995 ------- --------- -------- ------ ------- UNAUDITED <S> <C> <C> <C> <C> <C> SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized $ 29,029 $ 29,950 $ 58,556 $54,342 $51,405 Cash paid for income taxes 6,815 4,915 7,981 15,266 12,607 ======== ======== ======= ======= ======= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Property additions acquired on contracts and trade payables which were accrued, but not yet paid $ 2,603 $ 7,398 $ 6,973 $ 7,352 $24,109 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 $ -- $ -- $ -- $ -- ======== ========= ======== ======= ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 56
57 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 eleven casino entertainment facilities located in Las Vegas, Nevada, Tunica, Mississippi, Kansas City, Missouri, East Peoria, Illinois, and Kenner, Louisiana as well as a travel agency located in Honolulu, Hawaii. In addition, the Company manages a casino entertainment facility in Philadelphia, Mississippi for which it has a seven year management contract that expires in 2001. All material intercompany accounts and transactions have been eliminated. 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, 1996 and 1995 was $3.2 million, $4.6 million and $7.1 million, respectively. There were no such interest costs capitalized during 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, 1997 and June 30, 1997 and 1996, accumulated amortization was $8.0 million, $6.1 million and $4.0 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. 57
58 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: <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED JUNE 30, ------------------- --------------------------------------------- (IN THOUSANDS) 1997 1997 1996 1995 - --------------- --------- --------- --------- --------- <S> <C> <C> <C> <C> Room $ 5,668 $11,704 $10,660 $ 8,991 Food and beverage 33,397 58,120 59,254 49,674 Other 2,638 3,168 3,116 2,422 ------- ------- ------- ------- Total $41,703 $72,992 $73,030 $61,087 ======= ======= ======= ======= </TABLE> 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 six month period ended December 31, 1997 or the year ended June 30, 1995. 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, 1997 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. Recently Issued Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. This statement requires businesses to disclose comprehensive income and its components in their financial statements. Management intends to comply with the disclosure requirements of this statement in the year ending December 31, 1998. The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement redefines how operating segments are determined and requires qualitative disclosure of certain financial and descriptive information about a company's operating segments. The Company will adopt SFAS No. 131 in the year ending December 31, 1998. Management has not finalized its analysis of which operating segments it will report on to comply with SFAS No. 131. 58
59 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 funded the acquisition and the repayment of Treasure Chest's debt with borrowings under its bank credit facility. The Company's pro forma consolidated results of operations, as if the acquisition had occurred on July 1, 1995, are as follows: <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30, ----------------------------- ------------------------- 1997 1996 1997 1996 ---------- --------- --------- --------- <S> <C> <C> <C> <C> 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 ----------- --------- --------- --------- </TABLE> 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 recently 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 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: <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, YEAR ENDED JUNE 30, ----------------------------- ------------------------- 1997 1996 1997 1996 ---------- --------- --------- --------- <S> <C> <C> <C> <C> Pro forma (in thousands, except per share data) Net revenues................................ $ 455,771 $ 428,998 $ 861,563 $ 869,819 Income (loss) before extraordinary items.... 12,100 5,860 (66,644) 40,828 Net income (loss)........................... 4,860 (209) (72,713) 39,393 ---------- --------- --------- --------- Basic and diluted net income (loss) per common share Income (loss) before extraordinary items.... $ 0.20 $ 0.10 $ (1.11) $ 0.72 Net income (loss)........................... 0.08 (0.00) (1.21) 0.69 ----------- --------- --------- --------- </TABLE> NOTE 3. -- IMPAIRMENT LOSS 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. The Company also recorded a $5.3 million impairment loss related to its 17.4% ownership interest in the Fremont Street Experience, Limited Liability Company ("FSE"). 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. 59
60 NOTE 4. -- ACCOUNTS RECEIVABLE Accounts receivable consists of the following: <TABLE> <CAPTION> DECEMBER 31, JUNE 30, JUNE 30, (IN THOUSANDS) 1997 1997 1996 - -------------- ------------ ------- ------- <S> <C> <C> <C> Casino $ 9,612 $ 7,428 $ 6,420 Hotel 2,563 2,947 3,622 Other 10,951 9,875 8,110 ------- ------- ------- Total 23,126 20,250 18,152 Less allowance for doubtful accounts 3,754 3,304 2,112 ------- ------- ------- Accounts receivable, net $19,372 $16,946 $16,040 ======= ======= ======= </TABLE> NOTE 5. -- PROPERTY AND EQUIPMENT Property and equipment consists of the following: <TABLE> <CAPTION> ESTIMATED LIFE DECEMBER 31, JUNE 30, JUNE 30, (IN THOUSANDS) (YEARS) 1997 1997 1996 -------------- --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Land -- $ 115,439 $ 115,946 $ 119,057 Buildings and leasehold 3-40 632,094 632,829 607,874 improvements Furniture and equipment 3-30 341,759 327,445 312,937 Riverboats and barges 15-40 66,646 39,728 39,728 Construction in progress -- 14,570 5,973 50,854 ---------- ---------- ---------- Total 1,170,508 1,121,921 1,130,450 Less accumulated depreciation and amortization 399,273 377,883 334,357 ---------- ---------- ---------- Property and equipment, net $ 771,235 $ 744,038 $ 796,093 ========== ========== ========== </TABLE> NOTE 6. -- LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> DECEMBER 31, JUNE 30, JUNE 30, 1997 1997 1996 -------- -------- -------- <S> <C> <C> <C> (IN THOUSANDS) Bank Credit Facility $390,000 $351,000 $235,000 9.25% Senior Notes 200,000 200,000 -- 9.50% Senior Subordinated Notes 250,000 -- -- 11% Senior Subordinated Notes -- 185,000 185,000 10.75% Senior Subordinated Notes -- -- 150,000 Other 4,760 5,633 24,839 -------- -------- -------- Total long-term debt 844,760 741,633 594,839 Less current maturities 1,828 1,841 4,031 -------- -------- -------- Total $842,932 $739,792 $590,808 ======== ======== ======== </TABLE> The Company has a $500 million revolving bank credit facility which matures in June 2001 (the "Bank Credit Facility"). Beginning in December 1998, total availability under the Bank Credit Facility will be reduced by $25 million and reduced by an additional $50 million at the end of each six-month period thereafter until maturity. As of December 31, 1997, the Company had unused availability of $110 million under the Bank Credit Facility. Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or London Interbank Offered Rate, at the discretion of the Company. The blended interest rate under the Bank Credit Facility at December 31, 1997 was 8.2%. 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 nine 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 60
61 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 all existing significant subsidiaries of the Company. The guaranties are full, unconditional, and joint and several. All of the Company's significant subsidiaries are wholly-owned. Assets, equity, income and cash flows of all other subsidiaries of the Company that do not guaranty the 9.25% Notes are less than 3% of the respective consolidated amounts and are inconsequential, individually and in the aggregate, to the Company. The Company has not included separate financial information of the guarantors since such information is not material to investors. 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 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, 1997 was approximately $867 million, versus its book value of $845 million. At June 30, 1997, the estimated fair value of the Company's long-term debt was approximately $750 million, versus its book value of $742 million. The estimated fair value amounts were based on quoted market prices on or about December 31, 1997 and June 30, 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 5% to 10%. Management believes the Company and its subsidiaries are in compliance with all covenants contained in its long-term debt agreements at December 31, 1997. The scheduled maturities of long-term debt for the years ending December 31 are as follows: <TABLE> <CAPTION> (IN THOUSANDS) - -------------- <S> <C> 1998 $ 1,828 1999 1,852 2000 648 2001 390,432 2002 -- Thereafter 450,000 -------- Total $844,760 ======== </TABLE> 61
62 NOTE 7. -- 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 (5.91% at December 31, 1997) for a fixed libor rate of 5.54%, resulting in an initial gain of approximately $.1 million which will be deferred and 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, will be recorded as interest expense during the period of settlement. The swap agreement terminates on December 31, 2000. NOTE 8. -- COMMITMENTS AND CONTINGENCIES Future minimum lease payments required under noncancelable operating leases (principally for land) as of December 31, 1997 are as follows: <TABLE> <CAPTION> (IN THOUSANDS) - -------------- <S> <C> 1998 $ 3,952 1999 2,156 2000 2,144 2001 2,155 2002 2,143 Thereafter 84,476 --------- Total $ 97,026 ========= </TABLE> Rent expense for the six month period ended December 31, 1997 and the years ended June 30, 1997, 1996 and 1995 was $1.8 million, $3.2 million, $2.9 million and $2.8 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, an annual boarding fee of $2.50 per passenger onto the Company's Treasure Chest riverboat casino. The future minimum payment due in 1998 to the City of Kenner, based upon a portion of actual passenger counts from the prior year, is approximately $3.6 million. On May 29, 1996, the Company, through a wholly-owned subsidiary, executed the Joint Venture Agreement with Mirage to develop and own the Atlantic City Project. The Joint Venture Agreement provides for at least $100 million in capital contributions by the Company during the course of construction of the Atlantic City Project. The Company plans to fund its Mirage Joint Venture capital contributions primarily from cash flow from operations and availability under the Bank Credit Facility. In January 1998, Mirage attempted to unilaterally terminate the Joint Venture Agreement. On February 2, 1998, the Company filed a lawsuit against Mirage in the Superior Court of New Jersey to enforce its rights under the Joint Venture Agreement. The lawsuit alleges, among other things, that Mirage attempted to unilaterally terminate the Joint Venture Agreement and misappropriate the Mirage Joint Venture's business opportunity for its own benefit. As a result, there can be no assurance that the Atlantic City Project will be completed according to the terms contemplated by the Joint Venture Agreement, or at all. 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 9. -- 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 $1.2 million, $2.2 million, $2.2 million and $2.0 million for the six month period ended December 31, 1997 and for the years ended June 30, 1997, 1996 and 1995, 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 $1.4 million, $2.6 million, $1.4 million and $1.8 million for the 62
63 six month period ended December 31, 1997 and for the years ended June 30, 1997, 1996 and 1995, respectively, to the Company's 401(k) profit-sharing plan and trust. NOTE 10. -- INCOME TAXES A summary of the provision (benefit) for income taxes is as follows: <TABLE> <CAPTION> SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30, DECEMBER 31, -------------------------------------- (IN THOUSANDS) 1997 1997 1996 1995 - -------------- ------------- -------- ------- ------- <S> <C> <C> <C> <C> Current Federal $5,671 $ 7,009 $15,301 $14,165 State 1,091 1,045 817 494 ------ -------- ------- ------- 6,762 8,054 16,118 14,659 ------ -------- ------- ------- Deferred Federal 1,833 (43,899) 4,119 12,786 State 141 1,820 (216) 505 ------ -------- ------- ------- 1,974 (42,079) 3,903 13,291 ------ -------- ------- ------- Total $8,736 $(34,025) $20,021 $27,950 ====== ======== ======= ======= </TABLE> 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. <TABLE> <CAPTION> JUNE 30, DECEMBER 31, -------------------------- 1997 1997 1996 1995 ------------ -------- ------- ----- <S> <C> <C> <C> <C> Tax provision at statutory rate 35.0% (35.0)% 35.0% 35.0% Increase/(decrease) resulting from: State income tax, net of federal benefit 3.8 1.7 0.8 1.0 Company provided benefits 1.8 0.9 2.5 2.7 Licensing expenditures for new jurisdictions 0.5 0.3 0.5 3.1 Tax preferred investments -- -- -- (0.1) Other, net 0.8 (0.2) 1.6 1.8 ---- ------ ----- ----- Total 41.9% (32.3)% 40.4% 43.5% ==== ====== ===== ===== </TABLE> 63
64 The tax items comprising the Company's net deferred tax liability (asset) are as follows: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, ------------------------------------- (IN THOUSANDS) 1997 1997 1996 1995 - -------------- ------------- -------- ------- ------- <S> <C> <C> <C> <C> Deferred tax assets: Alternative minimum tax credit carryforward $ 9,234 $ 7,677 $ 5,146 $ 3,944 Preopening expense amortized for tax purposes 2,611 3,119 3,498 1,126 Difference between book and tax basis of property -- 1,991 -- -- Provision for doubtful accounts 1,495 1,314 952 832 Separate state loss attributes 5,575 5,425 -- -- Other 2,934 2,808 2,777 1,107 ------- ------- ------- ------- Subtotal 21,849 22,334 12,373 7,009 Valuation allowance (5,575) (5,425) -- -- ------- ------- ------- ------- Gross deferred tax asset 16,274 16,909 12,373 7,009 ------- ------- ------- ------- Deferred tax liabilities: Difference between book and tax basis of property 354 -- 38,187 33,053 Difference between book and tax basis of amortizable assets 5,445 3,821 2,185 1,513 Reserve differential for gaming activities 1,030 1,010 2,027 894 Other 2,887 3,545 3,520 1,192 ------- ------- ------- ------- Gross deferred liability 9,716 8,376 45,919 36,652 ------- ------- ------- ------- Net deferred tax liability (asset) $(6,558) $(8,533) $33,546 $29,643 ======= ======= ======= ======= </TABLE> At December 31, 1997 the Company has approximately $43.0 million of state tax net operating loss carryforwards which begin to expire in the year 2011. In 1995, the Company implemented a meal charge and reimbursement program and deducted the entire cost of the meals for tax purposes. The Internal Revenue Service ("IRS") subsequently notified the Company and the gaming industry that this deduction may be limited to 50% of the cost of providing these meals. In the event that the IRS decides to challenge this deduction and is successful in doing so, management estimates the potential impact, as of December 31, 1997, to be approximately $4 million (including interest). However, management believes that it will prevail on this issue as the deduction is appropriate under the guidelines set forth by the Internal Revenue Code. NOTE 11. -- 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 1,500,000 shares for issuance under the Plan and 612,657 shares remain available for future issuance. Stock Options As of December 31, 1997, 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 are 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 will fully vest and become exercisable on December 31, 1998. 64
65 Summarized information for the stock options plans is as follows: <TABLE> <CAPTION> OPTION OPTIONS PRICES --------- -------------- <S> <C> <C> Options outstanding at July 1, 1994 2,669,700 $ 17.00-$18.50 Options granted 1,285,600 13.63- 14.00 Options canceled (38,682) 13.63- 17.00 --------- -------------- Options outstanding at June 30, 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 ========= ============== Exercisable options at December 31, 1997 1,693,747 ========= Options available for grant at December 31, 1997 2,345,656 ========= </TABLE> The following table summarizes the information about stock options outstanding at December 31, 1997: <TABLE> <CAPTION> 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 - ---------------- ----------- ---------------- -------------- ----------- -------- <S> <C> <C> <C> <C> <C> $5.50-$5.50 15,000 9.24 $ 5.50 -- $ -- 5.75- 5.75 1,978,559 7.46 5.75 30,000 5.75 7.75-17.00 2,708,451 7.57 12.11 1,663,747 14.05 ---------- ---- -------- ---------- -------- 4,702,010 7.53 $ 9.41 1,693,747 $ 13.90 ========== ==== ======== ========== ======== </TABLE> 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 65
66 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 six months ended December 31, 1997 or the years ended June 30, 1997 and 1996. <TABLE> <CAPTION> SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1997 1996 - ------------------------------------- ---------------- --------- -------- <S> <C> <C> <C> Income (loss) before extraordinary item As reported $ 12,100 $(71,423) $29,579 Pro forma 10,904 (72,555) 29,561 Net income (loss) As reported $ 4,860 $(77,492) $28,144 Pro forma 3,664 (78,624) 28,126 Basic and diluted income (loss) per share before extraordinary item As reported $ 0.20 $ (1.19) $ 0.52 Pro forma 0.18 (1.20) 0.52 Basic and diluted net income (loss) per share As reported $ 0.08 $ (1.29) $ 0.49 Pro forma 0.06 (1.31) 0.49 Weighted-average assumptions Expected stock price volatility 38.48% 38.48% 38.48% Risk-free interest rate 6.05% 6.05% 6.20% Expected option lives (years) 2.02 2.54 2.72 Estimated fair value of options granted $ 1.79 $ 2.13 $ 4.15 </TABLE> 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. 66
67 NOTE 12. -- EARNINGS PER SHARE The Company recently adopted SFAS No. 128 "Earnings Per Share." This statement established standards for computing and presenting earnings per share and required restatement of all prior-period earnings per share data presented. The adoption of SFAS No. 128 did not affect the Company's previously reported earnings per share. A reconciliation of income and shares for basic and diluted earnings per share is as follows: <TABLE> <CAPTION> Six months ended December 31, ---------------------------------------------------------------------------------------- 1997 1996 (UNAUDITED) ------------------------------------------- ---------------------------------------- Weighted Weighted Income/ Average Per Share Income/ Average Per Share (IN THOUSANDS, EXCEPT PER SHARE DATA) (Loss) Shares Amount (Loss) Shares Amount -------- --------- --------- -------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> BASIC EARNINGS PER SHARE Income before extraordinary item $12,100 61,524,780 $ 0.20 $ 2,852 59,149,914 $ 0.05 Extraordinary item, net (7,240) 61,524,780 (0.12) (6,069) 59,149,914 (0.10) ------- ---------- ------ ------- ---------- ------ Net income (loss) $ 4,860 61,524,780 $ 0.08 $(3,217) 59,149,914 $(0.05) ======= ========== ====== ======= ========== ====== DILUTED EARNINGS PER SHARE Income before extraordinary item $12,100 61,524,780 2,852 59,149,914 Effect of dilutive securities-stock options -- 261,018 -- 8,622 ------- ---------- ------ ------- ---------- ------ Income before extraordinary item 12,100 61,785,798 $ 0.20 2,852 59,158,536 $ 0.05 Extraordinary item, net (7,240) -- (0.12) (6,069) -- (0.10) ------- ---------- ------ ------- ---------- ------ Net income (loss) $ 4,860 61,785,798 $ 0.08 $(3,217) 59,158,536 $(0.05) ======= ========== ====== ======= ========== ====== </TABLE> Options to purchase 2,778,451 and 3,676,337 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 share for the periods presented. <TABLE> <CAPTION> Fiscal year ended June 30, ------------------------------------------------------------------------------------------------ 1997 1996 1995 -------------------------------- ------------------------------- ----------------------------- Weighted Weighted Weighted Per IN THOUSANDS, EXCEPT PER Income/ Average Per Share Income/ Average Per Share Income/ Average Share SHARE DATA) (Loss) Shares Amount (Loss) Shares Amount (Loss) Shares Amount --------- --------- --------- ---------- ---------- -------- -------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> BASIC EARNINGS PER SHARE Income before extraordinary item $(71,423) 60,247,508 $(1.19) $ 29,579 57,057,550 $ 0.52 $ 36,249 56,870,104 $ 0.64 Extraordinary item, net (6,069) 60,247,508 (0.10) (1,435) 57,057,550 (0.03) -- 56,870,104 -- -------- ---------- ----- --------- ---------- ------ -------- ---------- ------- Net income (loss) $(77,492) 60,247,508 $(1.29) $ 28,144 57,057,550 $ 0.49 $ 36,249 56,870,104 $ 0.64 ======== ========== ====== ========= ========== ======= ======== ========== ======= DILUTED EARNINGS PER SHARE Income before extraordinary item $(71,423) 60,247,508 $ 29,579 57,057,550 $ 36,249 56,870,104 Effect of dilutive securities-stock Options -- -- -- 80 -- -- -- -------- ---------- ----- --------- ---------- ------ -------- ---------- ------- Income before extraordinary item (71,423) 60,247,508 $(1.19) 29,579 57,057,630 $ 0.52 36,249 56,870,104 $ 0.64 Extraordinary item, net (6,069) -- (0.10) (1,435) -- (0.03) -- -- -- -------- ---------- ----- --------- ---------- ------ -------- ---------- ------- Net income (loss) $(77,492) 60,247,508 $(1.29) $ 28,144 57,057,630 $ 0.49 $ 36,249 56,870,104 $ 0.64 ======== ========== ====== ========= ========== ======= ======== ========== ======= </TABLE> Options to purchase 2,752,367, 3,842,253, and 3,916,618 shares of common stock at June 30, 1997, 1996, and 1995, respectively, at prices of $8.38 - $18.50, $13.63 - $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 share for the periods presented. Options to purchase 18,042 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. 67
68 SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited) Boyd Gaming Corporation and Subsidiaries <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1997 ----------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND TOTAL --------- --------- --------- <S> <C> <C> <C> 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 ========= ========= ========= </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED JUNE 30, 1997 -------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL ------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> 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) ======== ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> FISCAL YEAR ENDED JUNE 30, 1996 -------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL -------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Net revenues $179,060 $ 200,289 $ 202,160 $ 194,348 $ 775,857 Operating income 18,729 31,280 31,743 19,034 100,786 Income before income tax and extraordinary item 6,859 17,322 19,236 6,183 49,600 Extraordinary item, net of tax -- -- -- 1,435 1,435 Net income $ 4,184 $ 10,567 $ 11,351 $ 2,042 $ 28,144 -------- --------- --------- --------- --------- Basic and diluted net income per common share: Income before extraordinary item 0.07 $ 0.19 $ 0.20 $ 0.06 $ 0.52 Extraordinary item, net of tax $ -- -- (0.02) (0.03) -------- --------- --------- --------- --------- Net income $ 0.07 $ 0.19 $ 0.20 $ 0.04 $ 0.49 ======== ========= ========= ========= ========= </TABLE> 68
69 (c) Exhibits. <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 2.1(5) Stock Purchase Agreement, dated as of April 26, 1996, by and among Registrant, 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. 2.3(2) Subscription Agreement dated as of August 30, 1993, by and among Boyd Kenner, Inc., the Company and Treasure Chest Casino, L.L.C. 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. 4.4(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. 4.5(13) First Supplemental Indenture, among Registrant, 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(2) First Amended and Restated Credit Agreement dated as of September 2, 1993, by and among CH&C, Certain Commercial Lending Institutions, CIBC Inc., First Interstate Bank of Nevada and related Exhibits. 10.2(2) Loan Agreement dated March 2, 1989, by and between First Interstate Bank of Nevada and Eldorado, Inc., including related Promissory Note, and related Revision Agreement dated October 31, 1989, by and between First Interstate Bank of Nevada, N.A. and Eldorado, Inc. 10.3(4) Loan Agreement dated August 17, 1994 by and among Boyd Tunica, Inc., the Company, First Interstate Bank of Nevada, Bankers Trust Company and Bank of America Nevada. 10.4(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. 10.5(1) Lease Agreement dated October 31, 1963, by and between Fremont Hotel, Inc. and Cora Edit Garehime. 10.6(1) Lease Agreement dated December 31, 1963, by and among Fremont Hotel, Inc., Bank of Nevada and Leon H. Rockwell, Jr. </TABLE> 69
70 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.7(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. 10.8(4) Lease Agreement dated July 25, 1973, by and between CH&C and William Peccole, as Trustee of the Peter Peccole 1970 Trust. 10.9(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. 10.10(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. 10.11(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. 10.12(4) Collective Bargaining Agreement effective as of January 17, 1994, by and between Sam-Will, Inc. d/b/a/ Fremont Hotel and Casino and the International Union of Operating Engineers, Local No. 501, AFL-CIO (slot technician unit). 10.13(2) Labor Agreement dated as of January 13, 1993, by and between Mare-Bear, Inc. d/b/a/ Stardust Hotel & Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.14(2) Labor Agreement dated as of January 13, 1993, by and between Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.15(2) Labor Agreement dated January 13, 1993, by and between CH&C and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.16(2) Agreement dated as of May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers' Union, Local No. 226 and Bartenders Union, Local No. 165. 10.17(1) Agreement dated as of May 1, 1991, by and between Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers' Union, Local No. 226 and Bartenders Union, Local No. 165. 10.18(2) Collective Bargaining Agreement dated September 12, 1991, by and between Eldorado Casino and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers Union, Local No. 226 and Bartenders Union, Local No. 165. 10.19(1) Collective Bargaining Agreement dated March 14, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the Musicians Union of Las Vegas, Local No. 369, American Federation of Musicians, AFL-CIO. 10.20(1) Labor Agreement dated May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada. 10.21(1) Labor Agreement dated May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada (Theatrical Wardrobe Employees). </TABLE> 70
71 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.22(1) Labor Agreement dated June 14, 1983, by and between Stardust Hotel & Casino and the International Brotherhood of Painters and Allied Trades, Local Union No. 159, AFL-CIO. 10.23(1) Labor Agreement dated June 1, 1983, by and between Stardust Hotel and Casino and the United Brotherhood of Carpenters and Joiners of America, Local Union No. 1780, Las Vegas, Nevada. 10.24(1) Labor Agreement dated August 1, 1983, by and between Stardust Hotel and the International Brotherhood of Electrical Workers, Local Union No. 357, AFL-CIO. 10.25(1) Implemented Proposal dated June 15, 1992, by and between Stardust Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.26(1) Implemented Proposal dated June 15, 1992, by and between Fremont Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.27(2) Management Agreement dated March 11, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.28(4) Addendum to Management Agreement dated November 24, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.29(2) Casino Management Agreement dated August 30, 1993, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.30(4) Amended and Restated Operating Agreement dated August 5, 1994, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.31(2) Real Estate Contract of Sale dated April 29, 1993, by and among Boyd Tunica, Inc. and Shea Leatherman, Irwin L. Zanone and William A. Leatherman, Jr. 10.32(2) Real Estate Contract of Sale dated April 29, 1993, by and between Eugene H. Beck, Jr. and the Boyd Group. 10.33(2) Real Estate Contract of Sale dated April 30, 1993, by and between Mid-West Terminal Warehouse Company and the Boyd Group. 10.34(2) Real Estate Contract of Sale dated April 30, 1993, by and between Hunt Midwest Real Estate Development, Inc. and the Boyd Group. 10.35(2) Amendment to Real Estate Contracts of Sale dated May 26, 1993, by and among The Boyd Group, Hunt Midwest Real Estate Development, Inc., Mid-West Terminal Warehouse Company and Eugene H. Beck, Jr. 10.36(2) Real Estate Contract of Sale dated as of April 30, 1993, by and between Vergie G. Bevan, individually and as trustee of the Vergie G. Bevan Revocable Trust and the Boyd Group. 10.37(4) Development Agreement dated June 6, 1994, by and among the Company, Boyd Kansas City, Inc. and Port Authority of Kansas City, Missouri. 10.38(4) Agreement dated January 10, 1994 by and between Boyd Tunica, Inc. and W.G. Yates & Sons Construction Company. 10.39(4) Building Contract dated July 15, 1993, by and between Marnell Corrao Associates, Inc. and Sam's Town Hotel and Gambling Hall for Sam's Town Addition Phase V. 10.40(2) Form of Indemnification Agreement. </TABLE> 71
72 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.41(2)* 1993 Flexible Stock Incentive Plan and related agreements. 10.42(2)* 1993 Directors Non-Qualified Stock Option Plan and related agreements. 10.43(2)* 1993 Employee Stock Purchase Plan and related agreement. 10.44(1) 401(k) Profit Sharing Plan and Trust. 10.45(1) Note dated July 1, 1992, from Samuel A. Boyd Family Trust to the Boyd Group in the principal sum of $3,000,000. 10.46(3) Promissory Note dated December 30, 1991, from Eldorado, Inc. to Samuel A. Boyd in the principal sum of $600,000. 10.47(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.) 10.48(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. 10.49(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. 10.50(8) Buy-Sell Agreement dated as of August 2, 1996, by and between the Company and Casino Magic of Louisiana, Corp., a Louisiana corporation. 10.51(10)* Boyd Gaming Corporation 1996 Stock Incentive Plan. 10.52(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. 10.53(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. 10.54(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 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 24 Powers of Attorney (reference is made to page II-2). </TABLE> 72
73 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 27 Financial Data Schedule. </TABLE> - ------------ * 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 Annual Report on Form 10-K for the year ended June 30, 1994. (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. 73
74 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, 1998. BOYD GAMING CORPORATION By: /s/ KEITH E. SMITH ------------------------------------ Keith E. Smith Senior Vice President, Controller 74
75 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William S. Boyd, Ellis Landau and Keith Smith, and each of them, his or 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. <TABLE> <CAPTION> SIGNATURE TITLE DATE - ------------------------- -------------------------------------------------- ------------- <S> <C> <C> /s/ William S. Boyd Chairman of the Board of Directors, Chief March 31, 1998 - ------------------------- Executive Officer and Director (Principal William S. Boyd Executive Officer) /s/ Ellis Landau Executive Vice President, Chief Financial March 31, 1998 - ------------------------- Officer and Treasurer (Principal Financial Officer) Ellis Landau /s/ Keith E. Smith Senior Vice President and Controller March 31, 1998 - ------------------------- (Principal Accounting Officer) Keith E. Smith /s/ Donald D. Snyder President and Director March 31, 1998 - ------------------------- Donald D. Snyder /s/ Robert L. Boughner Executive Vice President & March 31, 1998 - ------------------------- Chief Operating Officer and Director Robert L. Boughner /s/ William R. Boyd Director March 31, 1998 - ------------------------- William R. Boyd /s/ Marianne Boyd Johnson Director March 31, 1998 - ------------------------- Marianne Boyd Johnson /s/ Perry B. Whitt Director March 31, 1998 - ------------------------- Perry B. Whitt /s/ Warren L. Nelson Director March 31, 1998 - ------------------------- Warren L. Nelson /s/ Phillip Dion Director March 31, 1998 - ------------------------- Philip Dion /s/ Michael O. Maffe Director March 31, 1998 - ------------------------- Michael O. Maffe /s/ Billy G. McCoy Director March 31, 1998 - ------------------------- Billy G. McCoy /s/ William G. Yates Director March 31, 1998 - ------------------------- William G. Yates </TABLE> -75-
76 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 2.1(5) Stock Purchase Agreement, dated as of April 26, 1996, by and among Registrant, 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. 2.3(2) Subscription Agreement dated as of August 30, 1993, by and among Boyd Kenner, Inc., the Company and Treasure Chest Casino, L.L.C. 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. 4.4(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. 4.5(13) First Supplemental Indenture, among Registrant, 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(2) First Amended and Restated Credit Agreement dated as of September 2, 1993, by and among CH&C, Certain Commercial Lending Institutions, CIBC Inc., First Interstate Bank of Nevada and related Exhibits. 10.2(2) Loan Agreement dated March 2, 1989, by and between First Interstate Bank of Nevada and Eldorado, Inc., including related Promissory Note, and related Revision Agreement dated October 31, 1989, by and between First Interstate Bank of Nevada, N.A. and Eldorado, Inc. 10.3(4) Loan Agreement dated August 17, 1994 by and among Boyd Tunica, Inc., the Company, First Interstate Bank of Nevada, Bankers Trust Company and Bank of America Nevada. 10.4(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. 10.5(1) Lease Agreement dated October 31, 1963, by and between Fremont Hotel, Inc. and Cora Edit Garehime. 10.6(1) Lease Agreement dated December 31, 1963, by and among Fremont Hotel, Inc., Bank of Nevada and Leon H. Rockwell, Jr. </TABLE> -76-
77 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.7(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. 10.8(4) Lease Agreement dated July 25, 1973, by and between CH&C and William Peccole, as Trustee of the Peter Peccole 1970 Trust. 10.9(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. 10.10(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. 10.11(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. 10.12(4) Collective Bargaining Agreement effective as of January 17, 1994, by and between Sam-Will, Inc. d/b/a/ Fremont Hotel and Casino and the International Union of Operating Engineers, Local No. 501, AFL-CIO (slot technician unit). 10.13(2) Labor Agreement dated as of January 13, 1993, by and between Mare-Bear, Inc. d/b/a/ Stardust Hotel & Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.14(2) Labor Agreement dated as of January 13, 1993, by and between Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.15(2) Labor Agreement dated January 13, 1993, by and between CH&C and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.16(2) Agreement dated as of May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers' Union, Local No. 226 and Bartenders Union, Local No. 165. 10.17(1) Agreement dated as of May 1, 1991, by and between Sam-Will, Inc., d/b/a/ Fremont Hotel and Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers' Union, Local No. 226 and Bartenders Union, Local No. 165. 10.18(2) Collective Bargaining Agreement dated September 12, 1991, by and between Eldorado Casino and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers Union, Local No. 226 and Bartenders Union, Local No. 165. 10.19(1) Collective Bargaining Agreement dated March 14, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the Musicians Union of Las Vegas, Local No. 369, American Federation of Musicians, AFL-CIO. 10.20(1) Labor Agreement dated May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada. 10.21(1) Labor Agreement dated May 1, 1991, by and between Mare-Bear, Inc., d/b/a/ Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada (Theatrical Wardrobe Employees). </TABLE> -77-
78 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.22(1) Labor Agreement dated June 14, 1983, by and between Stardust Hotel & Casino and the International Brotherhood of Painters and Allied Trades, Local Union No. 159, AFL-CIO. 10.23(1) Labor Agreement dated June 1, 1983, by and between Stardust Hotel and Casino and the United Brotherhood of Carpenters and Joiners of America, Local Union No. 1780, Las Vegas, Nevada. 10.24(1) Labor Agreement dated August 1, 1983, by and between Stardust Hotel and the International Brotherhood of Electrical Workers, Local Union No. 357, AFL-CIO. 10.25(1) Implemented Proposal dated June 15, 1992, by and between Stardust Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.26(1) Implemented Proposal dated June 15, 1992, by and between Fremont Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.27(2) Management Agreement dated March 11, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.28(4) Addendum to Management Agreement dated November 24, 1993, by and between Mississippi Band of Choctaw Indians and Boyd Mississippi, Inc. 10.29(2) Casino Management Agreement dated August 30, 1993, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.30(4) Amended and Restated Operating Agreement dated August 5, 1994, by and between Treasure Chest Casino, L.L.C. and Boyd Kenner, Inc. 10.31(2) Real Estate Contract of Sale dated April 29, 1993, by and among Boyd Tunica, Inc. and Shea Leatherman, Irwin L. Zanone and William A. Leatherman, Jr. 10.32(2) Real Estate Contract of Sale dated April 29, 1993, by and between Eugene H. Beck, Jr. and the Boyd Group. 10.33(2) Real Estate Contract of Sale dated April 30, 1993, by and between Mid-West Terminal Warehouse Company and the Boyd Group. 10.34(2) Real Estate Contract of Sale dated April 30, 1993, by and between Hunt Midwest Real Estate Development, Inc. and the Boyd Group. 10.35(2) Amendment to Real Estate Contracts of Sale dated May 26, 1993, by and among The Boyd Group, Hunt Midwest Real Estate Development, Inc., Mid-West Terminal Warehouse Company and Eugene H. Beck, Jr. 10.36(2) Real Estate Contract of Sale dated as of April 30, 1993, by and between Vergie G. Bevan, individually and as trustee of the Vergie G. Bevan Revocable Trust and the Boyd Group. 10.37(4) Development Agreement dated June 6, 1994, by and among the Company, Boyd Kansas City, Inc. and Port Authority of Kansas City, Missouri. 10.38(4) Agreement dated January 10, 1994 by and between Boyd Tunica, Inc. and W.G. Yates & Sons Construction Company. 10.39(4) Building Contract dated July 15, 1993, by and between Marnell Corrao Associates, Inc. and Sam's Town Hotel and Gambling Hall for Sam's Town Addition Phase V. 10.40(2) Form of Indemnification Agreement. </TABLE> -78-
79 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 10.41(2)* 1993 Flexible Stock Incentive Plan and related agreements. 10.42(2)* 1993 Directors Non-Qualified Stock Option Plan and related agreements. 10.43(2)* 1993 Employee Stock Purchase Plan and related agreement. 10.44(1) 401(k) Profit Sharing Plan and Trust. 10.45(1) Note dated July 1, 1992, from Samuel A. Boyd Family Trust to the Boyd Group in the principal sum of $3,000,000. 10.46(3) Promissory Note dated December 30, 1991, from Eldorado, Inc. to Samuel A. Boyd in the principal sum of $600,000. 10.47(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.) 10.48(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. 10.49(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. 10.50(8) Buy-Sell Agreement dated as of August 2, 1996, by and between the Company and Casino Magic of Louisiana, Corp., a Louisiana corporation. 10.51(10)* Boyd Gaming Corporation 1996 Stock Incentive Plan. 10.52(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. 10.53(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. 10.54(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 Subsidiaries of Registrant. 23.1 Consent of Deloitte & Touche LLP. 24 Powers of Attorney (reference is made to page 75). </TABLE> 79
80 <TABLE> <CAPTION> EXHIBIT NUMBER DOCUMENT - ------- -------- <S> <C> 27 Financial Data Schedule. </TABLE> - ------------ * 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 Annual Report on Form 10-K for the year ended June 30, 1994. (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. -80-