SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the period ended June 30, 2003
OR
Commission file number: 1-12882
BOYD GAMING CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2950 Industrial Road, Las Vegas, NV 89109
(Address of principal executive offices) (Zip Code)
(702) 792-7200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period 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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
Shares outstanding of each of the Registrant’s classes of common stock as of July 31, 2003:
Class
Outstanding
Common stock, $.01 par value
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2003
TABLE OF CONTENTS
Item 1.
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2003 and 2002
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six month period ended June 30, 2003
Condensed Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
Submission of Matters to a Vote of Securities Holders
Item 6.
Exhibits and Reports on Form 8-K
Signature Page
Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
June 30,
2003
December 31,
2002
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Assets held for sale
Prepaid expenses and other
Income taxes receivable
Deferred income taxes
Total current assets
Property and equipment, net
Investment in Borgata, net
Other assets, net
Intangible assets and goodwill, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt
Accounts payable
Construction payables
Accrued liabilities
Payroll and related
Interest
Gaming
Accrued expenses and other
Total current liabilities
Long-term debt, net of current maturities
Deferred income taxes and other liabilities
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; 63,805,901 and 64,761,035 shares outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive losses, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Six Months Ended
Revenues
Food and beverage
Room
Other
Gross revenues
Less promotional allowances
Net revenues
Costs and expenses
Selling, general and administrative
Maintenance and utilities
Depreciation
Corporate expense
Preopening expenses
Total
Operating income
Other income (expense)
Interest income
Interest expense, net of amounts capitalized
Income before provision for income taxes
Provision for income taxes
Income before cumulative effect of a change in accounting principle
Cumulative effect of a change in accounting for goodwill
Net income
Basic net income per common share:
Average basic shares outstanding
Diluted net income per common share:
Average diluted shares outstanding
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the six month period ended June 30, 2003
Additional
Paid-In
Capital
Balances, January 1, 2003
Derivative instruments market adjustment, net of taxes of $37
Stock options exercised, including taxes of $133
Stock repurchased and retired
BALANCES, JUNE 30, 2003
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Derivative instruments market adjustment, net of tax
Comprehensive income
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Equity loss in Borgata
Cumulative effect of a change in accounting principle
Changes in operating assets and liabilities:
Other assets
Other current liabilities
Other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, equipment and other assets
Investments in and advances to Borgata
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt
Net payments under credit agreement
Net proceeds from issuance of long-term debt
Retirements of long-term debt
Proceeds from issuance of common stock
Common stock repurchased and retired
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized
Cash paid for income taxes, net of refunds
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Property additions acquired on construction and trade payables which were accrued, but not yet paid
Debt issuance costs
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Boyd Gaming Corporation and our wholly-owned subsidiaries. We own and operate twelve gaming facilities located in Las Vegas, Nevada; Tunica, Mississippi; East Peoria, Illinois; Kenner and Vinton, Louisiana; and Michigan City, Indiana as well as a travel agency located in Honolulu, Hawaii. All material intercompany accounts and transactions have been eliminated. We are also a 50% partner in a holding company that owns a limited liability company that operates Borgata Hotel Casino and Spa in Atlantic City, New Jersey, which commenced operations on July 3, 2003. Investments in 50% or less owned subsidiaries over which we have the ability to exercise significant influence, including ventures such as Borgata, are accounted for using the equity method.
Basis of Presentation
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of our operations for the three and six month periods ended June 30, 2003 and 2002 and our cash flows for the six month periods ended June 30, 2003 and 2002. We suggest reading this report in conjunction with our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2002. The operating results for the three and six month periods ended June 30, 2003 and 2002 and our cash flows for the six month periods ended June 30, 2003 and 2002 are not necessarily indicative of the results that will be achieved for the full year or future periods.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, 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 incorporated into our condensed consolidated financial statements 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, estimated cash flows in assessing the recoverability of long-lived assets, estimated liabilities for our self-insured medical plan, slot bonus point programs, and litigation, claims and assessments. Actual results could differ from those estimates.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Capitalized Interest
Interest costs associated with major construction projects, including our investment in the Borgata project, are capitalized. When no debt is incurred specifically for a project, interest is capitalized on amounts expended for the project using our weighted average cost of borrowing. Capitalization of interest ceases when the project or discernible portions of the project are substantially complete. We amortize capitalized interest over the estimated useful life of the related asset. Capitalized interest for the three and six month periods ended June 30, 2003 was $4.5 million and $8.9 million, respectively. Capitalized interest for the three and six month periods ended June 30, 2002 was $4.5 million and $9.5 million, respectively.
Preopening Expenses
We expense certain costs of start-up activities as incurred. For the three and six month periods ended June 30, 2003, we expensed $11.9 million and $16.1 million, respectively, in preopening expenses that primarily related to our share of preopening expense in Borgata, our venture project. Borgata commenced operations on July 3, 2003. During the three month period ended June 30, 2002, we expensed $3.2 million in preopening costs, approximately $2.1 million of which related to our share of preopening expense in the Borgata and approximately $1.1 million in costs related to unsuccessful efforts to assist in the development and operation of a Rhode Island casino with the Narragansett Indian Tribe. During the six month period ended June 30, 2002, we expensed $9.5 million in preopening costs that primarily related to our share of preopening expense in the Borgata, our unsuccessful efforts regarding a Rhode Island casino, and preopening expense at Delta Downs where we were in the process of expanding the property and equipping it for a new casino. The casino at Delta Downs commenced operations on February 13, 2002.
Derivative Instruments and Other Comprehensive Income (Loss)
GAAP requires all derivative instruments to be recognized on the balance sheet at fair value. Derivatives that are not designated as hedges must be adjusted to fair value through income. If the derivative qualifies and is designated as a hedge, depending on the nature of the hedge, changes in its fair value will either be offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. During the three and six month periods ended June 30, 2003, we utilized one interest rate swap, designated as a fair value hedge, to manage risk on one of our fixed-rate borrowings. During the quarter ended June 30, 2002, we utilized three interest rate swaps, designated as fair value hedges. In addition, Borgata, our venture project, utilizes derivative financial instruments to comply with the requirements of its bank credit agreement. For further information, see Note 4, “Derivative Instruments.”
Stock Based Employee Compensation Plans
We account for employee stock options in accordance with Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income as all options granted under our plans had an exercise price equal to the market value of the common stock on the date of grant. The following table illustrates the effect on net income and net income per share if we had applied the fair value recognition provisions of Statement of
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Financial Accounting Standards No. 123, or SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended
Income before cumulative effect
As reported
Total stock based employee compensation expense determined under fair value method for all awards, net of tax
Pro forma
Basic income per share before cumulative effect
Pro forma - basic
Diluted income per share before cumulative effect
Pro forma - diluted
Basic net income per share
Diluted net income per share
Recently Issued Accounting Standards
In April 2003, the Financial Accounting Standards Board, or FASB, issued SFAS No. 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. Based on our derivative instruments outstanding at June 30, 2003, the adoption of this statement did not have a material impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. An issuer is required to classify a financial instrument that is within the scope of this statement as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
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We adopted the standard on July 1, 2003 and the adoption did not have a material impact on our consolidated financial statements.
Reclassifications
Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the June 30, 2003 presentation. These reclassifications had no effect on our net income as previously reported.
Note 2. Earnings per Share
A reconciliation of income and shares outstanding for basic and diluted earnings per share is as follows:
Weighted average common stock outstanding
Dilutive effect of stock options outstanding
Weighted average common and potential shares outstanding
Basic earnings per share
Diluted earnings per share
Weighted average options to purchase approximately 2.8 million and 3.3 million shares, respectively, were not included in the diluted calculation for the three and six month periods ended June 30, 2003, and 1.0 million and 1.3 million shares, respectively, were not included in the diluted calculation during the three and six month periods ended June 30, 2002, since the exercise prices of such options were greater than the average price of our common shares during each of the periods.
Note 3. Stock Repurchases
In November 2002, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or negotiated transactions. We began repurchasing shares in February 2003. Through June 30, 2003, we repurchased 991,100 shares of our common stock for a total cost of $12.2 million. For the quarter ended June 30, 2003, we repurchased 128,900 shares for a total cost of $1.6 million. These shares were retired and are classified as authorized but unissued shares.
Note 4. Derivative Instruments
During the quarter ended June 30, 2002, we entered into various interest rate swaps with members of our bank group to manage risk on certain of our fixed-rate borrowings. The interest rate swaps convert a portion of our fixed-rate debt to a floating rate. As of June 30, 2003, we had one outstanding interest rate swap agreement with a total notional amount of $50 million in which we pay a floating rate of approximately 4.5%
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as of June 30, 2003 and we receive a fixed rate of 8.75%. The variable interest rate on this swap is set in arrears. As such, we estimate the variable rate based upon prevailing interest rates and implied forward rates in the yield curve. This variable rate estimate is used to record the effect of the swap until the variable rate is set, at which time any further adjustment between our estimate and the actual rate is recorded. The net effect of the interest rate swap resulted in a reduction in interest expense of $0.5 million and $1.2 million, respectively, for the three and six months ended June 30, 2003. The swap terminates in 2012, subject to certain optional termination dates which entitle us to the receipt of call premiums ranging from 4.375% in 2007 to 1.458% in 2010 and none thereafter. The optional termination dates for the swap mirror those terms of the fixed rate borrowing hedged.
The above interest rate swap qualifies for the “shortcut” method allowed under GAAP, which allows for an assumption of no ineffectiveness. As such, there is no net income statement impact from changes in the fair value of the hedging instruments. Instead, the fair value of the instrument is recorded as an asset or liability on our consolidated balance sheet with an offsetting adjustment to the carrying value of the related debt. As such, we recorded an asset of $5.9 million and $4.8 million, respectively, at June 30, 2003 and December 31, 2002, representing the fair value of the interest rate swap and a corresponding increase in long-term debt, as the interest rate swap is considered highly effective under the criteria established by GAAP.
We are exposed to credit loss in the event of nonperformance by the counterparty to the interest rate swap agreement. However, we believe that this risk is minimized because the counterparty to the swap is an existing lender under our bank credit facility. If we had terminated the swap as of June 30, 2003, we would have received $5.9 million based on its market value as quoted by the financial institution holding the swap.
In addition, Borgata, our venture project, has entered into derivative financial instruments that are designated as cash flow hedges to either fix or maintain, within a certain range, interest rates on its floating rate debt to comply with the requirements of its bank credit agreement. These derivative financial instruments have an initial aggregate notional amount of approximately $310 million and cover various periods ranging from 2002 to 2005. For the three month period ended June 30, 2002, we recorded $0.5 million in preopening expenses in the accompanying condensed consolidated statement of operations (as a result of ineffectiveness in certain of the hedges) and recorded $2.0 million of other comprehensive losses, net of $1.2 million of tax benefit, representing our portion of the decrease in fair value of the derivative instruments. For the six month period ended June 30, 2002, we recorded $0.2 million in preopening expenses in the accompanying condensed consolidated statement of operations (as a result of ineffectiveness in certain of the hedges) and recorded $2.0 million of other comprehensive losses, net of $1.1 million of tax benefit, representing our portion of the increase in fair value of the derivative instruments. For the three month period ended June 30, 2003, we recorded $0.1 million in preopening expenses in the accompanying condensed consolidated statement of operations (as a result of ineffectiveness in certain of the hedges) and recorded $0.1 million of other comprehensive income, net of a small tax benefit, representing our portion of the increase in fair value of the derivative instruments. For the six month period ended June 30, 2003, we recorded $0.3 million in preopening expenses in the accompanying condensed consolidated statement of operations (as a result of ineffectiveness in certain of the hedges) and recorded nominal other comprehensive income, net of a small tax benefit, representing our portion of the decrease in fair value of the derivative instruments.
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Note 5. Contingencies
We are subject to a completion guaranty related to our joint venture investment in Borgata. Our subsidiary owns half of the membership interests in Marina District Development Holding Co., LLC, or the Holding Company. A subsidiary of MGM MIRAGE owns the other half of the membership interests in the Holding Company. The Holding Company owns all of the membership interests of Marina District Development Company, LLC, or MDDC. MDDC owns Borgata Hotel Casino and Spa at Renaissance Pointe in Atlantic City, New Jersey that commenced operations on July 3, 2003.
The operating agreement governing the Holding Company contemplated a total original project cost of $1.035 billion and requires us and MGM to make equity contributions toward the development of Borgata, in addition to certain debt financing by Borgata. During construction, we and MGM agreed to certain scope changes designed to enhance the property and its operations that increased the total project cost in the operating agreement to $1.073 billion. We currently estimate that Borgata’s final project cost will be approximately $1.1 billion. As currently called for in the operating agreement, all project costs in excess of the original project cost of $1.035 billion, up to a total of $1.073 billion, will be equally funded by both parties through equity contributions. Any funding of project costs over the agreed-upon $1.073 billion, if required, is our responsibility. However, rather than solely funding any project costs in excess of $1.073 billion, we may use alternate funding sources, to the extent permissible, such as fully borrowing under Borgata’s bank credit agreement.
As of June 30, 2003, pursuant to the operating agreement, we have invested $188.4 million in cash and MGM has also contributed $188.4 million, consisting of cash, land and other assets. As currently called for in the operating agreement, we and MGM expect to contribute an additional $38 million, each, to Borgata during the third and fourth quarters of 2003 which would complete the funding of project costs up to $1.073 billion. To secure a portion of these remaining contributions to Borgata, we and MGM each provided a letter of credit in the amount of $25 million to the agent bank for Borgata’s bank credit agreement. Any unilateral cash investment that we may be required to make in order to fund project costs in excess of $1.073 billion would not proportionally increase our ownership of Borgata and would be recorded as an additional investment in Borgata to be amortized ratably over the life of the operating agreement for Borgata.
In addition to the equity contributions that both we and MGM are required to make, $621 million of Borgata’s project costs are being drawn under a $630 million bank credit agreement that a subsidiary of MDDC entered into on December 13, 2000. Under the terms of this bank credit agreement, no dividends or funds may be advanced to us or MGM except for taxes based on income or upon achievement of certain performance milestones. The bank credit agreement is non-recourse to both MGM and us, except for an unlimited completion guaranty provided by Boyd Gaming Corporation, pursuant to which we have agreed to guaranty the performance of certain obligations. Any funding of project costs over the agreed-upon $1.073 billion, whether or not required by the completion guaranty, is our responsibility and would not proportionally increase our ownership of Borgata.
We pay consulting fees of approximately $0.5 million per year, plus certain reimbursable expenses, under a Blue Chip consulting agreement that expires in November 2004. In addition, the consulting agreement provides for a $5.0 million contingent payment if, by November 2004, certain tribal gaming facilities have not commenced gaming operations near our Blue Chip casino. This $5.0 million payment, if required, will be charged against our 2004 operations.
We are subject to various litigation, claims and assessments in the normal course of business. In November 1998, Astoria Entertainment, Inc., an unsuccessful applicant for a riverboat gaming license in Jefferson Parish, Louisiana, filed two separate lawsuits (one in state court, one in federal court) which named the Treasure Chest Casino and Boyd Gaming as defendants. After we filed a motion to dismiss the federal claim, Astoria voluntarily dismissed all claims against us and Treasure Chest in the federal actions without prejudice to its right to refile the claims at a later date. Astoria refiled similar claims in early 2001. All federal claims against the Company were dismissed with prejudice by the federal court on August 22, 2001. The state
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law claims brought in the federal lawsuit were dismissed without prejudice, allowing Astoria to assert these claims in the state court action. On October 4, 2001, we appealed to the Fifth Circuit Court of Appeals seeking dismissal of the state law claims with prejudice. On January 7, 2003, the Fifth Circuit ruled that the state law claims could proceed in state court. We have filed a motion to dismiss these claims and are awaiting a ruling by the court. If the motion is not granted, we will vigorously defend the lawsuit.
Alvin C. Copeland, the sole shareholder of an unsuccessful applicant for a riverboat license at the location of our Treasure Chest Casino, has made several attempts to have the Treasure Chest license revoked and awarded to his company. In 1999 and 2000, Copeland unsuccessfully opposed the renewal of the Treasure Chest license and has brought two separate legal actions against us. In November 1993, Copeland objected to the relocation of Treasure Chest Casino from the Mississippi River to its current site on Lake Pontchartrain. The predecessor to the Louisiana Gaming Control Board allowed the relocation over Copeland’s objection. Copeland then filed an appeal of the agency’s decision with the Nineteenth Judicial District Court. Through a number of amendments to the appeal, Copeland improperly attempted to transform the appeal into a direct action suit and sought the revocation of the Treasure Chest license. Treasure Chest intervened in the matter in order to protect its interests. The appeal/suit, as it related to Treasure Chest Casino, was dismissed by the District Court and that dismissal was upheld on appeal by the First Circuit Court of Appeal.
Additionally, in 1999, Copeland filed a direct action against Treasure Chest and certain other parties seeking the revocation of Treasure Chest’s license, an award of the license to him and monetary damages. This suit was dismissed by the trial court citing that Copeland failed to state a claim on which relief could be granted. The dismissal was appealed by Copeland to the First Circuit Court of Appeal. On June 21, 2002, the First Circuit Court of Appeal reversed the trial court’s decision and remanded the matter to the trial court. On January 14, 2003, we filed a motion to dismiss the matter and that motion was denied. On June 30, 2003, we filed for supervisory writs with the appellate court and are presently awaiting its decision. If the matter is not dismissed, we intend to vigorously defend the lawsuit.
If any of these matters ultimately result in the Treasure Chest license being revoked, it would have a significant adverse effect on our business, financial condition and results of operations.
On October 29, 2001, Harrah’s of Lake Charles, LLC (formerly the Players Lake Charles, LLC), Harrah’s Star Partnership (formerly the Showboat Star Partnership) and several individuals, collectively, the plaintiffs, filed suit in state district court in Calcasieu Parish, Louisiana, against DDRA Capital, Inc. (the former owner of Delta Downs), the Calcasieu Parish Police Jury and Boyd Racing, L.L.C., the entity that owns and operates Delta Downs, seeking to revoke the building permit that the Calcasieu Parish Police Jury granted to us for our construction and renovation at Delta Downs. Specifically, the plaintiffs claim that our construction and renovation at Delta Downs exceeds the square foot specifications that were approved by the Calcasieu Parish Police Jury, and that the number of slot machines that we were approved to operate at Delta Downs exceeds the number which the former owner previously represented, in connection with the Calcasieu Parish Slot Machine Gaming Referendum, would be operated at the facility. On December 7, 2001, we responded to the plaintiffs’ complaint claiming, among other things, that their complaint failed to state a cause of action for which relief could be sought and that the statute of limitations on their action had lapsed. On February 11, 2002, the plaintiffs amended their complaint to eliminate certain defendants from the action. On March 1, 2002, the state district court approved Harrah’s motion to voluntarily dismiss the Calcasieu Parish Police Jury from the action, leaving DDRA and Boyd Racing as the defendants. On March 26, 2002, we filed a response
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to the plaintiffs’ amended complaint. To date, no trial date has been set on this action. We believe this lawsuit is without merit and we intend to defend the suit vigorously. We can provide no assurances that, if such action proceeds to trial, we will ultimately be successful in defending against the action at trial. In the event the claim seeking to revoke our building permit at Delta Downs is ultimately successful, we would have to reduce both the number of slot machines we operate and the size of the casino at Delta Downs. In addition, if the action is ultimately successful at trial, it would materially affect our cash flow from Delta Downs, would reduce the value of the Delta Downs acquisition and could have a material adverse effect on our business, financial condition and results of operations.
With the exception of the Astoria, Copeland and Harrah’s matters discussed above, in our opinion, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material adverse impact on our consolidated financial statements.
Note 6. Subsequent Events
On July 3, 2003, Borgata Hotel Casino and Spa, our joint venture project located at Renaissance Pointe in Atlantic City, New Jersey, commenced operations. Borgata features 125,000 square feet of gaming, 145 gaming tables, 3,640 slot machines, 2,002 guest rooms and suites, 11 destination restaurants, 11 retail boutiques, a 50,000 square foot spa, 70,000 square feet of event space and parking for 7,100 cars.
In July 2003, we entered into four additional interest rate swap agreements with various members of our bank group to manage risk on certain of our fixed-rate borrowings. These interest rate swaps convert a portion of our fixed-rate debt to a floating rate. Each new interest rate swap has a notional amount of $50 million in which we pay a floating rate and we receive a fixed rate of 9.25%. The variable interest rates on these swaps are set in arrears. The swaps terminate in 2009, subject to certain optional termination dates which entitle us to the receipt of call premiums ranging from 4.625% in 2005 to 2.313% in 2006 and none thereafter. The optional termination dates for the swaps mirror those terms of the fixed rate borrowing hedged. The above interest rate swaps qualify for the “shortcut” method allowed under GAAP, which allows for an assumption of no ineffectiveness. As such, there will be no net income statement impact from changes in the fair value of the new hedging instruments. Instead, the fair value of the instrument will be recorded as an asset or liability on our consolidated balance sheet with an offsetting adjustment to the carrying value of the related debt.
On July 25, 2003, our Board of Directors instituted a policy of quarterly cash dividends on our common stock. In addition, on July 25, 2003, our Board declared a dividend of $0.075 per share, payable September 3, 2003, to shareholders of record on August 12, 2003.
On July 31, 2003, we amended our bank credit facility to increase the limitations on investments, dividends and certain other payments from a total limit during the term of the bank credit facility to an annual limit for each year of the term of the bank credit facility.
Note 7. Segment Information
We review the results of operations based on the following distinct geographic gaming market segments: the Stardust Resort and Casino on the Las Vegas Strip; Sam’s Town Hotel and Gambling Hall, the Eldorado Casino and Jokers Wild Casino on the Boulder Strip; the Downtown Properties; Sam’s Town Hotel and
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Gambling Hall in Tunica, Mississippi; Par-A-Dice Hotel and Casino in East Peoria, Illinois; Treasure Chest Casino in Kenner, Louisiana; Blue Chip Casino in Michigan City, Indiana; and Delta Downs Racetrack and Casino in Vinton, Louisiana. As used herein, “Downtown Properties” consist of the California Hotel and Casino, the Fremont Hotel and Casino, Main Street Station Casino, Brewery and Hotel and Vacations Hawaii.
Gaming Revenues
Stardust
Sam’s Town Las Vegas
Eldorado and Jokers Wild
Downtown Properties
Sam’s Town Tunica
Par-A-Dice
Treasure Chest
Blue Chip
Delta Downs
Total gaming revenues
EBITDA (1)
Blue Chip (2)
Delta Downs (3)
Property EBITDA
Other Costs and Expenses
Other expense, net
Total other costs and expenses
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Note 8. Guarantor Information for 9.25% Senior Notes Due in 2003
Our 9.25% notes due on October 1, 2003 are guaranteed by a majority of our wholly-owned existing significant subsidiaries. These guaranties are full, unconditional, and joint and several. We have significant subsidiaries that do not guaranty these notes. As such, the following consolidating schedules present separate condensed financial statement information on a combined basis for the parent only, as well as our guarantor subsidiaries and non-guarantor subsidiaries, as of June 30, 2003 and December 31, 2002 and for the three and six month periods ended June 30, 2003 and 2002.
CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION
As of June 30, 2003
Combined
Guarantors
Non-
Elimination
Entries
Intercompany balances
Total liabilities and stockholders’ Equity
Elimination Entries
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As of December 31, 2002
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
For the Three Months Ended June 30, 2003
Management fees and equity income
Income before income taxes
20
For the Three Months Ended June 30, 2002
Other income (expense), net
21
For the Six Months Ended June 30, 2003
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For the Six Months Ended June 30, 2002
Cumulative effect
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net payments under bank credit agreement
Proceeds from issuance of long-term debt
Receipt/(payment) of dividends
Net cash provided by (used in) financing activities
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Investment in consolidated subsidiaries
Net cash provided by (used in) investing activities
Net increase (decrease) in cash and cash equivalents
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Note 9. Guarantor Information for 9.25% Senior Notes Due in 2009
Our 9.25% Senior Notes due in August 2009 are guaranteed by substantially all of our wholly-owned existing significant subsidiaries. These guaranties are full, unconditional, and joint and several. During April 2003, pursuant to the indenture governing these notes, we caused the significant subsidiaries that did not previously guaranty these notes to become guarantors of these notes. Therefore, as of June 30, 2003, all of our significant subsidiaries guaranty these notes. As such, the following consolidating schedules present separate condensed financial statement information on a combined basis for the parent only as well as our guarantor subsidiaries, as of June 30, 2003 and December 31, 2002 and for the three and six month periods ended June 30, 2003 and 2002.
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Investment in and advances to Borgata
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, certain operating data for our properties. As used herein, “Downtown Properties” consist of the California Hotel and Casino (the “California”), the Fremont Hotel and Casino (the “Fremont”), Main Street Station, Casino, Brewery and Hotel (“Main Street Station”) and Vacations Hawaii, the Company’s wholly-owned travel agency which operates for the benefit of the Downtown gaming properties. Net revenues displayed in this table and discussed in this section are net of promotional allowances.
Eldorado & Jokers Wild
Boulder Strip Properties
Downtown Properties (a)
Central Region Properties
Consolidated net revenues
Operating income (loss)
Blue Chip (b)
Delta Downs (c)
Property operating income
Corporate expense, including corporate depreciation and preopening expenses (d)
Consolidated operating income
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Consolidated Net Revenues
Consolidated net revenues remained essentially the same for the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. An 11.7% increase in net revenues at Blue Chip, primarily due to the commencement of dockside operations in August 2002, was offset by declines in net revenues primarily at Treasure Chest and Stardust (6.0% and 4.2%, respectively) due to lower business volumes. Net revenues also declined at the Downtown Properties due to lower business volumes at the Fremont as well as lower revenue at Vacations Hawaii.
Consolidated net revenues increased 3.2% for the six month period ended June 30, 2003 as compared to the same period in the prior year. The primary reasons for the increase in consolidated net revenues are as follows:
Consolidated Operating Income
Consolidated operating income decreased 47% to $25 million for the quarter ended June 30, 2003 from $46 million for the quarter ended June 30, 2002. In general, these consolidated results were negatively impacted during the quarter by the sluggish economy and the war in Iraq. The principal causes of fluctuations in operating income are as follows:
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Consolidated operating income decreased 23% to $69 million for the six month period ended June 30, 2003 from $90 million for the six month period ended June 30, 2002. In general, these consolidated results were negatively impacted during the six month period ended June 30, 2003 by the sluggish economy and the war in Iraq. The principal causes of fluctuations in operating income are as follows:
Corporate expense increased $12.0 million for the six month period ended June 30, 2003 as compared to the same period in the prior year due to an increase in preopening expense related to Borgata. For the six month period ended June 30, 2003, we expensed $16.1 million in preopening expenses for Borgata versus $4.1 million during the six month period ended June 30, 2002. Borgata’s preopening
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expenses increased significantly during the six month period ended June 30, 2003 in preparation for its opening on July 3, 2003.
In addition, Sam’s Town Tunica experienced an operating loss of $1.5 million for the quarter ended June 30, 2003 as compared to operating income of $0.6 million for the quarter ended June 30, 2002 and an operating loss of $2.2 million for the six months ended June 30, 2003 as compared to operating income of $1.4 million for the same period in the prior year. During 2003, we utilized the 225 hotel rooms we acquired in October 2002 from Isle of Capri. However, we have not begun to achieve our expected return on this acquisition. We and our new management team at Sam’s Town Tunica are attempting to build market share while controlling associated costs in order to return Sam’s Town Tunica to profitable operations. We are implementing new programs and systems relating to marketing and promotions and are attempting to efficiently utilize all of our hotel rooms, including the 225 rooms recently acquired, to benefit our casino revenues and profitability. If Sam’s Town Tunica continues to produce operating losses and does not have the prospect of becoming profitable, we will be subject to the asset recoverability test under Statement of Financial Accounting Standards No. 144, or SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and may be subject to a non-cash writedown of our Tunica assets which could have a material adverse effect on our financial position and our results of operations.
On June 20, 2003, the Governor of Illinois signed into law a new tax bill increasing gaming taxes and admission fees effective beginning July 1, 2003 through the earlier of July 1, 2005 or until a non-operating Illinois licensee or dormant Illinois licensee begins operations. Previously, the graduated tax scale ranged from 15% to 50% of adjusted gaming revenues and now ranges from 15% to 70% of gaming revenues. The admissions tax for an operation our size was increased from $3 per person to $4 per person. We estimate that the Illinois legislation could result in an increased tax liability of approximately $15 million annually.
In July 2003, the State of Nevada enacted new legislation to increase various taxes including, but not limited to, gaming taxes, payroll taxes and liquor taxes. This new legislation increases Nevada gaming taxes from 6.25% to 6.75% of defined gaming revenues effective August 1, 2003. We estimate that this new Nevada legislation could result in an increased tax liability of approximately $3 million annually.
On July 3, 2003, Borgata, our $1.1 billion joint venture project with MGM MIRAGE, opened in Atlantic City, New Jersey. Given the magnitude of this project, we expect the operating results of Borgata to have a material effect on our consolidated statement of operations in future accounting periods. Recently, the State of New Jersey enacted new legislation to increase taxes on gaming licensees operating in Atlantic City. These tax increases are expected to adversely impact the results of operations of Borgata.
Other Income (Expense)
Other income and expense is primarily comprised of interest expense, net of capitalized interest. For the quarter ended June 30, 2003, total interest costs, including capitalized interest, were $22 million as compared to $24 million for the quarter ended June 30, 2002. For the six month periods ended June 30, 2003 and 2002, total interest costs, including capitalized interest were $45 million and $47 million, respectively. Interest costs
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were lower during 2003 due to lower average outstanding debt and to declines in interest rates due to our fixed-rate debt refinancings that occurred during 2002 as well as declines in interest rates on our variable rate debt. In addition, as a result of our interest rate swaps outstanding during the periods, our interest expense was $0.5 million and $0.9 million, respectively, less than the contractual rate of the hedged debt during the quarters ended June 30, 2003 and 2002. Also, as a result of our interest rate swaps outstanding during the periods, our interest expense was $1.2 million and $0.9 million, respectively, less than the contractual rate of the hedged debt during the six month periods ended June 30, 2003 and 2002.
Cumulative Effect of a Change in Accounting Principle
For the quarter ended March 31, 2002, in connection with the initial application of SFAS No. 142, Goodwill and Intangible Assets, we reported an $8.2 million cumulative effect of a change in accounting principle to write down the remaining goodwill balance related to the 1985 acquisition of the Stardust. The fair value of Stardust’s goodwill was derived through the use of an independent appraisal. This writedown had no tax effect on our condensed consolidated statement of operations.
Net Income
As a result of these factors, we reported net income of $4.4 million and $17.0 million, respectively, for the quarters ended June 30, 2003 and 2002. We also reported net income of $21 million and $25 million, respectively, for the six month periods ended June 30, 2003 and 2002.
Liquidity and Capital Resources
Cash Flow from Operating Activities and Working Capital
Our policy is to use operating cash flow in combination with debt financing to fund renovations and expansion of our business.
For the six month period ended June 30, 2003, we generated operating cash flow of $85 million compared to $105 million for the six month period ended June 30, 2002 due mainly to a decrease in earnings before the cumulative effect of a change in accounting principle, as well as a reduction in interest payable as a result of lower interest rates and the change in timing of our semi-annual interest payments on our fixed-rate debt due to our refinancings completed during the past year. As of June 30, 2003 and 2002, we had balances of cash and cash equivalents of $77 million and working capital deficits of $9.4 million and $45 million, respectively. We have historically operated with minimal or negative levels of working capital in order to minimize borrowings and related interest costs under our bank credit facility. We believe that our bank credit facility and cash flows from operating activities will be sufficient to meet our operating and capital expenditure requirements for the next twelve months. In the longer term, or if we experience a significant decline in operating cash flows due to increased competition, regulatory changes, economic downturns, or other events affecting various forms of travel to our properties, or in the event of unforeseen circumstances, we may require additional funds and may seek to raise such funds through public or private equity or debt financing, bank lines of credit, or other sources. No assurance can be given that additional financing, if required, will be available or, if available, will be on terms favorable to us. In the foreseeable future, we expect operating expenses to continue to be negatively impacted by the increase in gaming taxes and admission fees in Illinois as well as the increases in gaming taxes in Indiana, Nevada and New Jersey. We
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intend to remain committed to our efforts to mitigate these costs through programs to increase revenues, continued cost containment programs and the potential benefits from dockside gaming in Indiana.
Cash Flows from Investing Activities
We are committed to continually maintaining and enhancing our facilities, most notably by upgrading and remodeling our casinos, hotel rooms, restaurants, other public spaces, and computer systems and by providing the latest slot machines for our customers. Our capital expenditures primarily related to these purposes were approximately $31 million and $21 million, respectively, for the six month periods ended June 30, 2003 and 2002.
During the six month period ended June 30, 2002, we also paid approximately $7.3 million for facility improvements and gaming equipment at Delta Downs and $1.0 million for interest costs capitalized on Delta Downs’ intangible license rights during the course of preparing the asset for its intended use. There were no such payments during the six month period ended June 30, 2003.
For the six month period ended June 30, 2003, we invested or advanced a total of $15.1 million, including capitalized interest, in Borgata, our Atlantic City venture project, as compared to approximately $45 million for the six month period ended June 30, 2002. See further discussion under “ – ExpansionProjects – Borgata.”
For the six month period ended June 30, 2002, we paid $6.7 million for preopening costs that primarily related to preopening expenses at Delta Downs where we were in the process of expanding the property and equipping it for a new casino. The casino at Delta Downs commenced operations on February 13, 2002.
We periodically evaluate the possibility of enhancing our properties. For example, in July 2003, we announced development plans for our Delta Downs and Blue Chip properties. See further discussions under “ – Expansion Projects – Delta Downs” and “ – Expansion Projects – Blue Chip.”
Cash Flows from Financing Activities
Substantially all of the funding for our acquisitions and our renovation and expansion projects comes from cash flows from existing operations as well as debt financing. In January 2003, we redeemed our outstanding $116 million principal amount of our 9.50% senior subordinated notes due 2007, pursuant to a redemption notice given on December 30, 2002. The redemption price for these notes was 104.75% and as such, we paid approximately $122 million for these notes. In March 2003, we repaid and retired approximately $6.1 million of our other indebtedness with borrowings from our bank credit facility. In February 2003, we issued a $16 million note to finance an equipment purchase. For more information about this note, see“Indebtedness.”
During the six month period ended June 30, 2003, we repaid $29 million of our bank credit facility. During the six months ended June 30, 2002, we repaid $281 million of our bank credit facility primarily with the net proceeds from the issuance of $250 million principal amount of 8.75% senior subordinated notes due April 2012. During the six month period ended June 30, 2003, we received $0.2 million from the issuance of common stock through the exercise of employee stock options as compared to $11.7 million received during the six month period ended June 30, 2002.
In November 2002, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our common stock. Depending upon market conditions, shares may be repurchased from time to time at
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prevailing market prices through open market or negotiated transactions. We began repurchasing shares in February 2003. Through June 30, 2003, we repurchased 991,100 shares of our common stock for a total cost of $12.2 million. These shares were retired and are classified as authorized but unissued shares.
Expansion Projects
Borgata. Our subsidiary, Boyd Atlantic City, Inc., or BAC, owns half of the membership interests in Marina District Development Holding Co., LLC, or the Holding Company. MAC, Corp., or MAC, a subsidiary of MGM MIRAGE, owns the other half of the membership interests in the Holding Company. The Holding Company owns all of the membership interests of Marina District Development Company, LLC, or MDDC. MDDC owns Borgata Hotel Casino and Spa at Renaissance Pointe in Atlantic City, New Jersey. Borgata commenced operations on July 3, 2003. We are operating Borgata and do not receive any management fees for these services.
The operating agreement governing the Holding Company contemplated a total original project cost of $1.035 billion and requires us and MGM to make equity contributions toward the development of Borgata, in addition to certain debt financing by Borgata. During construction, we and MGM agreed to certain scope changes designed to enhance the property and its operations that increased the total project cost in the operating agreement to $1.073 billion. We currently estimate that Borgata’s final project cost will be approximately $1.1 billion. As currently called for in the operating agreement, all project costs in excess of the original project cost of $1.035 billion, up to a total of $1.073 billion, will be equally funded by both parties through equity contributions. Any funding of project costs over the agreed-upon $1.073 billion, if required, is our responsibility. However, rather than solely funding any project costs in excess of $1.073 billion, we may use alternate funding sources, to the extent permissible, such as fully borrowing under Borgata’s bank credit agreement
As of June 30, 2003, pursuant to the operating agreement, we have invested $188.4 million in cash and MGM has also contributed $188.4 million, consisting of cash, land and other assets. During the three and six month periods ended June 30, 2003, we each contributed $4.9 million and $6.4 million, respectively, as additional investments in Borgata. As currently called for in the operating agreement, we and MGM expect to contribute an additional $38 million, each, to Borgata during the third and fourth quarters of 2003 which would complete the funding of project costs up to $1.073 billion. To secure a portion of these remaining contributions to Borgata, we and MGM each provided a letter of credit in the amount of $25 million to the agent bank for Borgata’s bank credit agreement. Any unilateral cash investment that we may be required to make in order to fund project costs in excess of $1.073 billion would not proportionally increase our ownership of Borgata and would be recorded as an additional investment in Borgata to be amortized ratably over the life of the operating agreement for Borgata.
In addition to the equity contributions that both we and MGM are required to make, $621 million of Borgata’s project costs are being drawn under a $630 million bank credit agreement that a subsidiary of MDDC entered into on December 13, 2000. Under the terms of this bank credit agreement, no dividends or funds may be advanced to us or MGM MIRAGE except for taxes based on income or upon achievement of certain performance milestones. The bank credit agreement is non-recourse to both MGM MIRAGE and us, except for an unlimited completion guaranty provided by Boyd Gaming Corporation, pursuant to which we have agreed to guaranty the performance of certain obligations. Any funding of project costs over the agreed-
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upon $1.073 billion, whether or not required by the completion guaranty, is our responsibility and would not proportionally increase our ownership of Borgata.
The Borgata project is subject to the many risks inherent in the operation of a new business enterprise, including potential unanticipated regulatory, environmental and operating problems, increased project costs, lack of adequate financing and the significant risks commonly associated with implementing a marketing strategy for a market in which we have not previously operated. If the Borgata’s final project costs exceed our current estimates or Borgata does not compete successfully in its new market, it could have a material adverse effect on our business, financial condition and results of operations. In addition, now that Borgata has commenced operations, it faces the same operational risks that our other properties face including, but not limited to, increases in competition if neighboring states allow gaming activities or changes in tax laws. For example, recently the New Jersey legislature enacted new legislation to increase taxes on gaming licensees operating in Atlantic City. These tax increases are expected to adversely impact the results of operations of Borgata.
The source of funds for our remaining share of the Borgata project may come from cash flows from operations and availability under our bank credit facility, to the extent availability exists after we meet our working capital needs, incremental bank financing, 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 us.
Delta Downs. In July 2003, we announced development plans for our Delta Downs property. We will soon begin a $50 million expansion project at Delta Downs. The first phase involves expanding the size of the casino building to provide customers with a more open and comfortable environment, including wider aisles on the slot floor. The second phase of this project, planned to begin in early 2004, involves the addition of food and beverage amenities and the development of a hotel at the property, the first phase of which is expected to contain approximately 200 rooms.
Blue Chip.Planning is also underway for an expansion of gaming operations at our Blue Chip Casino. We expect to build a new boat, which will allow for more gaming positions and for the casino to be located on one floor versus the three-story boat now in operation. The project, which is expected to include a new parking structure, is subject to regulatory and other approvals.
Indebtedness
Bank Credit Facility. Our bank credit facility consists of a $400 million revolving credit facility and a $100 million term loan. The revolver portion of the bank credit facility matures in June 2007 and the $100 million term loan component matures in June 2008. The term loan will be repaid in increments of $0.25 million per quarter that began on September 30, 2002 and will continue through March 31, 2008. At June 30, 2003, $99.0 million of borrowings were outstanding under the term loan, $101.5 million was outstanding under our revolving credit facility, and $25 million was allocated to support a letter of credit to the agent bank for Borgata’s bank credit agreement (see “—Expansion Projects—Borgata”), leaving availability under the bank credit facility of $273.5 million. Pursuant to the terms of the Borgata completion guaranty, we are required to maintain $50 million of unused availability under our revolving credit facility until Borgata is complete. We intend to utilize $122.2 million of the availability under the bank credit facility to redeem the remaining outstanding balance of our 9.25% senior notes due October 2003. However, we can provide no assurance that we will be able to redeem the remaining outstanding balance of 9.25% notes from availability under the bank
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credit facility. The interest rate on the bank credit facility is based upon either the agent bank’s quoted base rate or the eurodollar rate, plus an applicable margin. For the revolving portion of our bank credit facility, this margin is determined by the level of a predefined financial leverage ratio. For the term loan portion of our bank credit facility, the margin is fixed. In addition, we incur commitment fees on the unused portion of the revolver that ranges from 0.375% to 0.50% per annum. The blended interest rate for outstanding balances under the bank credit facility at June 30, 2003 and 2002 was 3.3% and 4.2%, respectively. Our obligations under the bank credit facility are secured by substantially all of our real and personal property (excluding the capital stock of our subsidiaries), including the real and personal property of our significant subsidiaries, and are guaranteed by all our significant subsidiaries.
The bank credit facility contains certain financial and other covenants, including, without limitation, various covenants (i) requiring the maintenance of a minimum net worth, (ii) requiring the maintenance of a minimum interest coverage ratio, (iii) establishing a maximum permitted total leverage ratio and senior leverage ratio, (iv) imposing limitations on the incurrence of additional indebtedness, (v) imposing limitations on the maximum permitted expansion capital expenditures during the term of the bank credit facility, (vi) imposing limits on the maximum permitted maintenance capital expenditures during each year of the term of the bank credit facility, (vii) imposing restrictions on investments, dividends and certain other payments, (viii) imposing a limitation on the maximum permitted amount of hedging obligations, and (ix) imposing limitations on the maximum permitted rental expense during each year of the term of the bank credit facility. We believe we are in compliance with the bank credit facility covenants at June 30, 2003.
Subsequent Event. On July 31, 2003, we amended our bank credit facility to increase the limitations on investments, dividends and certain other payments from a total limit during the term of the bank credit facility to an annual limit for each year of the term of the bank credit facility.
Note Issuance. In February 2003, we issued a note in the amount of $16 million to finance the purchase of a company aircraft. The note bears interest at the rate of 5.7% per annum. The note is payable in 120 equal monthly installments of principal and interest until March 2013, when the remaining balance becomes due and payable. The note is secured by the aircraft.
Notes. Our $122.2 million outstanding principal amount of senior notes due in 2003, $200 million principal amount of senior notes due in 2009, $250 million principal amount of senior subordinated notes due 2012 and $300 million principal amount of senior subordinated notes due 2012 contain limitations on, among other things, (a) our ability and our restricted subsidiaries’ (as defined in the indentures governing the notes) ability to incur additional indebtedness, (b) the payment of dividends and other distributions with respect to our capital stock and of our restricted subsidiaries and the purchase, redemption or retirement of our capital stock and our 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. We believe we are in compliance with the covenants related to these notes at June 30, 2003. The $122.2 million outstanding principal amount of our 9.25% senior notes due October 2003 are guaranteed by those significant subsidiaries that existed at the time these notes were issued. The guarantees are full, unconditional and joint and several. In addition, the $200 million principal amount of our 9.25% senior notes due August 2009 are guaranteed by all of our significant subsidiaries. The guarantees are full, unconditional and joint and several.
In June 2003, we exchanged in full our $300 million principal amount of 7.75% senior subordinated notes due 2012 for substantially similar notes that were registered under the Securities Act of 1933.
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Our ability to service our debt will be dependent on future performance, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, certain of which are beyond our control.
Private Securities Litigation Reform Act
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such statements include information regarding our expectations, goals or intentions regarding the future, including but not limited to statements regarding our strategy, competition (including the expansion of gaming into additional markets), expenses, development plans (including plans to expand our Delta Downs and Blue Chip properties, anticipated cost, timing and eventual acceptance of the expanded properties, as well as new facilities, such as Borgata, by the market), revenue, cash flow, operations, regulations, compliance with applicable laws, the effects of pending legal matters, the ability to control costs and reduce debt, the effects of increased costs and tax rates, risks relating to the nonperformance by counterparties to our rate swap agreements, the ability to mitigate certain costs through cost containment programs, anticipated benefits from dockside gaming in Indiana, our attempts to efficiently utilize assets purchased from Isle of Capri to benefit revenues and profitability and our ability to redeem the remaining outstanding balance of 9.25% notes due October 2003. In addition, forward-looking statements include our attempts to build market share at Sam’s Town Tunica, and our plans to make additional investments in the Borgata venture, including the amount and timing of such investments, estimates of the final project cost of Borgata and the sources of funding of final project costs. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in such statement. Among the factors that could cause actual results to differ materially are the following: competition, increased costs (including marketing costs and start-up costs) and uncertainties relating to new developments and expansion (including enhancements to improve property performance), increased taxes, the availability and price of energy, weather, regulation, economic conditions and the effects of war, terrorist or similar activity. In particular, there can be no assurance that the final project cost of Borgata will approximate current estimates or that we will complete the proposed expansion of either Delta Downs or Blue Chip, or if such expansions are completed, that they will result in increased revenue or EBITDA.
Additional factors that could cause actual results to differ are discussed under the heading “Investment Considerations” and in other sections of the Company’s Form 10-K for the fiscal year ended December 31, 2002 on file with the Securities and Exchange Commission, and in its other periodic reports filed from time to time with the Commission. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking information.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
As of June 30, 2003, there were no material changes to the information previously reported under Item 7A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. While our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote. However, based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in timely alerting them to material information required to be included in our periodic SEC filings at the reasonable assurance level.
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
Alvin C. Copeland, the sole shareholder of an unsuccessful applicant for a riverboat license at the location of our Treasure Chest Casino, has made several attempts to have the Treasure Chest license revoked and awarded to his company. In 1999, Copeland filed a direct action against Treasure Chest and certain other parties seeking the revocation of Treasure Chest’s license, an award of the license to him and monetary damages. This suit was dismissed by the trial court citing that Copeland failed to state a claim on which relief could be granted. The dismissal was appealed by Copeland to the First Circuit Court of Appeal. On June 21, 2002, the First Circuit Court of Appeal reversed the trial court’s decision and remanded the matter to the trial court. On January 14, 2003, we filed a motion to dismiss the matter and that motion was denied. On June 30, 2003, we filed for supervisory writs with the appellate court and are presently awaiting its decision. If the matter is not dismissed, we intend to vigorously defend the lawsuit.
Refer to Note 5 to our condensed consolidated financial statements as well as our periodic SEC filings (in particular our report on Form 10-K for the year ended December 31, 2002) for a discussion of matters that have previously been disclosed pursuant to this item.
Item 4. Submission of Matters to a Vote of Securities Holders
Our Annual Meeting of Stockholders was held on May 15, 2003. The stockholders re-elected Robert L. Boughner, Marianne Boyd Johnson and Billy G. McCoy to three year terms, ending on the date of our Annual Meeting of Stockholders in 2006. The number of shares voting as to the election of each nominee and the ratification of the appointment of Deloitte & Touche LLP to serve as independent auditors for the year ending December 31, 2003 is set forth below:
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Election of Class III Directors
Robert L. Boughner
Marianne Boyd Johnson
Billy G. McCoy
The stockholders ratified the selection of Deloitte & Touche LLP as independent auditors for the Company for the year ending December 31, 2003 with voting as follows: 61,597,502 for; 386,062 against; 9,928 non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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SIGNATURES
Pursuant to the requirements 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 August 12, 2003.
By:
/s/ JEFFREY G. SANTORO
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