1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-12168 BOYD GAMING CORPORATION (Exact name of registrant as specified in its charter) NEVADA 88-0242733 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2950 SOUTH INDUSTRIAL ROAD LAS VEGAS, NEVADA 89109 (Address of principal executive offices) (Zip Code) (702) 792-7200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [X] No [__] Shares outstanding of each of the Registrant's classes of common stock as of October 31, 1999: Class Outstanding ----- ----------- Common stock, $.01 par value 62,221,218
2 QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Page No. -------- <S> <C> Item 1. Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 3 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 1999 and 1998 4 Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine month period ended September 30, 1999 5 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 1999 and 1998 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosure about Market Risk 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 28 Signature Page 29 </TABLE> -2-
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (UNAUDITED) SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 - ------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets Cash and cash equivalents $ 63,946 $ 75,937 Accounts receivable, net 17,735 21,988 Inventories 7,278 9,567 Prepaid expenses and other 16,949 17,333 Income taxes receivable 647 11,065 Deferred income taxes 18,777 5,855 ---------- ---------- Total current assets 125,332 141,745 Property and equipment, net 775,433 763,207 Other assets and deferred charges, net 43,644 38,690 Intangible assets, net 198,550 202,614 ---------- ---------- Total assets $1,142,959 $1,146,256 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt $ 2,097 $ 1,961 Accounts payable 30,858 32,065 Accrued liabilities Payroll and related 26,974 29,465 Interest and other 54,630 54,162 ---------- ---------- Total current liabilities 114,559 117,653 Long-term debt, net of current maturities 714,041 774,890 Deferred income taxes and other 56,803 26,407 Commitments and contingencies Stockholders' equity Preferred stock, $.01 par value; 5,000,000 shares authorized -- -- Common stock, $.01 par value; 200,000,000 shares authorized; 62,215,232 and 62,027,514 shares outstanding 622 620 Additional paid-in capital 141,920 140,616 Retained earnings 115,014 86,070 ---------- ---------- Total stockholders' equity 257,556 227,306 ---------- ---------- Total liabilities and stockholders' equity $1,142,959 $1,146,256 ========== ========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. -3-
4 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED (UNAUDITED) SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues Casino $175,778 $173,466 $533,533 $541,003 Food and beverage 37,834 38,589 118,779 121,097 Room 17,038 18,232 53,812 55,110 Other 17,469 16,410 53,560 52,151 Management fee 13,976 10,247 34,820 30,606 -------- -------- -------- -------- Gross revenues 262,095 256,944 794,504 799,967 Less promotional allowances 22,580 22,351 69,795 69,847 -------- -------- -------- -------- Net revenues 239,515 234,593 724,709 730,120 -------- -------- -------- -------- Costs and expenses Casino 89,412 89,174 268,777 276,149 Food and beverage 25,216 26,105 77,242 79,514 Room 5,795 6,161 17,978 18,643 Other 16,339 16,671 48,843 48,947 Selling, general and administrative 34,375 35,645 104,652 111,440 Maintenance and utilities 11,429 10,956 30,974 31,069 Depreciation and amortization 17,478 17,940 54,744 54,938 Corporate expense 5,409 3,169 18,098 13,755 Preopening expense (primarily unconsolidated subsidiary) 354 -- 1,208 -- Restructuring charge -- -- -- 5,925 -------- -------- -------- -------- Total 205,807 205,821 622,516 640,380 -------- -------- -------- -------- Operating income 33,708 28,772 102,193 89,740 -------- -------- -------- -------- Other income (expense) Interest income 137 87 240 293 Interest expense, net of amounts capitalized (16,539) (18,443) (50,332) (56,462) -------- -------- -------- -------- Total (16,402) (18,356) (50,092) (56,169) -------- -------- -------- -------- Income before provision for income taxes and cumulative effect of a change in accounting principle 17,306 10,416 52,101 33,571 Provision for income taxes 6,969 4,479 21,419 14,276 -------- -------- -------- -------- Income before cumulative effect of a change in accounting principle 10,337 5,937 30,682 19,295 Cumulative effect of a change in accounting for start-up activities, net of tax benefit of $936 -- -- 1,738 -- -------- -------- -------- -------- Net income $ 10,337 $ 5,937 $ 28,944 $ 19,295 ======== ======== ======== ======== BASIC AND DILUTED NET INCOME PER COMMON SHARE Income before cumulative effect of a change in accounting principle $ 0.17 $ 0.10 $ 0.50 $ 0.31 Cumulative effect of a change in accounting for start-up activities, net of tax -- -- (0.03) -- -------- -------- -------- -------- Net income $ 0.17 $ 0.10 $ 0.47 $ 0.31 ======== ======== ======== ======== Average basic shares outstanding 62,213 61,826 62,091 61,723 Average diluted shares outstanding 62,431 61,831 62,201 61,857 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. -4-
5 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> COMMON STOCK ADDITIONAL TOTAL ------------------------ PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------------------------ ---------- -------- ------------- <S> <C> <C> <C> <C> <C> Balances, January 1, 1999 62,027,514 $620 $140,616 $ 86,070 $227,306 Net income -- -- -- 28,944 28,944 Stock issued in connection with employee stock purchase plan 179,801 2 1,256 -- 1,258 Stock options exercised 7,917 -- 48 -- 48 ---------- ---- -------- -------- -------- Balances, September 30, 1999 62,215,232 $622 $141,920 $115,014 $257,556 ========== ==== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. -5-
6 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) ------------------------------ (IN THOUSANDS) 1999 1998 - ----------------------------------------------------------------------------- ------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 28,944 $ 19,295 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 54,744 54,938 Cumulative effect of a change in accounting for start-up activities 2,674 -- Deferred income taxes 17,074 19,124 Restructuring charge -- 5,925 Equity loss in unconsolidated subsidiary 1,003 -- Changes in assets and liabilities: Accounts receivable, net 1,496 1,030 Inventories 2,289 1,498 Prepaid expenses and other (2,290) (2,576) Income taxes receivable 10,418 (9,296) Other assets (2,061) (3,550) Other current liabilities 548 (1,726) Other liabilities 400 -- --------- -------- Net cash provided by operating activities 115,239 84,662 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, equipment and other assets (65,449) (44,451) Investment in and advances to unconsolidated subsidiary (4,185) -- Proceeds from sale of Sam's Town Kansas City's assets 2,000 10,500 --------- -------- Net cash used in investing activities (67,634) (33,951) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 1,118 762 Proceeds from issuance of debt -- 8,000 Net payments under bank credit facility (59,250) (67,250) Payments on long-term debt (1,464) (2,449) --------- -------- Net cash used in financing activities (59,596) (60,937) --------- -------- Net decrease in cash and cash equivalents (11,991) (10,226) Cash and cash equivalents, beginning of period 75,937 78,277 --------- -------- Cash and cash equivalents, end of period $ 63,946 $ 68,051 ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized $ 50,986 $ 56,617 ========= ======== Cash paid for income taxes $ 4,182 $ 5,066 ========= ======== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. -6-
7 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of Boyd Gaming Corporation and its wholly-owned subsidiaries, collectively referred to herein as the "Company". At September 30, 1999, the Company owned and operated ten casino entertainment facilities located in Las Vegas, Nevada, Tunica, Mississippi, East Peoria, Illinois, and Kenner, Louisiana as well as a travel agency located in Honolulu, Hawaii. In addition, the Company manages a casino entertainment facility in Philadelphia, Mississippi, for which it has a management contract that terminates on January 31, 2000 (see Note 5). All material intercompany accounts and transactions have been eliminated. Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of its operations and cash flows for the three and nine month periods ended September 30, 1999 and 1998. It is suggested that this report be read in conjunction with the Company's audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 1998. The operating results for the three and nine month periods ended September 30, 1999 and 1998 and cash flows for the nine month periods ended September 30, 1999 and 1998 are not necessarily indicative of the results that will be achieved for the full year or for future periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, the estimated valuation allowance for deferred tax assets, and estimated cash flows used in assessing the recoverability of long-lived assets. Actual results could differ from those estimates. 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 or discernible portions of the project are substantially complete. Capitalized interest during the three and nine month periods ended September 30, 1999 was $0.5 million and $0.9 million, respectively. There were no such interest costs capitalized during the three and nine month periods ended September 30, 1998. -7-
8 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- Preopening Expenses The American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," which is effective for fiscal years beginning after December 15, 1998. The statement requires businesses to expense certain costs of start-up activities as incurred. During the three and nine month periods ended September 30, 1999, the Company expensed $0.4 million and $1.2 million, respectively, in preopening costs that related primarily to the Company's share of preopening expense in the Atlantic City joint venture. The initial application of this statement in January 1999 required the Company to expense certain previously capitalized items as a cumulative effect of a change in accounting principle. As such, the Company reported a charge of $1.7 million, net of tax, to the consolidated statement of operations during the three month period ended March 31, 1999 as the cumulative effect of the change in accounting principle. Recently Issued Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting of Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments for fiscal years beginning after June 15, 2000. Management has not yet completed an analysis of its existing contracts, agreements and other commitments to determine the potential impact that the adoption of this statement will have on the consolidated financial statements. NOTE 2. - NET INCOME PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" that requires the presentation of basic and diluted net income per share. Basic per share amounts are computed by dividing net income by the average shares outstanding during the period. Diluted per share amounts are computed by dividing net income by average shares outstanding plus the dilutive effect of common share equivalents. Diluted net income per share during the three and nine month periods ended September 30, 1999 and 1998 is determined considering the dilutive effect of outstanding stock options. The effect of stock options outstanding to purchase approximately 2.6 million and 4.6 million shares, respectively, was not included in the diluted calculations during the three and nine month periods ended September 30, 1999 and 4.6 million and 2.7 million shares, respectively, were not included in the diluted calculations during the three and nine month periods ended September 30, 1998 since the exercise price of such options was greater than the average price of the Company's common shares during the periods. NOTE 3. - DEBT On July 21, 1999, the Company replaced its existing bank credit facility with a new $600 million bank credit facility (the "New Bank Credit Facility"). The New Bank Credit Facility consists of a $500 million revolver component (the "Revolver") and a $100 million term loan component (the "Term Loan"), both of which mature in June 2003. Availability under the Revolver will be reduced by $15.6 million on December 31, 2001 and at the end of each quarter thereafter until March 31, 2003. The Term Loan will be repaid in increments of $0.25 million per quarter which began on September 30, 1999 and will continue through March 31, 2003. The interest rate on the New Bank Credit Facility is based upon either the agent bank's quoted base rate or the Eurodollar rate, plus an applicable margin that is determined by the level of a predefined financial leverage -8-
9 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- ratio. In addition, the Company incurs a commitment fee on the unused portion of the Revolver which ranges from 0.375% to 0.50% per annum. The New Bank Credit Facility is secured by substantially all of the real and personal property of the Company and its subsidiaries, including ten casino properties. The obligations of the Company under the New Bank Credit Facility are guaranteed by the significant subsidiaries of the Company. The New 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 secured 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 New Bank Credit Facility, (vi) imposing limits on the maximum permitted maintenance capital expenditures during each year of the term of the New Bank Credit Facility, and (vii) imposing restrictions on investments and certain other payments. Management believes the Company and its subsidiaries are in compliance with the New Bank Credit Facility covenants. NOTE 4. - ACQUISITION On November 10, 1999, the Company acquired the Blue Chip Casino, a riverboat casino in Michigan City, Indiana for approximately $274 million in cash, subject to certain adjustments. Included as part of the acquisition is a hotel and parking facility, currently under construction and attached to the existing casino complex. The Company funded the acquisition from borrowings under the New Bank Credit Facility. NOTE 5. - TERMINATION OF MANAGEMENT CONTRACT On October 20, 1999, the Company signed an agreement with the Mississippi Band of Choctaw Indians (the "Tribe") to terminate the Company's management of the Silver Star Resort and Casino in Philadelphia, Mississippi. Under the agreement, the Company will continue to manage Silver Star under the current terms of the management contract until January 31, 2000, at which time the Tribe will make a one-time payment of $72 million to the Company. This agreement with the Tribe terminates the Company's original management contract 17 months prior to the contract's scheduled expiration date. The one time payment will accelerate the utilization of the Company's tax credits and net operating losses carried forward from prior years. As such, the Company's deferred tax assets are classified as part of current assets on the accompanying condensed consolidated balance sheet at September 30, 1999. NOTE 6. - SEGMENT INFORMATION The Company's management reviews the results of operations based on four distinct geographic gaming market segments: the Stardust Resort and Casino on the Las Vegas Strip, Boulder Strip Properties, Downtown Properties and Central Region Properties. As used herein, "Boulder Strip Properties" consist of Sam's Town Hotel and Gambling Hall, the Eldorado Casino, and Jokers Wild Casino; "Downtown Properties" consist of the California Hotel and Casino, the Fremont Hotel and Casino, Main Street Station Casino, Brewery and Hotel and Vacations Hawaii; "Central Region Properties" consist of Sam's Town Hotel and Gambling Hall located in Tunica, Mississippi, Sam's Town Kansas City (through July 15, 1998), Par-A-Dice Hotel and Casino, Treasure Chest Casino, and management fee income from Silver Star Resort and Casino. -9-
10 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- (IN THOUSANDS) 1999 1998 1999 1998 -------- -------- -------- -------- <S> <C> <C> <C> <C> Casino Revenue Stardust $ 21,285 $ 25,543 $ 71,855 $ 79,133 Boulder Strip Properties 35,107 36,244 110,739 107,809 Downtown Properties 32,386 30,056 98,568 94,374 -------- -------- -------- -------- Nevada Region 88,778 91,843 281,162 281,316 Central Region 87,000 81,623 252,371 259,687 -------- -------- -------- -------- Total Casino Revenue $175,778 $173,466 $533,533 $541,003 ======== ======== ======== ======== EBITDA (1) Stardust $ 106 $ 2,356 $ 10,335 $ 15,925 Boulder Strip Properties 6,713 7,953 26,863 28,491 Downtown Properties 9,389 5,857 28,319 18,987 -------- -------- -------- -------- Nevada Region 16,208 16,166 65,517 63,403 Central Region 40,741 33,715 110,726 100,955 -------- -------- -------- -------- Property EBITDA 56,949 49,881 176,243 164,358 -------- -------- -------- -------- Other Costs and Expenses Corporate expense 5,409 3,169 18,098 13,755 Depreciation and amortization 17,478 17,940 54,744 54,938 Preopening expense 354 -- 1,208 -- Restructuring charge -- -- -- 5,925 Other expense, net 16,402 18,356 50,092 56,169 -------- -------- -------- -------- Total Other Costs and Expenses 39,643 39,465 124,142 130,787 -------- -------- -------- -------- Income before provision for income taxes and cumulative effect of a change in accounting principle 17,306 10,416 52,101 33,571 Provision for taxes 6,969 4,479 21,419 14,276 -------- -------- -------- -------- Income before cumulative effect of a change in accounting principle 10,337 5,937 30,682 19,295 Cumulative effect of a change in accounting for start-up activities, net -- -- 1,738 -- -------- -------- -------- -------- Net Income $ 10,337 $ 5,937 $ 28,944 $ 19,295 ======== ======== ======== ======== </TABLE> (1) EBITDA is earnings before interest, taxes, depreciation and amortization expense, preopening expense and restructuring charge. The Company believes that EBITDA is a useful financial measurement for assessing the operating performance of its properties. EBITDA does not represent net income or cash flows from operating, investing and financing activities as defined by generally accepted accounting principles. -10-
11 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7. - GUARANTOR INFORMATION The Company's $200 million of 9.25% Senior Notes (the "9.25% Notes") are guaranteed by a majority of the Company's wholly-owned subsidiaries. These guaranties are full, unconditional, and joint and several. The Company has significant subsidiaries that do not guarantee the 9.25% Notes. As such, the following consolidating schedules present separate condensed consolidating financial statement information on a combined basis for the parent only, as well as the Company's guarantor subsidiaries and non-guarantor subsidiaries, as of September 30, 1999 and December 31, 1998 and for the three and nine month periods ended September 30, 1999 and 1998. -11-
12 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 1999 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> ASSETS Current assets $ 25,366 $ 83,175 $ 19,169 $ (2,378) {1} $ 125,332 Property and equipment, net 39,487 697,098 38,848 -- 775,433 Other assets and deferred charges, net 903,800 (462,974) 174,923 (572,105) {1}{2} 43,644 Intangible assets, net -- 116,922 81,628 -- 198,550 -------- --------- -------- --------- ---------- Total assets $968,653 $ 434,221 $314,568 $(574,483) $1,142,959 ======== ========= ======== ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 29,564 $ 65,888 $ 21,489 $ (2,382) {1} $ 114,559 Long-term debt, net of current maturities 645,819 68,189 33 -- 714,041 Deferred income taxes and other 35,719 20,951 133 -- 56,803 Stockholders' equity 257,551 279,193 292,913 (572,101) {2} 257,556 -------- --------- -------- --------- ---------- Total liabilities and stockholders' equity $968,653 $ 434,221 $314,568 $(574,483) $1,142,959 ======== ========= ======== ========= ========== </TABLE> Elimination Entries {1} - To eliminate intercompany payables and receivables. {2} - To eliminate investment in subsidiaries and subsidiaries' equity. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 1998 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS <S> <C> <C> <C> <C> <C> <C> Current assets $ 23,193 $ 97,564 $ 22,533 $ (1,545) {1} $ 141,745 Property and equipment, net 36,490 687,740 38,977 -- 763,207 Other assets and deferred charges, net 919,264 (515,630) 153,170 (518,114) {1}{2} 38,690 Intangible assets, net -- 119,365 83,249 -- 202,614 -------- --------- --------- --------- ---------- Total assets $978,947 $ 389,039 $297,929 $(519,659) $1,146,256 ========= ========= ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities $ 35,301 $ 69,217 $ 15,575 $ (2,440) {1} $ 117,653 Long-term debt, net of current maturities 706,373 68,484 33 -- 774,890 Deferred income taxes and other 9,984 16,382 41 -- 26,407 Stockholders' equity 227,289 234,956 282,280 (517,219) {2} 227,306 -------- --------- -------- --------- ---------- Total liabilities and stockholders' equity $978,947 $ 389,039 $297,929 $(519,659) $1,146,256 ======== ========= ======== ========= ========== </TABLE> Elimination Entries {1} - To eliminate intercompany payables and receivables. {2} - To eliminate investment in subsidiaries and subsidiaries' equity. -12-
13 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Revenues Casino $ -- $ 145,417 $30,361 $ -- $ 175,778 Food and beverage -- 35,149 2,685 -- 37,834 Room -- 17,038 -- -- 17,038 Other 2,846 7,632 10,533 (3,542) {1} 17,469 Management fee 33,052 15,641 4,574 (39,291) {1} 13,976 -------- --------- ------- -------- --------- Gross revenues 35,898 220,877 48,153 (42,833) 262,095 Less promotional allowances -- 20,641 1,939 -- 22,580 -------- --------- ------- -------- --------- Net revenues 35,898 200,236 46,214 (42,833) 239,515 -------- --------- ------- -------- --------- Costs and expenses Casino -- 77,992 11,420 -- 89,412 Food and beverage -- 22,482 2,734 -- 25,216 Room -- 5,795 -- -- 5,795 Other -- 19,612 11,621 (14,894) {1} 16,339 Selling, general and administrative -- 27,916 6,459 -- 34,375 Maintenance and utilities -- 9,911 1,518 -- 11,429 Depreciation and amortization 495 14,800 2,183 -- 17,478 Corporate expense 8,523 35 393 (3,542) {1} 5,409 Preopening expense 123 -- 231 -- 354 -------- --------- ------- -------- --------- Total 9,141 178,543 36,559 (18,436) 205,807 -------- --------- ------- -------- --------- Operating income 26,757 21,693 9,655 (24,397) 33,708 Other income (expense), net (15,055) (1,597) 250 -- (16,402) -------- --------- ------- -------- --------- Income before provision for income taxes 11,702 20,096 9,905 (24,397) 17,306 Provision for income taxes 1,365 5,604 -- -- 6,969 -------- --------- ------- -------- --------- Net income $ 10,337 $ 14,492 $ 9,905 $(24,397) $ 10,337 ======== ========= ======= ======== ========= </TABLE> Elimination Entries {1} - To eliminate intercompany revenue and expense as well as equity income. -13-
14 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenues Casino $ -- $ 144,924 $28,542 $ -- $ 173,466 Food and beverage -- 36,123 2,466 -- 38,589 Room -- 18,232 -- -- 18,232 Other 2,411 7,597 9,308 (2,906) {1} 16,410 Management fee 26,681 11,895 4,364 (32,693) {1} 10,247 -------- --------- ------- -------- --------- Gross revenues 29,092 218,771 44,680 (35,599) 256,944 Less promotional allowances -- 20,600 1,751 -- 22,351 -------- --------- ------- -------- --------- Net revenues 29,092 198,171 42,929 (35,599) 234,593 -------- --------- ------- -------- --------- Costs and expenses Casino -- 78,456 10,718 -- 89,174 Food and beverage -- 23,486 2,619 -- 26,105 Room -- 6,161 -- -- 6,161 Other -- 19,534 9,804 (12,667) {1} 16,671 Selling, general and administrative -- 29,578 6,067 -- 35,645 Maintenance and utilities -- 9,802 1,154 -- 10,956 Depreciation and amortization 184 15,478 2,278 -- 17,940 Corporate expense 5,435 262 378 (2,906) (1) 3,169 -------- --------- ------- -------- --------- Total 5,619 182,757 33,018 (15,573) 205,821 -------- --------- ------- -------- --------- Operating income 23,473 15,414 9,911 (20,026) 28,772 Other income (expense), net (17,023) (1,661) 328 -- (18,356) -------- --------- ------- -------- --------- Income before provision for income taxes 6,450 13,753 10,239 (20,026) 10,416 Provision for income taxes 3,023 1,456 -- -- 4,479 -------- --------- ------- -------- --------- Net income $ 3,427 $ 12,297 $10,239 $(20,026) $ 5,937 ======== ========= ======= ======== ========= </TABLE> Elimination Entries {1} - To eliminate intercompany revenue and expense as well as equity income. -14-
15 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Revenues Casino $ -- $ 440,602 $ 92,931 $ -- $ 533,533 Food and beverage -- 110,886 7,893 -- 118,779 Room -- 53,812 -- -- 53,812 Other 8,538 24,723 30,929 (10,630) {1} 53,560 Management fee 104,737 40,202 14,924 (125,043) {1} 34,820 --------- --------- -------- --------- --------- Gross revenues 113,275 670,225 146,677 (135,673) 794,504 Less promotional allowances -- 64,092 5,703 -- 69,795 --------- --------- -------- --------- --------- Net revenues 113,275 606,133 140,974 (135,673) 724,709 --------- --------- -------- --------- --------- Costs and expenses Casino -- 234,426 34,351 -- 268,777 Food and beverage -- 69,314 7,928 -- 77,242 Room -- 17,978 -- -- 17,978 Other -- 55,868 33,322 (40,347) {1} 48,843 Selling, general and administrative -- 84,345 20,307 -- 104,652 Maintenance and utilities -- 26,484 4,490 -- 30,974 Depreciation and amortization 1,412 46,677 6,655 -- 54,744 Corporate expense 27,373 130 1,225 (10,630) {1} 18,098 Preopening expense 186 -- 1,022 -- 1,208 --------- --------- -------- --------- --------- Total 28,971 535,222 109,300 (50,977) 622,516 --------- --------- -------- --------- --------- Operating income 84,304 70,911 31,674 (84,696) 102,193 Other income (expense), net (46,298) (4,599) 805 -- (50,092) --------- --------- -------- --------- --------- Income before provision for income taxes 38,006 66,312 32,479 (84,696) 52,101 Provision for income taxes 7,324 14,095 -- -- 21,419 --------- --------- -------- --------- --------- Income before cumulative effect 30,682 52,217 32,479 (84,696) 30,682 Cumulative effect, net 1,738 -- -- -- 1,738 --------- --------- -------- --------- --------- Net income $ 28,944 $ 52,217 $ 32,479 $ (84,696) $ 28,944 ========= ========= ======== ========= ========= </TABLE> Elimination Entries {1} - To eliminate intercompany revenue and expense as well as equity income. -15-
16 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION (IN THOUSANDS) PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Revenues Casino $ -- $ 451,436 $ 89,567 $ -- $ 541,003 Food and beverage -- 113,849 7,248 -- 121,097 Room -- 55,110 -- -- 55,110 Other 7,236 27,267 26,158 (8,510){1} 52,151 Management fee 85,553 35,985 15,020 (105,952){1} 30,606 -------- --------- -------- --------- --------- Gross revenues 92,789 683,647 137,993 (114,462) 799,967 Less promotional allowances -- 64,683 5,164 -- 69,847 -------- --------- -------- --------- --------- Net revenues 92,789 618,964 132,829 (114,462) 730,120 -------- --------- -------- --------- --------- Costs and expenses Casino -- 242,936 33,213 -- 276,149 Food and beverage -- 71,873 7,641 -- 79,514 Room -- 18,643 -- -- 18,643 Other -- 58,193 28,757 (38,003){1} 48,947 Selling, general and administrative -- 92,414 19,026 -- 111,440 Maintenance and utilities -- 27,620 3,449 -- 31,069 Depreciation and amortization 381 47,807 6,750 -- 54,938 Corporate expense 19,779 1,336 1,150 (8,510)(1) 13,755 Restructuring charge -- 5,925 -- -- 5,925 -------- --------- -------- --------- --------- Total 20,160 566,747 99,986 (46,513) 640,380 -------- --------- -------- --------- --------- Operating income 72,629 52,217 32,843 (67,949) 89,740 Other income (expense), net (51,960) (4,886) 677 -- (56,169) -------- --------- -------- --------- --------- Income before provision for income taxes 20,669 47,331 33,520 (67,949) 33,571 Provision for income taxes 3,583 10,693 -- -- 14,276 -------- --------- -------- --------- --------- Net income $ 17,086 $ 36,638 $ 33,520 $ (67,949) $ 19,295 ======== ========= ======== ========= ========= </TABLE> Elimination Entries {1} - To eliminate intercompany revenue and expense as well as equity income. -16-
17 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 <TABLE> <CAPTION> COMBINED COMBINED NON- (IN THOUSANDS) PARENT GUARANTORS GUARANTORS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Cash flows provided by operating activities $ 52,816 $ 49,885 $ 12,538 $ 115,239 -------- -------- -------- --------- Cash flows from investing activities Acquisition of property, equipment and other assets (4,409) (56,137) (4,903) (65,449) Investments in and advances to unconsolidated subsidiary -- -- (4,185) (4,185) Proceeds from sale of Sam's Town Kansas City's assets -- 2,000 -- 2,000 -------- -------- -------- --------- Net cash used in investing activities (4,409) (54,137) (9,088) (67,634) -------- -------- -------- --------- Cash flows from financing activities Net payments under bank credit facility (59,250) -- -- (59,250) Receipt (payment) of dividends 11,791 (5,242) (6,549) -- Other (41) (305) -- (346) -------- -------- -------- --------- Net cash used in financing activities (47,500) (5,547) (6,549) (59,596) -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents 907 (9,799) (3,099) (11,991) Cash and cash equivalents, beginning of period 1,054 55,492 19,391 75,937 -------- -------- -------- --------- Cash and cash equivalents, end of period $ 1,961 $ 45,693 $ 16,292 $ 63,946 ======== ======== ======== ========= </TABLE> CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 <TABLE> <CAPTION> COMBINED COMBINED NON- (IN THOUSANDS) PARENT GUARANTORS GUARANTORS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Cash flows provided by (used in) operating activities $ 53,278 $ (1,605) $ 32,989 $ 84,662 -------- -------- -------- -------- Cash flows from investing activities Acquisition of property equipment and other assets (588) (42,191) (1,672) (44,451) Proceeds from sale of Sam's Town Kansas City's assets -- 10,500 -- 10,500 -------- -------- -------- -------- Net cash used in investing activities (588) (31,691) (1,672) (33,951) -------- -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt -- 8,000 -- 8,000 Net payments under bank credit facility (67,250) -- -- (67,250) Receipt (payment) of dividends 13,752 14,820 (28,572) -- Other (1,095) (463) (129) (1,687) -------- -------- -------- -------- Net cash provided by (used in) financing activities (54,593) 22,357 (28,701) (60,937) -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,903) (10,939) 2,616 (10,226) Cash and cash equivalents, beginning of period 2,832 58,317 17,128 78,277 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 929 $ 47,378 $ 19,744 $ 68,051 ======== ======== ======== ======== </TABLE> -17-
18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating data for the Company's properties. As used herein, "Boulder Strip Properties" consist of Sam's Town Las Vegas, the Eldorado and Jokers Wild; "Downtown Properties" consist of the California, the Fremont, Main Street Station and Vacations Hawaii, the Company's wholly-owned travel agency which operates for the benefit of the Downtown casino properties; and "Central Region Properties" consist of Sam's Town Tunica, Sam's Town Kansas City (through July 15, 1998), Par-A-Dice, Treasure Chest Casino, and management fee income from Silver Star Resort and Casino. Net revenues displayed in this table and discussed in this section are net of promotional allowances; as such, references to room revenue and food and beverage revenue do not agree to the amounts on the Condensed Consolidated Statements of Operations. Operating income (loss) from properties for the purposes of this table excludes corporate expense, including related depreciation and amortization, preopening expense and restructuring charge. <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ --------------------------- (In thousands) 1999 1998 1999 1998 --------- --------- -------- -------- <S> <C> <C> <C> <C> Net revenues Stardust $ 32,239 $ 38,024 $109,360 $120,459 Boulder Strip Properties 44,008 45,746 140,555 140,050 Downtown Properties(a) 53,824 49,893 163,427 153,413 --------- --------- -------- -------- Nevada Region 130,071 133,663 413,342 413,922 Central Region 109,444 100,930 311,367 316,198 --------- --------- -------- -------- Total properties $ 239,515 $ 234,593 $724,709 $730,120 ========= ========= ======== ======== Operating income (loss) Stardust $ (2,946) $ (373) $ 1,422 $ 7,053 Boulder Strip Properties 3,506 4,236 16,176 17,543 Downtown Properties 5,379 2,148 16,525 7,649 --------- --------- -------- -------- Nevada Region 5,939 6,011 34,123 32,245 Central Region 34,332 26,385 89,650 78,358(b) --------- --------- -------- -------- Total properties $ 40,271 $ 32,396 $123,773 $110,603 ========= ========= ======== ======== </TABLE> (a) Includes revenues related to Vacations Hawaii, a Honolulu travel agency, of $9,760 and $8,525, respectively, for the quarters ended September 30, 1999 and 1998, and revenues of $28,633 and $24,069, respectively, for the nine month periods ended September 30, 1999 and 1998. (b) Before restructuring charge. -18-
19 REVENUES Consolidated net revenues increased 2.1% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998. Company wide casino revenue increased 1.3%, food and beverage revenue decreased 3.7%, and room revenue decreased 5.7%. Net revenues from the Stardust, Boulder Strip and Downtown Properties (the "Nevada Region") decreased 2.7% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998. Net revenues at the Downtown Properties increased 7.9%, while net revenues at the Stardust and Boulder Strip decreased 15.2% and 3.8%, respectively. The decline in revenues at the Stardust and Boulder Strip is partially attributable to construction disruption at the Stardust and Sam's Town Las Vegas as well as increased competition at both locations. The Stardust renovation project is scheduled to be completed before the end of 1999. Sam's Town Las Vegas' renovation of the existing facility is expected to continue until the spring of 2000, while a major expansion of the property is expected to take place during 2000. Net revenues in the Central Region increased 8.4% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 primarily due to the increase in net revenues at Par-A-Dice and Silver Star. Par-A-Dice experienced its first full quarter of dockside operations which began in Illinois on June 26, 1999. The increase in revenues at Silver Star is due mainly to the increase in the management fee percentage from 30% to 40% of operating income on July 1, 1999 pursuant to the terms of the management agreement. The management contract is set to terminate on January 31, 2000, which is 17 months prior to its originally scheduled expiration date. See further discussion under "Liquidity and Capital Resources-Termination of Management Contract." Consolidated net revenue decreased slightly during the nine month period ended September 30, 1999 compared to the same period in the prior year which included 6 1/2 months of operations from Sam's Town Kansas City. Company-wide casino revenue decreased 1.4%, food and beverage revenue decreased 2.5%, and room revenue decreased 1.4%. These decreases were offset by an increase in management fee revenue of 13.8%. Net revenues from the Nevada Region remained virtually unchanged during the nine month period ended September 30, 1999 compared to the nine month period ended September 30, 1998 as a 9.2% decline in revenues at the Stardust was partially offset by a 6.5% increase in revenues at the Downtown Properties. Net revenues at the Boulder Strip were virtually unchanged. Net revenues in the Central Region declined 1.5% during the nine month period ended September 30, 1999 compared to the same period in the prior year. The decrease is primarily a result of the closure of the Sam's Town Kansas City property in July 1998, partially offset by increases at Par-A-Dice, Silver Star, and Treasure Chest of 13.0%, 13.8%, and 3.9%, respectively. OPERATING INCOME (LOSS) Consolidated operating income before preopening expense increased by 18.4% to $34 million during the quarter ended September 30, 1999 from $29 million during the quarter ended September 30, 1998. Operating income in the Nevada Region decreased 1.2% as the operating loss experienced at Stardust increased to $2.9 million during the quarter ended September 30, 1999 compared to $0.4 million in the quarter ended September 30, 1998. The increase in operating loss at the Stardust was nearly offset by a 150% increase in operating income at the Downtown Properties that was principally due to the increase in net revenues coupled with cost reductions resulting from more efficient operations. The increased operating loss at the Stardust is attributable to increased competition on the Las Vegas Strip, as well as construction disruption related to the renovation project which is scheduled to be completed before the end of 1999. In the Central Region, operating income increased 30% due to a 60% increase at Par-A-Dice and a 38% increase related to the Silver Star net management fee income. The increases at Par-A-Dice and Silver Star are related to the increases in net revenues from those properties. In addition, there was a reduction in operating loss from the closure of the Sam's Town Kansas City property in July 1998. For the nine month period ended September 30, 1999, consolidated operating income before preopening expense and a restructuring charge increased 8.1% to $103 million from $96 million in the same period from the prior year. -19-
20 Operating income in the Nevada Region increased 5.8% due primarily to the increase in net revenues coupled with cost reductions resulting from the operating efficiencies experienced at the Downtown Properties, partially offset by a decline at the Stardust and Boulder Strip Properties. In the Central Region, operating income increased 14.4% due primarily to increases at Par-A-Dice and Silver Star related to increases in net revenues at those properties, in addition to the reduction in operating loss from the Sam's Town Kansas City property which was closed in July 1998. STARDUST For the quarter ended September 30, 1999, net revenues at the Stardust decreased 15.2% compared to the quarter ended September 30, 1998 due to increased competition as well as construction disruption related to a renovation project that is expected to be completed by the end of 1999. Casino revenue declined 16.7% due to a decrease in slot and table game wagering. Room revenue declined 14.8% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 resulting from a decline in the number of available rooms by 33% due to the closure of motor inn rooms and the renovation of guest rooms in both hotel towers. Operating loss at the Stardust increased to $2.9 million during the quarter ended September 30, 1999 from $0.4 million during to the same period in the prior year as a result of the decline in revenues. For the nine month period ended September 30, 1999, net revenues at the Stardust declined 9.2% versus the comparable period in the prior year. Casino revenue declined 9.2% due to a decrease in slot and table game wagering. Room revenue declined 8.2% as the number of available rooms declined 24% as a result of the closure of the motor inn rooms and the renovation project. Operating income decreased to $1.4 million during the nine month period ended September 30, 1999 from $7.1 million during the same period in the prior year as a result of the decline in revenues. BOULDER STRIP PROPERTIES Net revenues at the Boulder Strip properties decreased 3.8% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 due primarily to a decline in casino revenue of 3.1% as a result of a decline in slot wagering volume. Operating income at the Boulder Strip Properties declined 17.2% to $3.5 million during the quarter ended September 30, 1999 compared to $4.2 million during the quarter ended September 30, 1998 due to the decrease in net revenues and an increase in marketing and other expenses. During the nine month period ended September 30, 1999, net revenues at the Boulder Strip Properties remained virtually unchanged compared to the same period in the prior year. Operating income at the Boulder Strip Properties declined 7.8% to $16.2 million during the nine month period ended September 30, 1999 compared to $17.5 million during the same period in the prior year. The decline is attributable to an increase in marketing and other expenses. DOWNTOWN PROPERTIES Net revenues at the Downtown Properties increased 7.9% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 due primarily to a 7.7% increase in casino revenue which was a result of an increase in slot and table game wagering. Operating income at the Downtown Properties increased 150% to $5.4 million during the quarter ended September 30, 1999 compared to $2.1 million during the quarter ended September 30, 1998 due to operating gains experienced at the California, Fremont and Main Street Station, partially offset by a slight operating loss at Vacations Hawaii, the Company's Honolulu travel agency. Operating income margin increased to 10.0% during the quarter ended September 30, 1999 from 4.3% during the comparable quarter in the prior year. The increases in operating income and operating income margin are primarily attributable to the increase -20-
21 in net revenues coupled with cost reductions in marketing and other expenses at each of the Downtown casino properties. Net revenues at the Downtown Properties increased 6.5% during the nine month period ended September 30, 1999 compared to the same period in the prior year due primarily to a 4.4% increase in casino revenue as slot wagering volume increased at all three casino properties. Revenues related to Vacations Hawaii, the Company's Honolulu travel agency, increased 19.0% for the nine month period ended September 30, 1999 compared to the nine month period of the prior year. Operating income at the Downtown Properties increased $8.9 million, or 116%, during the nine month period ended September 30, 1999 compared to the same period in the prior year. Operating income margin increased to 10.1% during the nine month period ended September 30, 1999 versus 5.0% in the comparable prior year period. The increases in operating income and operating income margin are primarily attributable to the increase in net revenues as well as cost reductions in marketing and other expenses at each of the Downtown Properties. CENTRAL REGION Net revenues in the Central Region increased 8.4% during the quarter ended September 30, 1999 compared to the quarter ended September 30, 1998 primarily due to the increase in net revenues at Par-A-Dice and Silver Star. Par-A-Dice experienced its first full quarter of dockside operations which began in Illinois on June 26, 1999. The increase in revenues at Silver Star is due mainly to the increase in the management fee percentage from 30% to 40% of operating income on July 1, 1999 pursuant to the terms of the management agreement. The management contract is set to terminate on January 31, 2000, which is 17 months prior to its originally scheduled expiration date. See further discussion under "Liquidity and Capital Resources-Termination of Management Contract". At Treasure Chest, net revenues increased 6.4% due primarily to increases in slot and table game wagering. At Sam's Town Tunica, net revenues decreased 9.3% due to declines in slot and table game wagering related to increased competition in the Tunica gaming market. Operating income in the Central Region increased 30.1% due primarily to the increases in net revenues at Par-A-Dice and Silver Star. Net revenues in the Central Region declined 1.5% during the nine month period ended September 30, 1999 compared to the same period in the prior year. The majority of the decrease is attributable to the closure of the Sam's Town Kansas City property in July 1998, partially offset by increases in net revenues at Par-A-Dice (13.0%), Silver Star (13.8%), and Treasure Chest (3.9%). Operating income in the Central Region increased to $90 million during the nine month period ended September 30, 1999 compared to $78 million during the comparable period in the prior year due to the closure of the Sam's Town Kansas City property as well as increased net revenues at Par-A-Dice and Silver Star. OTHER INCOME (EXPENSE) Other income and expense is primarily comprised of interest expense. Interest expense decreased by $1.9 million and $6.1 million, respectively, during the three and nine month periods ended September 30, 1999 compared to the corresponding periods in the prior year. The declines are attributable to lower debt levels combined with a decline in interest rates on floating rate debt. In addition, the Company capitalized $0.5 million and $0.9 million, respectively, in interest costs during the quarter ended September 30, 1999 and the nine month period ended September 30, 1999. There were no such costs capitalized during the quarter or nine month period ended September 30, 1998. -21-
22 CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR START-UP ACTIVITIES The Company reported a charge of $1.7 million, net of $0.9 million in tax benefits, as the cumulative effect of a change in accounting for start-up activities. The American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" that required the Company to expense certain previously capitalized costs of start-up activities as a cumulative effect of a change in accounting principle. NET INCOME As a result of these factors, the Company reported net income of $10.3 million and $5.9 million, respectively, during the quarters ended September 30, 1999 and 1998, and $28.9 million and $19.3 million, respectively, during the nine month periods ended September 30, 1999 and 1998. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATING ACTIVITIES AND WORKING CAPITAL The Company's policy is to use operating cash flow in combination with debt financing to fund renovations and expansion of its business. During the nine month period ended September 30, 1999, the Company generated operating cash flows of $115 million compared to $85 million during the same period in the prior year. The increase in operating cash flows is primarily attributable to the Company's enhanced earnings, as well as the realization of a portion of the tax benefits related to the sale of certain assets at the Sam's Town Kansas City property. (See further discussion regarding the tax benefits in the following paragraph). As of September 30, 1999 and 1998, the Company had balances of cash and cash equivalents of $64 million and $68 million, respectively, and working capital of $10.8 million and $22.8 million, respectively. The Company has historically operated with minimal levels of working capital in order to minimize borrowings and interest costs under the Company's bank credit facility. In connection with the July 1998 sale of certain tangible assets of Sam's Town Kansas City for $12.5 million, the Company has been and will be able to realize the benefit of approximately $35 million in tax attributes. The realization of these tax attributes, which began in the quarter ended September 30, 1998 and continued to benefit operating cash flow in 1999, generated refunds of approximately $11 million. Current and future federal tax payments on the Company's taxable income will also be reduced at such time as the remaining tax attributes are realized. At September 30, 1999, the Company had $18.8 million in current deferred tax assets. CASH FLOWS FROM INVESTING ACTIVITIES 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 spaces and by providing the latest slot machines for its customers. The Company's capital expenditures primarily related to these purposes were approximately $65 million and $44 million, respectively, during the nine month periods ended September 30, 1999 and 1998. See "Expansion and Other Projects" for a further discussion on current and planned investing activities. The Company received $10.5 million in cash at the time of sale of certain tangible assets of Sam's Town Kansas City in 1998 and received the remaining $2.0 million when certain third party consents were received in 1999. In addition, the Company funded $4.2 million during 1999 to its Atlantic City joint venture. See further discussion regarding the joint venture under "Expansion and Other Projects." CASH FLOW FROM FINANCING ACTIVITIES -22-
23 Substantially all of the funding for the Company's renovation and expansion projects comes from debt financing, as well as cash flows from existing operations. The Company paid down outstanding debt with its free cash flow generated from operations and excess cash balances which resulted in cash flows used for financing activities of $60 million during the nine month period ended September 30, 1999 compared to $61 million during the nine month period ended September 30, 1998. At September 30, 1999, outstanding borrowings and unused availability under the bank credit facility were $258 million and $342 million, respectively. Interest under the bank credit facility is based upon the agent bank's quoted base rate or the Eurodollar rate, at the discretion of the Company. The blended rate on outstanding borrowings under the bank credit facility as of September 30, 1999 was 7.7%. On July 21, 1999, the Company replaced its existing bank credit facility with a new $600 million bank credit facility (the "New Bank Credit Facility"). The New Bank Credit Facility consists of a $500 million revolver component (the "Revolver") and a $100 million term loan component (the "Term Loan"), both of which mature in June 2003. Availability under the Revolver will be reduced by $15.6 million on December 31, 2001 and at the end of each quarter thereafter until March 31, 2003. The Term Loan will be repaid in increments of $0.25 million per quarter which began on September 30, 1999 and will continue through March 31, 2003. The interest rate on the New Bank Credit Facility is based upon either the agent bank's quoted base rate or the Eurodollar rate, plus an applicable margin that is determined by the level of a predefined financial leverage ratio. In addition, the Company incurs a commitment fee on the unused portion of the Revolver which ranges from 0.375% to 0.50% per annum. The New Bank Credit Facility is secured by substantially all of the real and personal property of the Company and its subsidiaries, including ten casino properties. The obligations of the Company under the New Bank Credit Facility are guaranteed by the significant subsidiaries of the Company. The New 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 secured 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 New Bank Credit Facility, (vi) imposing limits on the maximum permitted maintenance capital expenditures during each year of the term of the New Bank Credit Facility, and (vii) imposing restrictions on investments, dividends and certain other payments. Management believes the Company and its subsidiaries are in compliance with the New Bank Credit Facility covenants. The Company's $200 million principal amount of Senior Notes (the "9.25% Notes") and $250 million principal amount of Senior Subordinated Notes (the "9.50% Notes") contain limitations on, among other things, (a) the ability of the Company and its Restricted Subsidiaries (as defined in the Indenture Agreements) to incur additional indebtedness, (b) the payment of dividends and other distributions with respect to the capital stock of the Company and its Restricted Subsidiaries and the purchase, redemption or retirement of capital stock of the Company and its Restricted Subsidiaries, (c) the making of certain investments, (d) asset sales, (e) the incurrence of liens, (f) transactions with affiliates, (g) payment restrictions affecting restricted subsidiaries and (h) certain consolidations, mergers and transfers of assets. Management believes the Company and its subsidiaries are in compliance with the covenants related to the 9.25% and 9.50% Notes at September 30, 1999. 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. -23-
24 EXPANSION AND OTHER PROJECTS The Company, as part of its ongoing strategic planning process, is currently establishing its priorities for the future. In Nevada, the Company is exploring development opportunities in the Las Vegas locals market. In addition, the Company has recently initiated an $80 million expansion and renovation project at Sam's Town Las Vegas. The project includes, among other things, an 18 screen state-of-the-art movie theatre, additional casino space for 500 slot machines, an 11,200 square foot multi-purpose events center, a new 550 seat buffet, and a reconfigured and remodeled porte cochere and valet parking area to improve access to the property. As of September 30, 1999, the Company has incurred $11.0 million in costs associated with the Sam's Town Las Vegas expansion and renovation. The renovation portion of the project is expected to continue until the spring of 2000 and the expansion is expected to be completed by December 31, 2000. The Company has postponed plans to develop a new property on the Stardust's 61-acre site until the impact of the opening of several new resorts on the Las Vegas Strip has been determined. Instead, the Company has initiated a $25 million renovation of the Stardust which includes guest rooms, public space and exterior enhancements intended to make the property more competitive with other Strip resorts. In connection with the renovation project, the Stardust removed from service, in April 1999, all of its approximately 550 motor inn rooms. The Company is evaluating the impact of the motor inn closure on the Stardust's operations. Based upon the results of the evaluation, the Company will either refurbish or demolish the Stardust motor inn rooms. As of September 30, 1999, the Company had incurred $17.3 million in costs associated with the Stardust renovation, $15.8 million of which was incurred during the nine month period ended September 30, 1999. This project is expected to be substantially complete by the end of 1999. The Company, through a wholly-owned subsidiary, is a party to a Joint Venture Agreement (the "Agreement") with Mirage Resorts, Incorporated, through a wholly-owned subsidiary ("Mirage"), to jointly develop and own The Borgata, a casino hotel entertainment facility in Atlantic City, New Jersey. The Agreement contemplates a hotel of at least 1,200 rooms and a casino and related amenities adjacent and connected to Mirage's planned wholly-owned resort. The Agreement provides for each party to make an equity contribution of $150 million. The Company will contribute $90 million when Mirage contributes the land to the venture, which is expected in the middle of 2000. The Agreement further provides for the venture to arrange $450 million in non-recourse financing for the project. There can be no assurances that The Borgata can be designed or developed for $750 million. Funding of the Company's joint venture capital contributions is expected to be derived from cash flow from operations, availability under the Company's New Bank Credit Facility and additional debt offerings. The Borgata will be subject to the many risks inherent in the establishment of a new business enterprise, including potential unanticipated design, construction, regulatory, environmental and operating problems, increased project costs, timing delays, lack of adequate financing and the significant risks commonly associated with implementing a marketing strategy in a new market. Once construction begins, if The Borgata does not become operational within the time frame and budget currently contemplated or does not compete successfully in its new market, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has begun work on the planning stages of this development which is expected to open in 2002. As of September 30, 1999, the Company has contributed or advanced funds of $5.3 million to The Borgata, $4.2 million of which was contributed or advanced during the nine month period ended September 30, 1999. On November 10, 1999, the Company acquired the Blue Chip Casino, a riverboat casino in Michigan City, Indiana for approximately $274 million in cash, subject to certain adjustments. Included as part of the acquisition is a hotel and parking facility, currently under construction and attached to the existing casino complex. The Company funded the acquisition from borrowings under the New Bank Credit Facility. -24-
25 The Company began a Customer Information System ("CIS") project that will standardize the Company's customer tracking systems. The purpose of the CIS project is to link all points of customer contact at a particular property to enable the Company to better monitor customer activity in order to enhance and direct marketing efforts. The Company expects to spend $14 million in 1999 on the CIS project. For the nine month period ended September 30, 1999, the Company had incurred $4.8 million in costs associated with the CIS project, substantially all of which was capitalized. The Company has never undertaken a CIS project of this magnitude and may experience difficulties in the integration and implementation of this project. In addition, given the inherent difficulties of a project of this magnitude and the resources required, the timing and costs involved could differ materially from those anticipated by the Company. There can be no assurance that the CIS project will be completed successfully, on schedule, or within budget. Substantial funds are required for The Borgata, as well as the other projects discussed above and would also be required for other future expansion projects. There are no assurances that any of the above mentioned projects will go forward on a timely basis, if at all, 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 New 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 New 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. TERMINATION OF MANAGEMENT CONTRACT On October 20, 1999, the Company signed an agreement with the Mississippi Band of Choctaw Indians (the "Tribe") to terminate the Company's management of the Silver Star Resort and Casino in Philadelphia, Mississippi. Under the agreement, the Company will continue to manage Silver Star under the current terms of the management contract until January 31, 2000, at which time the Tribe will make a one-time payment of $72 million to the Company. This agreement with the Tribe terminates the Company's original management contract 17 months prior to the contract's scheduled expiration date. The Company plans to use the net proceeds of the termination agreement to reduce its outstanding indebtedness under the New Bank Credit Facility. YEAR 2000 PROJECT The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is currently engaged in a five-phase process of evaluating and resolving the problems that might be associated with its internal operating systems and the Year 2000 issue. The five phases are as follows: 1. Evaluation and development of remediation plans for traditional information technology ("IT") systems; 2. Evaluation and development of remediation plans for non-IT systems; 3. Implementation and testing of remediation plans; 4. Evaluation of vendor compliance with Year 2000 issues; and 5. Preparation of contingency plans. The first phase of the process is the evaluation and development of remediation plans for IT systems which was completed in the fourth quarter of 1998. In this phase, the Company evaluated which IT systems are Year 2000 compliant and made plans to bring identified non-compliant systems into compliance. -25-
26 The second phase of the process is the evaluation and development of remediation plans for non-IT systems which was completed in October 1999. In this phase, the Company evaluated which non-IT systems are Year 2000 compliant and made plans to bring identified non-compliant systems into compliance. The Company did not discover Year 2000 issues in the course of its evaluation processes in phases one or two. However, issues may not have been detected that could have a material adverse effect on the business, financial condition and results of operations of the Company. Phase three of the process involves the implementation of remediation plans for IT and non-IT systems that were identified in phases one and two as non-compliant. This process was substantially complete by the end of the third quarter of 1999 and involved either the replacement of the Company's existing systems with systems that are Year 2000 compliant or the remedial review and replacement of the software code with code that does not use the two digit year code. As part of this phase, the Company intends to perform date sensitive testing including testing on systems that vendors have certified to be Year 2000 compliant, to ensure that the modifications developed adequately resolve the Year 2000 issue. While the Company believes the testing program should provide additional evidence of its ability to operate in the Year 2000, the Company may discover Year 2000 issues in the course of its testing process, or issues may not be detected, that could have a material adverse effect on the business, financial condition and results of operations of the Company. Phase four involves evaluating Year 2000 compliance for those vendors who provide the Company with goods and services critical to the servicing of our guests, mainly in the non-gaming portions of our business. No individual vendor supplies the Company with a significant portion of the goods or services used in the non-gaming operations. This process was substantially completed in October 1999 and the Company did not discover Year 2000 issues in the course of evaluation of its vendors. However, issues may not have been detected that could have a material adverse effect on the business, financial condition and results of operations of the Company. The final phase of the process, expected to be completed during the fourth quarter of 1999, will involve the development of a contingency plan in the event any non-compliant critical systems remain by January 1, 2000. As part of this phase, the Company will attempt to quantify the impact, if any, of the failure to complete any necessary corrective action. The Company currently believes that the majority of the equipment and processes used by the Company have adequate manual backup procedures that would allow the Company to continue to operate a significant portion of the business in the event the conversion project is not completed on schedule (or the systems of other companies on which the Company may rely are not timely converted). However, in most of the Central Region gaming jurisdictions, electronic monitoring of operations is required. Waivers for manual processes may be obtained from these gaming jurisdictions; however, there can be no assurance that a material portion of the gaming business at those properties would not be affected until the time at which a waiver is granted or if this waiver will be granted at all. If the Company is able to obtain timely waivers for the Central Region properties, the remaining primary risks associated with the Year 2000 may be an effect on the timing of the reporting of certain operating results to management and may include an adverse effect on business volumes if the Year 2000 problems could not be timely corrected. Although the Company cannot currently estimate the magnitude of such impact, if systems material to the Company's operations have not been made Year 2000 compliant upon completion of this phase, the Year 2000 issue could have a material adverse impact on the Company's business, financial condition and results of operation. The Company currently estimates approximately $8 million in costs directly associated with the Year 2000 project that is expected to be funded from cash flow from operations and availability under the Company's New Bank Credit Facility. This current estimate includes approximately $3 million in operating expenses related to the remediation efforts, including training. At September 30, 1999, the Company had incurred approximately $7.5 million in costs directly related to the Year 2000 project, $5.5 million of which were capitalized as they related to replacement of systems that were not Year 2000 compliant. -26-
27 Given the inherent risks for a project of this magnitude and the resources required, the timing and costs involved could differ materially from those anticipated by the Company. There can be no assurance that the Year 2000 project will be completed on schedule or within budget. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 1 to Notes to Condensed Consolidated Financial Statements for a complete discussion of recently issued accounting standards and their expected impact on the Company's consolidated financial statements. PRIVATE SECURITIES LITIGATION REFORM ACT Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward looking, such as statements relating to the Company's Year 2000 project, plans for future expansion and other business development activities as well as capital spending, financing sources, anticipated timing of completion of projects under development, and the effects of regulation (including gaming and tax regulation) and competition. These statements may be identified by the utilization of words such as "believes", "expects", "anticipates", "intends", "plans" and similar expressions. Forward looking statements involve important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, actual results may differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those related to construction, expansion and development activities, economic conditions, changes in tax laws, changes in laws or regulations affecting gaming licenses, changes in competition, and factors affecting leverage and debt service including sensitivity to fluctuation in interest rates, risks related to the Year 2000 project and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Any forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates. To reduce such risks, the Company selectively uses financial instruments for its floating rate debt. On December 31, 1997, the Company entered into an interest rate swap agreement for a notional amount of $100 million. The agreement calls for the Company to swap its variable LIBOR rate (5.51% at September 30, 1999) for a fixed LIBOR rate of 5.54%. The variable LIBOR rate readjusts each quarter and the agreement is cancelable should the LIBOR rate exceed 5.99%. The swap agreement terminates in December 2000. The fair value of the swap liability at September 30, 1999 is less than $0.1 million based on the present value of future cash outflows expected from the Company based on the LIBOR rate at September 30, 1999. -27-
28 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.31 Termination and Transition Agreement among the Company and the Mississippi Band of Choctaw Indians, dated as of October 20, 1999. 27. Financial Data Schedule (b) Reports on Form 8-K. (i) The Company filed a current report on Form 8-K dated July 13, 1999 related to a definitive agreement to acquire 100% of the equity interests in Blue Chip Casino, LLC. - ----------------- -28-
29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOYD GAMING CORPORATION (Registrant) Date: November 12, 1999 By /s/Ellis Landau ----------------------------- Ellis Landau, Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer) -29-
30 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION --------- ----------- 10.31 Termination and Transition Agreement among the Company and the Mississippi Band of Choctaw Indians, dated as of October 20, 1999. 27. Financial Data Schedule