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, 2001 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 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, 2001: Class Outstanding - ----------------------------- ----------- Common stock, $.01 par value 62,256,594
BOYD GAMING CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> Page No. -------- <S> <C> <C> Item 1. Unaudited Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2001 and 2000 4 Condensed Consolidated Statement of Changes in Stockholders' Equity for the nine month period ended September 30, 2001 5 Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 3. Quantitative and Qualitative Disclosure about Market Risk 33 PART II. OTHER INFORMATION Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 Signature Page 36 </TABLE> 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> ASSETS SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ <S> <C> <C> Current assets Cash and cash equivalents ........................... $ 82,122 $ 88,059 Accounts receivable, net ............................ 12,086 14,260 Inventories ......................................... 4,930 6,200 Prepaid expenses and other .......................... 12,909 11,837 Income taxes receivable ............................. 2,655 66 Deferred income taxes ............................... 5,593 8,149 ----------- ---------- Total current assets ........................ 120,295 128,571 Property and equipment, net ............................ 966,961 959,966 Investments in unconsolidated subsidiaries ............. 124,487 105,560 Other assets and deferred charges, net ................. 43,457 38,213 Intangible assets, net ................................. 436,109 345,304 ----------- ---------- Total assets ................................ $ 1,691,309 $1,577,614 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt ................ $ 2,447 $ 2,485 Account payables .................................... 31,322 38,540 Construction payables ............................... 2,288 9,816 Accrued liabilities Payroll and related ............................. 38,008 36,115 Interest and other .............................. 78,709 70,061 ----------- ---------- Total current liabilities ................... 152,774 157,017 Long-term debt, net of current maturities .............. 1,111,375 1,016,813 Deferred income taxes and other liabilities ............ 81,330 74,006 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; 62,256,594 and 62,234,954 shares outstanding ....................................... 623 622 Additional paid-in capital ........................... 142,130 142,020 Retained earnings .................................... 205,715 187,136 Accumulated other comprehensive losses ............... (2,638) -- ----------- ---------- Total stockholders' equity .................. 345,830 329,778 ----------- ---------- Total liabilities and stockholders' equity .. $ 1,691,309 $1,577,614 =========== ========== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3
BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues Gaming .......................................... $ 228,021 $ 218,985 $ 690,486 $ 660,103 Food and beverage ............................... 38,621 39,260 120,448 118,991 Room ............................................ 19,135 19,217 58,544 56,917 Other ........................................... 18,451 18,358 58,445 54,429 Management fee .................................. -- -- -- 3,815 Termination fee, net ............................ -- -- -- 70,988 --------- --------- --------- --------- Gross revenues ..................................... 304,228 295,820 927,923 965,243 Less promotional allowances ........................ 30,813 31,460 92,806 88,623 --------- --------- --------- --------- Net revenues ............................ 273,415 264,360 835,117 876,620 --------- --------- --------- --------- Costs and expenses Gaming .......................................... 109,083 107,083 325,105 313,415 Food and beverage ............................... 25,298 25,549 80,401 76,427 Room ............................................ 5,801 5,301 17,416 16,855 Other ........................................... 18,238 18,080 58,685 53,090 Selling, general and administrative ............. 42,600 42,854 130,138 126,891 Maintenance and utilities ....................... 13,944 12,452 40,948 36,258 Depreciation .................................... 23,005 20,237 66,724 59,021 Amortization of intangible license rights ....... 2,479 2,451 7,386 7,351 Corporate expense ............................... 4,704 5,440 15,921 17,547 Preopening expense .............................. 2,365 811 2,777 3,143 --------- --------- --------- --------- Total ................................... 247,517 240,258 745,501 709,998 --------- --------- --------- --------- Operating income ................................... 25,898 24,102 89,616 166,622 --------- --------- --------- --------- Other income (expense) Interest income ................................. 7 1,345 9 1,807 Interest expense, net of amounts capitalized .... (18,992) (19,432) (58,399) (58,800) --------- --------- --------- --------- Total ................................... (18,985) (18,087) (58,390) (56,993) --------- --------- --------- --------- Income before provision for income taxes ........... 6,913 6,015 31,226 109,629 Provision for income taxes ......................... 2,800 2,315 12,647 42,207 --------- --------- --------- --------- Net income ......................................... $ 4,113 $ 3,700 $ 18,579 $ 67,422 ========= ========= ========= ========= Basic and diluted net income per common share ...... $ 0.07 $ 0.06 $ 0.30 $ 1.08 ========= ========= ========= ========= Average basic shares outstanding ................... 62,249 62,235 62,240 62,231 Average diluted shares outstanding ................. 62,272 62,272 62,256 62,293 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4
BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL --------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS LOSSES EQUITY ---------- ------ --------- -------- ------------- ------------- <S> <C> <C> <C> <C> <C> <C> Balances, January 1, 2001 .... 62,234,954 $622 $142,020 $187,136 $ -- $329,778 Net income ................... -- -- -- 18,579 -- 18,579 Derivative instruments market adjustment .......... -- -- -- -- (2,638) (2,638) Stock options exercised ...... 21,640 1 110 -- -- 111 ---------- ---- -------- -------- ------- -------- BALANCE, SEPTEMBER 30, 2001 .. 62,256,594 $623 $142,130 $205,715 $(2,638) $345,830 ========== ==== ======== ======== ======= ======== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5
BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) - ------------------------------------------------------------------------------- <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 2001 2000 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income ...................................................... $ 18,579 $ 67,422 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................. 74,110 66,372 Deferred income taxes ...................................... 11,060 24,689 Preopening expense ......................................... 2,777 3,143 Equity loss in unconsolidated subsidiaries ................. 475 352 Changes in assets and liabilities: Accounts receivable, net ................................. 2,211 3,248 Inventories .............................................. 1,306 1,574 Prepaid expenses and other ............................... (1,072) 2,528 Other assets ............................................. (2,277) 1,651 Other current liabilities ................................ 2,661 10,085 Other liabilities ........................................ 369 353 Income taxes receivable .................................. (2,589) 1,108 Income taxes payable ..................................... -- 2,083 --------- --------- Net cash provided by operating activities ....................... 107,610 184,608 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ........................ (53,557) (91,964) Net cash paid for acquisition of Delta Downs ................. (60,000) -- Investments in and advances to unconsolidated subsidiaries ... (21,452) (8,039) Preopening expense ........................................... (2,777) (3,143) --------- --------- Net cash used in investing activities ........................... (137,786) (103,146) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt ................................... (376) (569) Net payments under credit agreements ......................... (170,100) (89,150) Proceeds from issuance of debt ............................... 194,604 -- Proceeds from issuance of common stock ....................... 111 34 --------- --------- Net cash provided by (used in) financing activities ............. 24,239 (89,685) --------- --------- Net decrease in cash and cash equivalents ....................... (5,937) (8,223) Cash and cash equivalents, beginning of period .................. 88,059 86,192 --------- --------- Cash and cash equivalents, end of period ........................ $ 82,122 $ 77,969 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized ........... $ 56,018 $ 55,415 Cash paid for income taxes, net of refunds ................... 4,176 14,327 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Property additions acquired on construction and trade payables which were accrued, but not yet paid .............. $ 2,806 $ 26,039 Debt issuance costs .......................................... 5,396 -- Seller note issued for Delta Downs acquisition ............... 65,000 -- ========= ========= </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6
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. 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 joint venture that is developing The Borgata in Atlantic City, New Jersey, which is expected to open in the summer of 2003. Investments in 50% or less owned subsidiaries over which we have the ability to exercise significant influence, including joint ventures such as The 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 nine month periods ended September 30, 2001 and 2000 and cash flows for the nine month periods ended September 30, 2001 and 2000. 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, 2000. The operating results for the three and nine month periods ended September 30, 2001 and 2000 and cash flows for the nine month periods ended September 30, 2001 and 2000 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 requires us to make estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes. Our significant estimates include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, the estimated valuation allowance for deferred tax assets, and estimated cash flows in assessing the recoverability of long-lived assets. Actual results could differ from those estimates. 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 our 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, 2001 was $5.5 million and $12.0 million, respectively. Capitalized interest during the three and nine month periods ended September 30, 2000 was $1.9 million and $4.1 million, respectively. 7
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- Preopening Expenses We expense certain costs of start-up activities as incurred. During the three and nine month periods ended September 30, 2001, we expensed $2.4 million and $2.8 million, respectively, in preopening costs that related to our share of preopening expense in The Borgata, the Company's Atlantic City joint venture as well as preopening expense at Delta Downs where we are in the process of expanding the property and equipping it for a new casino. During the three and nine month periods ended September 30, 2000, we expensed $0.8 million and $3.1 million, respectively, in preopening costs, $1.5 million of which related to our unsuccessful efforts to assist in the development and operation of a Rhode Island Indian casino with the Narragansett Indian Tribe. The remainder of the preopening expenses incurred during the three and nine month periods ended September 30, 2000 related primarily to our share of preopening expense in The Borgata. Derivative Instruments The Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities which requires all derivative instruments to be recognized on the balance sheet at fair value. Derivatives that are not designated as cash flow hedges must be adjusted to fair value through income. If the derivative is 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. We do not currently have any derivative items. However, The Borgata, our unconsolidated subsidiary, has entered into derivative financial instruments 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. These derivative financial instruments were designated as cash flow hedges on May 1, 2001. During the three month period ended September 30, 2001, we recorded other comprehensive losses of $3.1 million, net of $1.8 million in tax benefits, representing our portion of the decrease in fair value of the derivative financial instruments. During the nine month period ended September 30, 2001, we recorded $0.5 million of preopening income on the accompanying condensed consolidated statement of operations and other comprehensive losses totaling $2.6 million, net of $1.5 million in tax benefits, representing our portion of the decrease in fair value of the derivative financial instruments. Recently Issued Accounting Standards In January 2001, the Emerging Issues Task Force of the FASB reached a consensus in EITF Issue No. 00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future. EITF Issue No. 00-22 requires that the redemption of "Points" for cash be recognized as a reduction of revenues. We complied with the requirements of EITF Issue No. 00-22 on the accompanying condensed consolidated statement of operations for the three and nine month periods ended September 30, 2001. Amounts in the condensed consolidated statement of operations for the three and nine month periods ended September 30, 2000 were also reclassified, from that previously reported, to conform with this consensus. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These statements require that the purchase method of accounting be used for all 8
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- business combinations initiated after June 30, 2001 and prohibit the pooling-of-interest method and change the accounting for goodwill from an amortization method to an impairment-only approach. We are required to adopt the new method of accounting for goodwill and other intangible assets on January 1, 2002. The new method of accounting for goodwill and other intangible assets applies to all existing and future unamortized balances at the time of adoption. As part of the adoption of these standards, we must reassess the useful lives of our goodwill and intangible assets and perform impairment tests. We are currently in the process of performing these steps but have not yet finalized the impact of this standard. Based upon our initial reviews, at the time of initial adoption of this standard, we are expecting to recognize a writedown of a portion of our goodwill and other intangible assets which could have a material effect on our results of operations. Also based upon our initial reviews of this standard, we are expecting to cease the amortization of our goodwill and intangible license rights beginning January 1, 2002 as we have determined that these assets have an indefinite life. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The requirements of this statement are effective for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material effect on our financial position or results of operations. Reclassifications Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the September 30, 2001 presentation. These reclassifications had no effect on our net income. NOTE 2. NET INCOME PER COMMON 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 effects of common share equivalents. Diluted net income per share during the three and nine month periods ended September 30, 2001 and 2000 is determined considering the dilutive effects of outstanding stock options. The effect of stock options outstanding to purchase approximately 4.1 million and 5.2 million shares, respectively, were not included in the diluted calculation during the three and nine month periods ended September 30, 2001, and 5.3 million and 5.4 million shares, respectively, were not included in the diluted calculation during the three and nine month periods ended September 30, 2000, since the exercise price of such options was greater than the average price of our common shares during each of the periods. NOTE 3. ACQUISITION On May 31, 2001, we acquired substantially all of the assets of the Delta Downs Racetrack near Vinton, Louisiana, together with an off-track betting facility in Mound, Louisiana, for a purchase price of $125 million. The purchase price is subject to adjustment based on the number of slot machines we receive approval to operate and other performance based criteria. The purchase price will be reduced if we receive approval to operate fewer than 1,700 slot machines, and at its lowest, could be $115 million if we receive approval to operate fewer than 1,600 slot machines. The purchase price could be increased by up to $27 million if we achieve certain defined income targets over a period of two and one-half years after the start of slot operations at the facility, or if there is regulatory authorization to increase the number of slot machines at Louisiana racetracks to a predefined target and certain other conditions are met within a period of five years from the closing of the transaction. On October 30, 2001, we received unanimous approval from the Louisiana Gaming Control Board for our gaming license to operate slot machines at Delta Downs. However, we are still waiting for the approval of the final number of slot machines to be placed into operations at the facility. We can provide no assurance that we will receive approval to operate the number of slot machines for which we applied. For more information see "Part II, Item 5 -- Other Information." We plan to begin casino operations in December 2001 after we complete necessary improvements to the facility, including the installation of slot machines and related equipment, as well as the hiring and training of additional staff. These items are expected to cost approximately $35 million. We funded the acquisition through borrowings under our bank credit facility and the issuance of a $65 million note payable to the sellers. The seller note was 9
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- prepaid in October 2001 with additional borrowings from our bank credit facility. See Note 4. We plan to fund the improvements to the facility through our bank credit facility. NOTE 4. DEBT Bank Credit Facility. On May 21, 2001, we amended our bank credit facility, primarily to allow for the acquisition of the Delta Downs Racetrack, the completion of necessary improvements to the facility, and the financing of the acquisition and improvements. Long-Term Debt. On July 26, 2001, we issued, through a private placement, $200 million principal amount of 9.25% Senior Notes due August 2009. The notes require semi-annual interest payments in February and August each year through August 2009, at which time the entire principal balance becomes due and payable. The notes contain certain restrictive covenants regarding, among other things, incurrence of debt, sales of assets, mergers and consolidations and limitations on restricted payments (as defined in the indenture governing the notes). At any time prior to August 2004, we may redeem up to 35% of the aggregate principal amount of the outstanding notes with the net proceeds from equity offerings at a redemption price of 109.25% of the principal amount, plus accrued and unpaid interest, subject to certain conditions. On or after August 2005, we may redeem all or a portion of the notes at redemption prices ranging from 104.625% in 2005 to 100% in 2007 and thereafter. We reduced outstanding indebtedness under our bank credit facility with the net proceeds from this offering of which $69 million represented a permanent reduction in our bank credit facility availability. We are obligated to register and have declared effective the notes or exchange them for identical notes that have been registered with the Securities and Exchange Commission within certain predefined time parameters. If we do not consummate an effective registration of the notes within the required time frame, we must pay certain liquidated damages. Seller Note and Subsequent Event. In connection with the purchase of substantially all of the assets of the Delta Downs Racetrack, we issued a $65 million promissory note to the sellers dated May 31, 2001. We prepaid this note in full in October 2001 with additional borrowings from our bank credit facility. For more information, see "Indebtedness - Bank Credit Facility." NOTE 5. 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 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; Delta Downs Racetrack near Vinton, Louisiana (acquired May 31, 2001); and management fee income from Silver Star Resort and Casino located near Philadelphia, Mississippi (through January 31, 2000). 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. 10
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- -------- --------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Gaming Revenues Stardust ................................ $ 23,160 $ 23,632 $ 72,622 $ 73,500 Sam's Town Las Vegas .................... 27,538 26,614 86,354 84,080 Eldorado and Jokers Wild ................ 7,622 7,301 23,025 22,156 Downtown Properties ..................... 32,921 31,564 102,447 99,252 Sam's Town Tunica ....................... 24,411 23,308 74,650 65,841 Par-A-Dice .............................. 35,151 33,229 103,964 97,760 Treasure Chest .......................... 27,218 25,387 86,056 78,358 Blue Chip ............................... 48,370 47,950 139,138 139,156 Delta Downs ............................. 1,630 -- 2,230 -- --------- -------- --------- -------- Total gaming revenues ........... $ 228,021 $218,985 $ 690,486 $660,103 ========= ======== ========= ======== EBITDA(1) Stardust ................................ $ 722 $ 3,021 $ 9,339 $ 11,822 Sam's Town Las Vegas .................... 5,003 2,664 16,380 16,744 Eldorado and Jokers Wild ................ 1,233 1,205 4,846 4,593 Downtown Properties ..................... 8,883 9,422 30,559 31,020 Sam's Town Tunica ....................... 3,870 631 6,884 4,636 Par-A-Dice .............................. 13,304 12,343 39,762 36,657 Treasure Chest .......................... 4,651 3,370 15,013 13,299 Silver Star ............................. -- -- -- 74,803 Blue Chip ............................... 21,004 20,385 59,848 60,110 Delta Downs ............................. (219) -- (207) -- --------- -------- --------- -------- Property EBITDA .................. 58,451 53,041 182,424 253,684 --------- -------- --------- -------- Other Costs and Expenses Corporate expense ....................... 4,704 5,440 15,921 17,547 Depreciation and amortization ........... 25,484 22,688 74,110 66,372 Preopening expense ...................... 2,365 811 2,777 3,143 Other expense, net ...................... 18,985 18,087 58,390 56,993 --------- -------- --------- -------- Total other costs and expenses .. 51,538 47,026 151,198 144,055 --------- -------- --------- -------- Income before provision for income taxes .. 6,913 6,015 31,226 109,629 Provision for income taxes ................ 2,800 2,315 12,647 42,207 --------- -------- --------- -------- Net income ................................ $ 4,113 $ 3,700 $ 18,579 $ 67,422 ========= ======== ========= ======== </TABLE> (1) EBITDA is earnings before interest, taxes, depreciation, amortization and preopening expense. We believe that EBITDA is a useful financial measurement for assessing the operating performances of our properties. EBITDA does not represent net income or cash flows from operating, investing or financing activities as defined by accounting principles generally accepted in the United States of America. It should also be noted that not all gaming companies that report EBITDA information calculate EBITDA in the same manner as we do. 11
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- NOTE 6. GUARANTOR INFORMATION FOR 9.25% SENIOR NOTES DUE IN 2003 Our 9.25% notes due in 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 September 30, 2001 and December 31, 2000 and for the three and nine month periods ended September 30, 2001 and 2000. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED ---------- ---------- ---------- ------------ ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> ASSETS Current assets ............................... $ 4,922 $ 82,951 $ 33,651 $ (1,229)(1) $ 120,295 Property and equipment, net .................. 56,765 740,814 169,382 -- 966,961 Investments in unconsolidated subsidiaries, net ........................ -- 1,508 122,979 -- 124,487 Other assets and deferred charges, net ....... 1,322,119 (385,772) 529,296 (1,422,186)(1)(2) 43,457 Intangible assets, net ....................... -- 110,405 325,704 -- 436,109 ---------- --------- ---------- ----------- ---------- Total assets ............................. $1,383,806 $ 549,906 $1,181,012 $(1,423,415) $1,691,309 ========== ========= ========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities .......................... $ 42,377 $ 71,116 $ 40,772 $ (1,491)(1) $ 152,774 Long-term debt, net of current maturities .... 989,050 57,325 65,000 -- 1,111,375 Deferred income taxes and other liabilities .. 3,911 69,620 7,799 -- 81,330 Stockholders' equity ......................... 348,468 351,845 1,067,441 (1,421,924)(2) 345,830 ---------- --------- ---------- ----------- ---------- Total liabilities and stockholders' equity .............................. $1,383,806 $ 549,906 $1,181,012 $(1,423,415) $1,691,309 ========== ========= ========== =========== ========== </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 12
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF DECEMBER 31, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED ---------- --------- -------- ----------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> ASSETS Current assets ............................... $ 1,354 $ 96,701 $ 30,285 $ 231(1) $ 128,571 Property and equipment, net .................. 44,493 766,603 148,870 -- 959,966 Investments in unconsolidated subsidiaries, net ........................ -- 1,700 103,860 -- 105,560 Other assets and deferred charges, net ....... 1,285,373 (459,081) 462,906 (1,250,985)(1)(2) 38,213 Intangible assets, net ....................... -- 112,849 232,455 -- 345,304 ---------- --------- -------- ----------- ---------- Total assets ............................. $1,331,220 $ 518,772 $978,376 $(1,250,754) $1,577,614 ========== ========= ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities .......................... $ 30,304 $ 86,993 $ 39,516 $ 204(1) $ 157,017 Long-term debt, net of current maturities .... 959,150 57,663 -- -- 1,016,813 Deferred income taxes and other liabilities .. 11,988 55,321 6,697 -- 74,006 Stockholders' equity ......................... 329,778 318,795 932,163 (1,250,958)(2) 329,778 ---------- --------- -------- ----------- ---------- Total liabilities and stockholders' equity .............................. $1,331,220 $ 518,772 $978,376 $(1,250,754) $1,577,614 ========== ========= ======== =========== ========== </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 13
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- --------- ---------- ------------ ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $ 150,803 $ 77,218 $ -- $ 228,021 Food and beverage .................... -- 33,972 4,649 -- 38,621 Room ................................. -- 18,168 967 -- 19,135 Other ................................ 3,356 6,805 12,134 (3,844)(1) 18,451 Management fee and equity income ..... 23,662 776 14,219 (38,657)(1) -- -------- --------- --------- -------- --------- Gross revenues ......................... 27,018 210,524 109,187 (42,501) 304,228 Less promotional allowances ............ -- 25,581 5,232 -- 30,813 -------- --------- --------- -------- --------- Net revenues ................. 27,018 184,943 103,955 (42,501) 273,415 -------- --------- --------- -------- --------- Costs and expenses Gaming ............................... -- 79,106 29,977 -- 109,083 Food and beverage .................... -- 20,646 4,652 -- 25,298 Room ................................. -- 5,409 392 -- 5,801 Other ................................ -- 10,025 17,542 (9,329)(1) 18,238 Selling, general and administrative .. -- 28,825 13,775 -- 42,600 Maintenance and utilities ............ -- 10,815 3,129 -- 13,944 Depreciation and amortization ........ 1,706 17,705 6,073 -- 25,484 Corporate expense .................... 8,246 22 280 (3,844)(1) 4,704 Preopening expense ................... -- -- 2,365 -- 2,365 -------- --------- --------- -------- --------- Total ........................ 9,952 172,553 78,185 (13,173) 247,517 -------- --------- --------- -------- --------- Operating income ....................... 17,066 12,390 25,770 (29,328) 25,898 Other expense, net ..................... (16,371) (1,272) (1,342) -- (18,985) -------- --------- --------- -------- --------- Income before income taxes ............. 695 11,118 24,428 (29,328) 6,913 Provision (benefit) for income taxes ... (3,418) 3,549 2,669 -- 2,800 -------- --------- --------- -------- --------- Net income ............................. $ 4,113 $ 7,569 $ 21,759 $(29,328) $ 4,113 ======== ========= ========= ======== ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 14
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- --------- ---------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $ 145,647 $ 73,338 $ -- $ 218,985 Food and beverage .................... -- 34,920 4,340 -- 39,260 Room ................................. -- 18,396 821 -- 19,217 Other ................................ 3,000 6,925 12,175 (3,742)(1) 18,358 Management fee and equity income ..... 24,080 491 17,800 (42,371)(1) -- -------- --------- -------- -------- --------- Gross revenues ......................... 27,080 206,379 108,474 (46,113) 295,820 Less promotional allowances ............ -- 27,679 3,781 -- 31,460 -------- --------- -------- -------- --------- Net revenues ................. 27,080 178,700 104,693 (46,113) 264,360 -------- --------- -------- -------- --------- Costs and expenses Gaming ............................... -- 79,387 27,696 -- 107,083 Food and beverage .................... -- 20,473 5,076 -- 25,549 Room ................................. -- 4,912 389 -- 5,301 Other ................................ -- 9,164 17,078 (8,162)(1) 18,080 Selling, general and administrative .. -- 28,167 14,687 -- 42,854 Maintenance and utilities ............ -- 9,503 2,949 -- 12,452 Depreciation and amortization ........ 716 16,400 5,572 -- 22,688 Corporate expense .................... 8,675 28 479 (3,742)(1) 5,440 Preopening expense ................... 32 173 606 -- 811 -------- --------- -------- -------- --------- Total ........................ 9,423 168,207 74,532 (11,904) 240,258 -------- --------- -------- -------- --------- Operating income ....................... 17,657 10,493 30,161 (34,209) 24,102 Other income (expense), net ............ (17,006) (1,246) 165 -- (18,087) -------- --------- -------- -------- --------- Income before income taxes ............. 651 9,247 30,326 (34,209) 6,015 Provision (benefit) for income taxes ... (3,049) 2,829 2,535 -- 2,315 -------- --------- -------- -------- --------- Net income ............................. $ 3,700 $ 6,418 $ 27,791 $(34,209) $ 3,700 ======== ========= ======== ======== ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 15
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED ------- ---------- ---------- ------------ ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $ 463,062 $ 227,424 $ -- $ 690,486 Food and beverage .................... -- 106,584 13,864 -- 120,448 Room ................................. -- 55,955 2,589 -- 58,544 Other ................................ 10,070 23,952 35,890 (11,467)(1) 58,445 Management fee and equity income ..... 86,486 2,600 48,978 (138,064)(1) -- ------- --------- --------- --------- --------- Gross revenues ......................... 96,556 652,153 328,745 (149,531) 927,923 Less promotional allowances ............ -- 77,068 15,738 -- 92,806 ------- --------- --------- --------- --------- Net revenues ................. 96,556 575,085 313,007 (149,531) 835,117 ------- --------- --------- --------- --------- Costs and expenses Gaming ............................... -- 239,294 85,811 -- 325,105 Food and beverage .................... -- 66,136 14,265 -- 80,401 Room ................................. -- 16,390 1,026 -- 17,416 Other ................................ -- 32,529 52,466 (26,310)(1) 58,685 Selling, general and administrative .. -- 88,932 41,206 -- 130,138 Maintenance and utilities ............ -- 31,142 9,806 -- 40,948 Depreciation and amortization ........ 3,065 53,549 17,496 -- 74,110 Corporate expense .................... 26,503 72 813 (11,467)(1) 15,921 Preopening expense ................... 73 -- 2,704 -- 2,777 -------- --------- --------- --------- --------- Total ........................ 29,641 528,044 225,593 (37,777) 745,501 -------- --------- --------- --------- --------- Operating income ....................... 66,915 47,041 87,414 (111,754) 89,616 Other expense, net ..................... (53,137) (3,824) (1,429) -- (58,390) -------- --------- --------- --------- --------- Income before income taxes ............. 13,778 43,217 85,985 (111,754) 31,226 Provision (benefit) for income taxes ... (4,801) 10,167 7,281 -- 12,647 -------- --------- --------- --------- --------- Net income ............................. $ 18,579 $ 33,050 $ 78,704 $(111,754) $ 18,579 ======== ========= ========= ========= ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 16
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- ---------- -------- ----------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $ 442,588 $217,515 $ -- $ 660,103 Food and beverage .................... -- 105,870 13,121 -- 118,991 Room ................................. -- 54,980 1,937 -- 56,917 Other ................................ 8,998 21,351 35,315 (11,235)(1) 54,429 Management fee and equity income ..... 159,510 6,089 55,412 (217,196)(1) 3,815 Termination fee, net ................. -- 70,988 -- -- 70,988 --------- --------- -------- --------- --------- Gross revenues ......................... 168,508 701,866 323,300 (228,431) 965,243 Less promotional allowances ............ -- 78,167 10,456 -- 88,623 --------- --------- -------- --------- --------- Net revenues ................. 168,508 623,699 312,844 (228,431) 876,620 --------- --------- -------- --------- --------- Costs and expenses Gaming ............................... -- 232,861 80,554 -- 313,415 Food and beverage .................... -- 61,661 14,766 -- 76,427 Room ................................. -- 15,886 969 -- 16,855 Other ................................ -- 78,717 50,526 (76,153)(1) 53,090 Selling, general and administrative .. -- 84,594 42,297 -- 126,891 Maintenance and utilities ............ -- 26,660 9,598 -- 36,258 Depreciation and amortization ........ 1,844 48,542 15,986 -- 66,372 Corporate expense .................... 27,303 121 1,358 (11,235)(1) 17,547 Preopening expense ................... 1,595 334 1,214 -- 3,143 --------- --------- -------- --------- --------- Total ........................ 30,742 549,376 217,268 (87,388) 709,998 --------- --------- -------- --------- --------- Operating income ....................... 137,766 74,323 95,576 (141,043) 166,622 Other income (expense), net ............ (53,640) (3,871) 518 -- (56,993) --------- --------- -------- --------- --------- Income before income taxes ............. 84,126 70,452 96,094 (141,043) 109,629 Provision for income taxes ............. 16,704 18,081 7,422 -- 42,207 --------- --------- -------- --------- --------- Net income ............................. $ 67,422 $ 52,371 $ 88,672 $(141,043) $ 67,422 ========= ========= ======== ========= ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 17
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- PARENT GUARANTORS GUARANTORS CONSOLIDATED --------- ---------- ---------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> Cash flows from operating activities ................... $ 50,597 $ 21,547 $ 35,466 $ 107,610 --------- -------- -------- --------- Cash flows from investing activities Acquisition of property and equipment ................. (15,317) (31,985) (6,255) (53,557) Net cash paid for acquisition of Delta Downs .......... -- -- (60,000) (60,000) Investments in and advances to unconsolidated subsidiaries ........................................ -- -- (21,452) (21,452) Investment in consolidated subsidiaries ............... (60,000) -- 60,000 -- Preopening expense .................................... (73) -- (2,704) (2,777) --------- -------- -------- --------- Net cash used in investing activities .................. (75,390) (31,985) (30,411) (137,786) --------- -------- -------- --------- Cash flows from financing activities Net payments under credit agreements ................. (170,100) -- -- (170,100) Proceeds from issuance of debt ....................... 194,604 -- -- 194,604 Receipt/(payment) of dividends ....................... -- 1,643 (1,643) -- Payments on long-term debt ........................... (28) (315) (33) (376) Proceeds from issuance of common stock ............... 111 -- -- 111 --------- -------- -------- --------- Net cash provided by (used in) financing activities .... 24,587 1,328 (1,676) 24,239 --------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents .. (206) (9,110) 3,379 (5,937) Cash and cash equivalents, beginning of period ......... 358 61,219 26,482 88,059 --------- -------- -------- --------- Cash and cash equivalents, end of period ............... $ 152 $ 52,109 $ 29,861 $ 82,122 ========= ======== ======== ========= </TABLE> 18
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- PARENT GUARANTORS GUARANTORS CONSOLIDATED -------- ---------- ---------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> Cash flows from operating activities .................. $ 82,463 $ 68,320 $ 33,825 $ 184,608 -------- -------- -------- --------- Cash flows from investing activities Acquisition of property and equipment ................ (6,202) (73,717) (12,045) (91,964) Investment in and advances to unconsolidated subsidiaries ....................................... -- -- (8,039) (8,039) Preopening expense ................................... (1,595) (334) (1,214) (3,143) -------- -------- -------- --------- Net cash used in investing activities ................. (7,797) (74,051) (21,298) (103,146) -------- -------- -------- --------- Cash flows from financing activities Net payments under credit agreements ................ (89,150) -- -- (89,150) Proceeds from issuance of common stock .............. 34 -- -- 34 Receipt/(payment) of dividends ...................... 4,729 1,824 (6,553) -- Receipt/(payments) on long-term debt ................ 9,725 (10,294) -- (569) -------- -------- -------- --------- Net cash used in financing activities ................. (74,662) (8,470) (6,553) (89,685) -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents .. 4 (14,201) 5,974 (8,223) Cash and cash equivalents, beginning of period ........ 138 62,755 23,299 86,192 -------- -------- -------- --------- Cash and cash equivalents, end of period .............. $ 142 $ 48,554 $ 29,273 $ 77,969 ======== ======== ======== ========= </TABLE> 19
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- NOTE 7. GUARANTOR INFORMATION FOR 9.25% SENIOR NOTES DUE IN 2009 On July 26, 2001, we issued, through a private placement, $200 million principal amount of 9.25% Senior Notes due in August 2009. These notes are guaranteed by substantially all of our wholly-owned existing significant subsidiaries. These guaranties are full, unconditional, and joint and several. We have significant subsidiaries that do not currently 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 September 30, 2001 and for the three and nine month periods ended September 30, 2001. Comparative financial information as of December 31, 2000 and for the three and nine month periods ended September 30, 2000 is not presented as we believe such information is not material to investors since there were no material non-guarantor subsidiaries in existence during the prior year. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED ---------- ----------- ---------- ------------ ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> ASSETS Current assets ............................... $ 4,922 $ 114,439 $ 1,774 $ (840)(1) $ 120,295 Property and equipment, net .................. 56,765 883,270 26,926 -- 966,961 Investments in unconsolidated subsidiaries, net ........................ -- 124,487 -- -- 124,487 Other assets and deferred charges, net ....... 1,322,119 (240,602) (5,920) (1,032,140)(1)(2) 43,457 Intangible assets, net ....................... -- 338,288 97,821 -- 436,109 ---------- ----------- --------- ----------- ---------- Total assets ............................. $1,383,806 $ 1,219,882 $ 120,601 $(1,032,980) $1,691,309 ========== =========== ========= =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities .......................... $ 42,377 $ 109,191 $ 2,012 $ (806)(1) $ 152,774 Long-term debt, net of current maturities .... 989,050 57,325 115,000 (50,000)(1) 1,111,375 Deferred income taxes and other liabilities .. 3,911 77,419 -- -- 81,330 Stockholders' equity ......................... 348,468 975,947 3,589 (982,174)(2) 345,830 ---------- ----------- --------- ----------- ---------- Total liabilities and stockholders' equity .............................. $1,383,806 $ 1,219,882 $ 120,601 $(1,032,980) $1,691,309 ========== =========== ========= =========== ========== </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 20
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- ---------- ---------- ------------ ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $226,391 $ 1,630 $ -- $ 228,021 Food and beverage .................... -- 38,500 121 -- 38,621 Room ................................. -- 19,135 -- -- 19,135 Other ................................ 3,356 18,928 11 (3,844)(1) 18,451 Management fee and equity income ..... 23,662 -- -- (23,662)(1) -- -------- -------- ------- -------- --------- Gross revenues ......................... 27,018 302,954 1,762 (27,506) 304,228 Less promotional allowances ............ -- 30,813 -- -- 30,813 -------- -------- ------- -------- --------- Net revenues ................. 27,018 272,141 1,762 (27,506) 273,415 -------- -------- ------- -------- --------- Costs and expenses Gaming ............................... -- 107,568 1,515 -- 109,083 Food and beverage .................... -- 25,156 142 -- 25,298 Room ................................. -- 5,801 -- -- 5,801 Other ................................ -- 27,070 31 (8,863)(1) 18,238 Selling, general and administrative .. -- 42,361 239 -- 42,600 Maintenance and utilities ............ -- 13,890 54 -- 13,944 Depreciation and amortization ........ 1,706 23,572 206 -- 25,484 Corporate expense .................... 8,246 302 -- (3,844)(1) 4,704 Preopening expense ................... -- 614 1,751 -- 2,365 -------- -------- ------- -------- --------- Total ........................ 9,952 246,334 3,938 (12,707) 247,517 -------- -------- ------- -------- --------- Operating income (loss) ................ 17,066 25,807 (2,176) (14,799) 25,898 Other income (expense), net ............ (16,371) 129 (2,743) -- (18,985) -------- -------- ------- -------- --------- Income (loss) before income taxes ...... 695 25,936 (4,919) (14,799) 6,913 Provision (benefit) for income taxes ... (3,418) 6,218 -- -- 2,800 -------- -------- ------- -------- --------- Net income (loss) ...................... $ 4,113 $ 19,718 $(4,919) $(14,799) $ 4,113 ======== ======== ======= ======== ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 21
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED -------- --------- ---------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................... $ -- $ 688,256 $ 2,230 $ -- $ 690,486 Food and beverage .................... -- 120,256 192 -- 120,448 Room ................................. -- 58,544 -- -- 58,544 Other ................................ 10,070 59,831 11 (11,467)(1) 58,445 Management fee and equity income ..... 86,486 -- -- (86,486)(1) -- -------- --------- ------- -------- --------- Gross revenues ......................... 96,556 926,887 2,433 (97,953) 927,923 Less promotional allowances ............ -- 92,803 3 -- 92,806 -------- --------- ------- -------- --------- Net revenues ................. 96,556 834,084 2,430 (97,953) 835,117 -------- --------- ------- -------- --------- Costs and expenses Gaming ............................... -- 323,269 1,836 -- 325,105 Food and beverage .................... -- 80,195 206 -- 80,401 Room ................................. -- 17,416 -- -- 17,416 Other ................................ -- 83,463 31 (24,809)(1) 58,685 Selling, general and administrative .. -- 129,683 455 -- 130,138 Maintenance and utilities ............ -- 40,839 109 -- 40,948 Depreciation and amortization ........ 3,065 70,775 270 -- 74,110 Corporate expense .................... 26,503 885 -- (11,467)(1) 15,921 Preopening expense ................... 73 304 2,400 -- 2,777 -------- --------- ------- -------- --------- Total ........................ 29,641 746,829 5,307 (36,276) 745,501 -------- --------- ------- -------- --------- Operating income (loss) ................ 66,915 87,255 (2,877) (61,677) 89,616 Other expense, net ..................... (53,137) (1,719) (3,534) -- (58,390) -------- --------- ------- -------- --------- Income (loss) before income taxes ...... 13,778 85,536 (6,411) (61,677) 31,226 Provision (benefit) for income taxes ... (4,801) 17,448 -- -- 12,647 -------- --------- ------- -------- --------- Net income (loss) ...................... $ 18,579 $ 68,088 $(6,411) $(61,677) $ 18,579 ======== ========= ======= ======== ========= </TABLE> - --------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 22
BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- ---------- ---------- ----------- ------------ (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Cash flows from operating activities ...... $ 50,597 $ 53,419 $ 3,594 $ -- $ 107,610 --------- -------- -------- ------- --------- Cash flows from investing activities Acquisition of property and equipment .... (15,317) (38,225) (15) -- (53,557) Net cash paid for acquisition of Delta Downs ....................... -- -- (60,000) -- (60,000) Investments in and advances to unconsolidated subsidiaries .......... -- (21,452) -- -- (21,452) Investment in consolidated subsidiaries .. (60,000) 50,000 10,000 -- -- Loan to consolidated subsidiary .......... -- (50,000) -- 50,000(1) -- Preopening expense ....................... (73) (304) (2,400) -- (2,777) --------- -------- -------- ------- --------- Net cash used in investing activities ..... (75,390) (59,981) (52,415) 50,000 (137,786) --------- -------- -------- ------- --------- Cash flows from financing activities Net payments under credit agreements .... (170,100) -- -- -- (170,100) Proceeds from issuance of debt .......... 194,604 -- -- -- 194,604 Proceeds from issuance of intercompany debt ................... -- -- 50,000 (50,000)(1) -- Payments on long-term debt .............. (28) (348) -- -- (376) Proceeds from issuance of common stock ............................... 111 -- -- -- 111 --------- -------- -------- ------- --------- Net cash provided by (used in) financing activities ................ 24,587 (348) 50,000 (50,000) 24,239 --------- -------- -------- ------- --------- Net increase (decrease) in cash and cash equivalents .................... (206) (6,910) 1,179 -- (5,937) Cash and cash equivalents, beginning of period ................. 358 87,701 -- -- 88,059 --------- -------- -------- ------- --------- Cash and cash equivalents, end of period .. $ 152 $ 80,791 $ 1,179 $ -- $ 82,122 ========= ======== ======== ======= ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany debt. 23
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, "Boulder Strip Properties" consist of Sam's Town Hotel and Gambling Hall ("Sam's Town Las Vegas"), the Eldorado Casino (the "Eldorado") and Jokers Wild Casino ("Jokers Wild"); "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; and "Central Region Properties" consist of Sam's Town Hotel and Gambling Hall in Tunica, Mississippi ("Sam's Town Tunica"), Par-A-Dice Hotel and Casino ("Par-A-Dice"), Treasure Chest Casino ("Treasure Chest"), Blue Chip Casino ("Blue Chip"), Delta Downs Racetrack ("Delta Downs") (acquired May 31, 2001) and management fee income from Silver Star Resort and Casino (through January 31, 2000). Net revenues displayed in this table and discussed in this section are net of promotional allowances; as such, references to gaming, room, and food and beverage revenues do not agree with the amounts on the Condensed Consolidated Statements of Operations. For the purpose of this table, information enclosed therein excludes corporate expense, including related depreciation and amortization, preopening expense and the one-time $72 million Silver Star termination fee (see further discussion under "Termination Fee" later in this section.) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 2001 2000 2001 2000 --------- --------- --------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Net revenues Stardust ................... $ 34,353 $ 35,972 $ 110,795 $111,518 Boulder Strip Properties ... 42,096 40,288 134,637 128,187 Downtown Properties (a) .... 55,035 54,022 169,344 166,040 Central Region Properties .. 141,931 134,078 420,341 399,887 --------- --------- --------- -------- Total properties .... $ 273,415 $ 264,360 $ 835,117 $805,632 ========= ========= ========= ======== Operating income (loss) Stardust ................... $ (2,659) $ (816) $ (963) $ 457 Boulder Strip Properties ... 1,440 86 6,559 10,514 Downtown Properties ........ 4,484 5,329 17,607 18,716 Central Region Properties .. 31,614 26,828 88,772 89,715 --------- --------- --------- -------- Total properties .... $ 34,879 $ 31,427 $ 111,975 $119,402 ========= ========= ========= ======== </TABLE> - -------- (a) Includes revenues related to Vacations Hawaii, our Honolulu Travel Agency, of $11,212 and $10,920, respectively, for the three month periods ended September 30, 2001 and 2000 and revenues of $33,122 and $31,600, respectively, for the nine month periods ended September 30, 2001 and 2000. REVENUES Consolidated net revenues increased 3.4% during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. Company-wide gaming revenues increased 3.9%, food and beverage revenues increased 1.6%, and room revenues remained virtually unchanged. These quarterly revenue increases were achieved despite a slowdown in our operations following the attacks of September 11, 2001. The properties most affected by the attacks were the Stardust and Sam's Town Las Vegas. Net revenues from the Stardust, Boulder Strip and Downtown Properties (the "Nevada Region") increased 0.9% 24
during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. Net revenues in the Central Region increased 5.9% during the quarter ended September 30, 2001 compared to the same period in the prior year. These increases in net revenues in both the Nevada and Central Regions during the quarter are due to aggressive marketing in the areas of advertising, promotions, and entertainment. Consolidated net revenues before the termination fee increased 3.7% during the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000. Company-wide gaming revenues increased 4.0%, food and beverage revenues increased 6.0% and room revenues remained virtually unchanged. Net revenues from the Nevada Region increased 2.2% during the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000. Net revenues in the Central Region increased 5.1% during the nine month period ended September 30, 2001 compared to the same period in the prior year despite the absence of management fee income from Silver Star due to the termination of the management contract in January 2000. See further discussion under "Termination Fee" later in this section. These increases in net revenues in both the Nevada and Central Regions during the nine month period ended September 30, 2001 are due to aggressive marketing in the areas of advertising, promotions, and entertainment. OPERATING INCOME (LOSS) Despite the slowdown in our operations due to the attacks of September 11, 2001, consolidated operating income before preopening expense increased 13.4% to $28 million during the quarter ended September 30, 2001 from $25 million during the quarter ended September 30, 2000. Operating income in the Nevada Region declined $1.3 million or 29% primarily due to the $2.7 million operating loss experienced at the Stardust during the quarter ended September 30, 2001 which is attributable to a decline in Stardust's net revenue. In the Central Region, operating income increased $4.8 million or 17.8% due primarily to the increase in net revenues. Consolidated operating income before preopening expense and termination fee decreased 6.5% to $92 million during the nine month period ended September 30, 2001 from $99 million during the nine month period ended September 30, 2000. Operating income in the Nevada Region declined $6.5 million or 22% primarily due to the $4.2 million decline experienced at Sam's Town Las Vegas as a result of the competitive environment on the Boulder Strip. In the Central Region, operating income decreased $0.9 million or 1.1% due primarily to the termination of the Silver Star management contract in January 2000 and the $2.5 million operating loss experienced at Sam's Town Tunica due to the competitive environment in that gaming market. STARDUST For the quarter ended September 30, 2001, net revenues at the Stardust declined 4.5% as compared to the same period in the prior year. Non-gaming revenues declined 7.1% and gaming revenues declined 3.0% primarily due to a decline in table game wagering. The decline in net revenues is primarily attributable to the decrease in tourism resulting after the attacks of September 11, 2001. During the quarter ended September 30, 2001, the Stardust's operating loss increased to $2.7 million as compared to an operating loss of $0.8 million during the same period in the prior year. The increase in operating loss during the quarter is due mainly to the decline in net revenues accompanied by an increase in marketing and promotional costs as well as an increase in utility costs. For the nine months ended September 30, 2001, net revenues at the Stardust declined 0.6% versus the nine month period ended September 30, 2000. Non-gaming revenues increased 2.1% while gaming revenues 25
declined 2.3% primarily due to a decline in table game wagering. The Stardust experienced an operating loss of $1.0 million during the nine month period ended September 30, 2001 as compared to operating income of $0.5 million during the same period in the prior year due primarily to the decline in net revenues accompanied by an increase in utility costs. BOULDER STRIP PROPERTIES Net revenues at the Boulder Strip Properties increased 4.5% during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000 due primarily to a 4.5% increase in net revenues at Sam's Town Las Vegas. Sam's Town Las Vegas completed an $84 million renovation and expansion project during the fourth quarter of 2000. Gaming revenues at the Boulder Strip Properties remained virtually unchanged during the quarter ended September 30, 2001 as compared to the same period in the prior year. Non-gaming revenues increased 23% due to the new food and beverage and entertainment amenities at Sam's Town Las Vegas. Sam's Town Las Vegas' results were negatively impacted by the attacks of September 11, 2001. Operating income at the Boulder Strip Properties increased $1.4 million during the quarter ended September 30, 2001 as compared to the same period in the prior year due primarily to the increase in net revenues. For the nine month period ended September 30, 2001, net revenues at the Boulder Strip Properties increased 5.0% as compared to the same period in the prior year. Gaming revenues at the Boulder Strip Properties increased 1.4% due primarily to an increase in slot win and non-gaming revenues increased 22% due to the new food and beverage and entertainment amenities at Sam's Town Las Vegas. Operating income at the Boulder Strip Properties declined $4.0 million or 38% during the nine month period ended September 30, 2001 compared to the same period in the prior year. Much of the decline in operating income is attributable to increased marketing and promotional expenses due to the competitive environment on the Boulder Strip, as well as an increase in depreciation expense related to the completion of the renovation and expansion project at Sam's Town Las Vegas. DOWNTOWN PROPERTIES Net revenues at the Downtown Properties increased 1.9% during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000 due primarily to a 3.9% increase in gaming revenue mainly attributable to an increase in slot wagering and table game win. Operating income at the Downtown Properties decreased 15.9% to $4.5 million during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. The decline in operating income is primarily attributable to the events of September 11, 2001. During the nine month period ended September 30, 2001, net revenues at the Downtown Properties increased 2.0% as compared to the same period in the prior year. The increase in net revenues is due primarily to a 4.8% increase in revenues from Vacations Hawaii, our Honolulu travel agency. Operating income at the Downtown Properties decreased 5.9% to $17.6 million during the nine month period ended September 30, 2001 compared to the nine month period ended September 30, 2000. This decline in operating income is primarily attributable to slightly higher marketing expenses at the Downtown casino properties. 26
CENTRAL REGION Net revenues from the Central Region increased 5.9% during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000. Results for the quarter ended September 30, 2001 include $1.8 million of revenue from Delta Downs, which was acquired on May 31, 2001. Increased marketing and promotional programs at both Sam's Town Tunica and Treasure Chest, as well as the April 1, 2001 implementation of dockside gaming in Treasure Chest's market were also reasons for the increase in net revenues from the Central Region. Operating income in the Central Region increased $4.8 million or 17.8% due primarily to the increase in net revenues, partially offset by higher gaming taxes at Treasure Chest that accompanied the implementation of dockside gaming at Treasure Chest. Delta Downs experienced an operating loss of $0.4 million during the quarter ended September 30, 2001. Slot operations are expected to commence at Delta Downs in December 2001. Net revenues from the Central Region increased 5.1% during the nine month period ended September 30, 2001 compared to the same period in the prior year despite the absence of management fee income from Silver Star due to the termination of the management contract in January 2000. Results for the nine month period ended September 30, 2001 include $2.4 million of revenue from Delta Downs. Increased marketing and promotional programs at both Sam's Town Tunica and Treasure Chest were the primary reasons for the increase in net revenues from the Central Region. Operating income in the Central Region decreased $0.9 million or 1.1% due primarily to the termination of the Silver Star contract. In addition, Sam's Town Tunica experienced an operating loss of $2.5 million during the nine month period ended September 30, 2001 as compared to an operating loss of $2.7 million during the same period in the prior year. We continue to focus on our marketing efforts to reintroduce the newly renovated Sam's Town Tunica facility to its marketplace and return the property to profitable operations. Delta Downs experienced an operating loss of $0.5 million during the nine months ended September 30, 2001. Slot operations are expected to commence at Delta Downs in December 2001. TERMINATION FEE On October 20, 1999, the Company agreed to terminate its management contract with the Mississippi Band of Choctaw Indians (the "Tribe") prior to the contract's expiration date in June 2001 in exchange for a one-time payment of $72 million. Pursuant to that agreement, the Company continued to manage Silver Star under the terms of the management contract through January 31, 2000, at which time the Tribe made the one-time termination payment and the Company recorded the termination fee, net of certain expenses. OTHER EXPENSES Depreciation expense increased 13.8% during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000 and increased 13.1% during the nine month period ended September 30, 2001 as compared to the same period in the prior year primarily as a result of the increase in fixed assets at Sam's Town Las Vegas and Sam's Town Tunica due to the completion of their respective renovation and expansion projects in the fourth quarter of 2000. OTHER INCOME (EXPENSE) Other income and expense is primarily comprised of interest expense, net of capitalized interest. Total interest costs, including capitalized interest, were $24 million and $21 million, respectively, during the quarter ended September 30, 2001 compared to the quarter ended September 30, 2000, and $70 million and $63 27
million, respectively, during the nine month periods ended September 30, 2001 and 2000. These increases are attributable to higher average debt levels principally due to the borrowings related to fund the renovation and expansion projects at Sam's Town Las Vegas and Sam's Town Tunica, as well as the purchase of Delta Downs. NET INCOME As a result of these factors, the Company reported net income of $4.1 million and $3.7 million, respectively, during the quarters ended September 30, 2001 and 2000 and $18.6 million and $67.4 million, respectively, during the nine month periods ended September 30, 2001 and 2000. 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. During the nine month period ended September 30, 2001, we generated operating cash flow of $108 million compared to $185 million during the nine month period ended September 30, 2000. The decline in operating cash flow is primarily attributable to the one-time $72 million termination payment we received from Silver Star in the prior year. As of September 30, 2001 and 2000, we had balances of cash and cash equivalents of $82 million and $78 million, respectively, and working capital deficits of $32 million and $52 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 revenues, 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 will be available or, if available, will be on terms favorable to us. 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, and other public spaces and by providing the latest slot machines for our customers. We are also committed to continually maintaining and enhancing our computer system infrastructure. Our capital expenditures primarily related to these purposes were approximately $37 million and $35 million, respectively, during the nine month periods ended September 30, 2001 and 2000. During the nine month period ended September 30, 2001, we also paid approximately $1.8 million for capital expenditures related to the renovation and expansion of Sam's Town Las Vegas, $5.2 million for capital expenditures related to the renovation of Sam's Town Tunica and $9.4 million for facility improvements to Delta Downs. During the nine month period ended September 30, 2000, we paid $57 million for capital expenditures related to the renovation and expansion of Sam's Town Las Vegas and the renovation of Sam's Town Tunica. On May 31, 2001, we acquired substantially all of the assets of the Delta Downs Racetrack, near Vinton, Louisiana, together with an off-track betting facility in Mound, Louisiana, for a purchase price of $125 28
million, subject to certain conditions. See "Expansion and Other Projects - Delta Downs". We funded the acquisition with $60 million of cash borrowed from our bank credit facility and the issuance of a $65 million note payable to the sellers. The seller note was prepaid in October 2001 with additional borrowings from our bank credit facility. For more information, see "Indebtedness - Bank Credit Facility." CASH FLOWS FROM FINANCING ACTIVITIES Substantially all of the funding for our acquisitions and renovation and expansion projects comes from cash flows from existing operations as well as debt financing. On July 26, 2001, we issued, through a private placement, $200 million principal amount of 9.25% Senior Notes due August 2009. We reduced outstanding indebtedness under our bank credit facility with the net proceeds from this offering of which $69 million represented a permanent reduction in our bank credit facility availability. Upon consummation of the offering, our bank credit facility availability was permanently reduced by approximately $69 million. During the nine month period ended September 30, 2000, we reduced debt by $89 million due primarily to the one-time $72 million Silver Star termination payment. EXPANSION AND OTHER PROJECTS The 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. The Holding Company owns all of the membership interests of Marina District Development Company, LLC, or MDDC. MDDC is developing The Borgata, a casino resort in Atlantic City. The Borgata is being constructed on property adjacent to and will be connected to MGM MIRAGE's planned wholly-owned resort. The operating agreement contemplates a total project cost of $1.035 billion for The Borgata. We expect to open The Borgata during the summer of 2003. The operating agreement requires us and MGM MIRAGE to make equity contributions aggregating $207 million each toward the development of The Borgata. We have invested approximately $121 million in cash as of September 30, 2001 and MGM MIRAGE has also contributed approximately $121 million, consisting of land, personal property and intangible property valued at $90 million and cash of approximately $31 million. We expect that we will each invest an additional $61 million between now and March 31, 2002, and the remaining $25 million during the summer of 2003. The remaining $621 million of total project costs will be drawn down under a $630 million credit facility that a subsidiary of MDDC entered into on December 13, 2000. Under the terms of this bank credit facility no dividends or funds may be advanced to us except for our share of taxes based on income or upon achievement of certain performance milestones. Except for an unlimited completion guaranty, pursuant to which we have agreed to guaranty the performance of certain obligations, the bank credit facility is non-recourse to us and MGM MIRAGE. If we contribute additional cash pursuant to performance under the completion guaranty, there will be no proportionate increase in our ownership of The Borgata. Delta Downs. On May 31, 2001, we acquired substantially all of the assets of the Delta Downs Racetrack near Vinton, Louisiana, together with an off-track betting facility in Mound, Louisiana, for a purchase price of $125 million. The purchase price is subject to adjustment based on the number of slot machines for which we receive approval to operate and other performance based criteria. The purchase price will be reduced if we receive approval to operate fewer than 1,700 slot machines, and at its lowest, could be $115 million if we receive approval to operate fewer than 1,600 slot machines. The purchase price could be increased by up to 29
$27 million if we achieve certain defined income targets over a period of two and one-half years after the start of slot operations at the facility, or if there is regulatory authorization to increase the number of slot machines at Louisiana racetracks to a predefined target and certain other conditions are met within a period of five years from the closing of the transaction. On October 30, 2001, we received unanimous approval from the Louisiana Gaming Control Board for our gaming license to operate slot machines at Delta Downs. However, we are still waiting for the approval of the final number of slot machines to be placed into operations at the facility. We can provide no assurance that we will receive approval to operate the number of slot machines for which we applied. For more information see "Part II, Item 5- Other Information." We plan to begin casino operations in December 2001 after we complete necessary improvements to the facility, including the installation of slot machines and related equipment as well as the hiring and training of additional staff. These items are expected to cost approximately $35 million. We funded the acquisition through borrowings from our bank credit facility and the issuance of a $65 million note payable to the sellers. In October 2001, we prepaid the $65 million seller note with additional borrowings from our bank credit facility. We plan to fund the improvements to the facility through our bank credit facility. Computer Infrastructure and Customer Information System. We continually monitor technological advances for potential benefits related to our business and our industry. As we deem necessary, we implement and integrate these advances into our computer infrastructure. Recently, we have reprioritized the objectives of the Customer Information Systems Project in order to better manage the timing and resources of this project. The Customer Information Systems Project, whose main objective is to enhance and standardize our customer tracking systems, will now be segmented and included as part of the management of our general computer infrastructure. These costs are part of our recurring annual capital expenditures and are reported in the "Cash Flows from Investing Activities" section above. Substantial funds are required for the completion of The Borgata and the expansion and improvements at Delta Downs. There can be no assurances that either 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 our working capital needs (including maintenance capital expenditures) is expected to be cash flow from operations and availability under our bank credit facility. The source of funds for our expansion and other projects may come from cash flow from operations and availability under our bank credit facility, 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 or our stockholders. The Borgata project and the Delta Downs casino project are subject to the many risks inherent in the development and operation 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 for a market in which we have not previously operated. If The Borgata project or the Delta Downs casino project do not become operational within the time frames and budgets currently contemplated or do not compete successfully in their new markets, it could have a material adverse effect on our business, financial condition and results of operations. 30
INDEBTEDNESS Bank Credit Facility. Our $700 million bank credit facility consists of a $500 million revolving credit facility and two term loan components (the term loan B and the term loan C) each with original principal balances of $100 million. Our revolving credit facility, term loan B and term loan C all mature in June 2003. Availability under our revolving credit facility will be reduced by $15.6 million on December 31, 2001 and at the end of each quarter thereafter until March 31, 2003. Term loan B repayments are in increments of $0.25 million per quarter which began on September 30, 1999 and will continue through March 31, 2003. Term loan C repayments are in increments of $0.25 million per quarter which began on December 31, 2000 and will continue through March 31, 2003. On July 26, 2001, our bank credit facility availability was permanently reduced by approximately $69 million in connection with our issuance of $200 million principal amount of 9.25% Senior Notes due August 2009. For more information see "9.25% Senior Notes due August 2009" below. At September 30, 2001, $127.8 million of borrowings were outstanding under our term loans and $264.3 million was outstanding under our revolving credit facility, leaving availability under the bank credit facility of $235.7 million. Pursuant to the terms of The Borgata credit agreement, we are required to maintain $50 million of unused availability under our revolving credit facility until The Borgata opens. The interest rate on the bank credit facility is based upon either the alternate base rate or the eurodollar rate, plus an applicable margin that is determined by the level of a predefined financial leverage ratio. The blended interest rate under the bank credit facility at September 30, 2001 was 6.1%. In addition, we incur a commitment fee on the unused portion of the revolving credit facility which ranges from 0.375% to 0.50% per annum. Our obligations under the bank credit facility are guaranteed by all our significant subsidiaries and, in connection therewith, are secured by substantially all of their real and personal property. On May 21, 2001, we amended our bank credit facility, primarily to allow for the acquisition of the Delta Downs Racetrack, the completion of necessary improvements to the facility, and the financing of the acquisition and improvements. 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 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 bank credit facility, (vi) imposing limits on the maximum permitted maintenance capital expenditures during each year of the term of the bank credit facility, and (vii) imposing restrictions on investments, dividends and certain other payments. We believe we are in compliance with the bank credit facility covenants at September 30, 2001. On October 30, 2001, we prepaid the $65 million Delta Downs seller note with funds from the revolving portion of our bank credit facility with rates and terms similar to those described above for the bank credit facility. Notes. Our $200 million principal amount of senior notes due in 2003 and $250 million principal amount of senior subordinated notes due in 2007 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 31
and transfers of assets. We believe we are in compliance with the covenants related to these notes at September 30, 2001. 9.25% Senior Notes due August 2009. On July 26, 2001, we issued, through a private placement, $200 million principal amount of 9.25% Senior Notes due August 2009. The notes require semi-annual interest payments in February and August each year through August 2009, at which time the entire principal balance becomes due and payable. The notes contain certain restrictive covenants regarding, among other things, incurrence of debt, sales of assets, mergers and consolidations and limitations on restricted payments (as defined in the indenture governing the notes). At any time prior to August 2004, we may redeem up to 35% of the aggregate principal amount of the outstanding notes with the net proceeds from equity offerings at a redemption price of 109.25% of the principal amount, plus accrued and unpaid interest, subject to certain conditions. On or after August 2005, we may redeem all or a portion of the notes at redemption prices ranging from 104.625% in 2005 to 100% in 2007 and thereafter. We reduced outstanding indebtedness under our bank credit facility with the net proceeds from this offering of which $69 million represented a permanent reduction in our bank credit facility availability. We are obligated to register and have declared effective the notes or exchange them for identical notes that have been registered with the Securities and Exchange Commission within certain predefined time parameters. If we do not consummate an effective registration of the notes within the required time frame, we must pay certain liquidated damages. Seller Note. In connection with the purchase of substantially all of the assets of the Delta Downs Racetrack, we issued a promissory note to the sellers dated May 31, 2001. We prepaid this $65 million note in October 2001 with additional borrowings from our bank credit facility. For more information, see "Indebtedness - Bank Credit Facility." Our ability to service our debt will be dependent on our 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. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2001, the Emerging Issues Task Force of the FASB reached a consensus in EITF Issue No. 00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future. EITF Issue No. 00-22 requires that the redemption of "Points" for cash be recognized as a reduction of revenues. We complied with the requirements of EITF Issue No. 00-22 on the accompanying condensed consolidated statement of operations for the three and nine month periods ended September 30, 2001. Amounts in the condensed consolidated statement of operations for the three and nine month periods ended September 30, 2000 were also reclassified, from that previously reported, to conform with this consensus. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These statements require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and prohibit the pooling-of-interest method and change the accounting for goodwill from an amortization method to an impairment-only approach. We are required to adopt the new method of accounting for goodwill and other intangible assets on January 1, 2002. The new method of accounting for goodwill and other intangible assets applies to all existing and future unamortized balances at the time of adoption. As part of the adoption of these standards, we must reassess the useful lives of our goodwill and intangible assets and perform impairment tests. We are currently in the process of 32
performing these steps but have not yet finalized the impact of this standard. Based upon our initial reviews, at the time of initial adoption of this standard, we are expecting to recognize a writedown of a portion of our goodwill and other intangible assets which could have a material effect on our results of operations. Also based upon our initial reviews of this standard, we are expecting to cease the amortization of our goodwill and intangible license rights beginning January 1, 2002 as we have determined that these assets have an indefinite life. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. SFAS No. 144 requires one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The requirements of this Statement are effective for fiscal years beginning after December 15, 2001. The adoption of this Statement is not expected to have a material effect on our financial position or results of operations. PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. 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 plans for future expansion and other business development activities as well as capital spending, financing sources, and the effects of regulation (including gaming and tax regulation) and competition. Such 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 acquisition, construction, expansion and development activities, the availability and price of energy, economic conditions, regulatory approvals, changes in tax laws, changes in laws or regulations affecting gaming licenses, changes in competition, financing sources, and factors affecting leverage and debt service including sensitivity to fluctuation in interest rates. There can be no assurance that our construction of The Borgata or our renovation of the Delta Downs Racetrack will be completed on time or within budget. In addition, there can be no assurance that we will be able to obtain the permits and licenses necessary to operate the Delta Downs casino as planned, including obtaining approval to install the full number of slot machines that we have anticipated. If the injunction recently brought against Delta Downs by a competitor is successful in revoking our license to operate slot machines at Delta Downs pending trial, the timing of opening Delta Downs would be delayed. Moreover, if the action proceeds and particularly if a trial is commenced it would be costly, divert management's attention and could negatively affect our reputation. In the event the claim seeking to revoke our Delta Downs gaming license is ultimately successful, we would not be able to commence the operation of slot machines at Delta Downs which would materially affect our ability to experience increased cash flow from Delta Downs and would reduce the value of the Delta Downs acquisition. Both Delta Downs and The Borgata are subject to the many risks inherent in the development and operation of a new business enterprise, including potential unanticipated design, construction, regulatory, environmental and operating problem, increased project costs, timing delays, lack of adequate financing and the significant risks commonly associated with implementing a marketing strategy in a new market. Recent terrorist attacks in the United States, as well as future events occurring in response or in connection to them, including, without limitation, future terrorist attacks against United States targets, actual conflicts involving the United States or its allies or military or trade disruptions, negative impacts on the airline industry, increased security restrictions or the public's general reluctance to travel, could negatively impact our business, financial condition, results of operation and may result in the volatility of the market price for our common stock and on the future price of our common stock. Additional factors that could cause actual results to differ are 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, 2000. 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 Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our long-term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long-term fixed-rate borrowings and short-term borrowings under our bank credit facility. Borrowings under our bank credit facility are based upon either the alternate base rate or the eurodollar rate, plus an applicable margin that is determined by the level of a predefined financial leverage ratio. However, 33
the amount of outstanding borrowings is expected to fluctuate and may be reduced from time to time. At September 30, 2001, we did not utilize any hedging instruments. A subsidiary of MDDC entered into a credit agreement to borrow up to $630 million to be used in connection with the development of The Borgata. Except for an unlimited completion guaranty, the credit agreement is non-recourse to us. The credit agreement requires the borrower to enter into interest rate protection agreements. During the three month period ended March 31, 2001, a subsidiary of MDDC entered into interest rate protection agreements with an initial aggregate notional amount of approximately $310 million that cover various periods ranging from 2002 to 2005. The interest rate protection agreements are accounted for as derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. These derivative financial instruments were designated as cash flow hedges on May 1, 2001. During the three month period ended September 30, 2001, we recorded other comprehensive losses of $3.1 million, net of $1.8 million in tax benefits, representing our portion of the decrease in fair value of the derivative financial instruments. During the nine month period ended September 30, 2001, we recorded $0.5 million of preopening income on the accompanying condensed consolidated statement of operations and other comprehensive losses totaling $2.6 million, net of $1.5 million in tax benefits, representing our portion of the decrease in fair value of the derivative financial instruments. 34
PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On November 2, 2001, Isle of Capri Casinos, Inc. and certain of its subsidiaries, or Isle, filed an action in Louisiana District Court against the Louisiana Gaming Control Board, or LGCB, and later named Delta Downs to the action. The action seeks a revocation of the gaming license to operate slot machines at Delta Downs. This action seeks injunctive relief that would mandate that the LGCB revoke Delta Downs gaming license pending a trial on the merits of the case. If Isle is successful in obtaining the injunction, the expected opening of the Delta Downs casino operations would be delayed by at least several months pending trial. If Isle is successful at trial, our Delta Downs gaming license would be revoked. Any significant delay or license revocation would have a material adverse effect on our financial condition and results of operations. We believe this lawsuit is without merit and we intend to defend the suit vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.5 Form of Indenture relating to $200,000,000 aggregate principal amount of 9.25% Senior Notes due 2009, dated as of July 26, 2001, by and among the Company, as Issuer, certain subsidiaries of the Company, as Guarantors, and The Bank of New York, as Trustee, including the Form of Note (incorporated herein by reference to the Company's Registration Statement on Form S-4, File No. 333-69566, filed with the Commission on September 18, 2001). 4.6 Registration Rights Agreement, dated as of July 26, 2001, by and among the Company, as Issuer, certain subsidiaries of the Company, as Guarantors, and the Initial Purchasers named therein (incorporated herein by reference to the Company's Registration Statement on Form S-4, File No. 333-69566, filed with the Commission on September 18, 2001). (b) Reports on Form 8-K (i) We filed a current report on Form 8-K dated July 12, 2001 related to a private placement of $200 million of 8-year notes. 35
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 November 14, 2001. BOYD GAMING CORPORATION By: /s/ JEFFREY G. SANTORO ----------------------------------- Jeffrey G. Santoro Vice President and Controller (Principal Accounting Officer) 36