1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 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 July 31, 2001: Class Outstanding - ---------------------------- ---------- Common stock, $.01 par value 62,246,407
2 BOYD GAMING CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 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 June 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2001 and 2000 4 Condensed Consolidated Statement of Changes in Stockholders' Equity for the six month period ended June 30, 2001 5 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 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 21 Item 3. Quantitative and Qualitative Disclosure about Market Risk 30 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 31 Item 6. Exhibits and Reports on Form 8-K 32 Signature Page 33 </TABLE> 2
3 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 JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------ <S> <C> <C> Current assets Cash and cash equivalents ............................................. $ 83,938 $ 88,059 Accounts receivable, net .............................................. 12,015 14,260 Inventories ........................................................... 5,387 6,200 Prepaid expenses and other ............................................ 13,092 11,837 Income taxes receivable ............................................... -- 66 Deferred income taxes ................................................. 8,199 8,149 ---------- ---------- Total current assets .......................................... 122,631 128,571 Property and equipment, net .............................................. 972,194 959,966 Investments in unconsolidated subsidiaries ............................... 113,300 105,560 Other assets and deferred charges, net ................................... 37,937 38,213 Intangible assets, net ................................................... 438,465 345,304 ---------- ---------- Total assets .................................................. $1,684,527 $1,577,614 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current maturities of long-term debt .................................. $ 2,473 $ 2,485 Account payables ...................................................... 37,881 38,540 Construction payables ................................................. 3,037 9,816 Accrued liabilities Payroll and related ............................................... 33,896 36,115 Interest and other ................................................ 76,420 70,061 Income taxes payable .............................................. 253 -- ---------- ---------- Total current liabilities ..................................... 153,960 157,017 Long-term debt, net of current maturities ................................ 1,105,590 1,016,813 Deferred income taxes and other liabilities .............................. 80,241 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; 62,235,954 and 62,234,954 shares outstanding ....................... 622 622 Additional paid-in capital ............................................. 142,024 142,020 Retained earnings ...................................................... 201,602 187,136 Accumulated other comprehensive income ................................. 488 -- ---------- ---------- Total stockholders' equity .................................... 344,736 329,778 ---------- ---------- Total liabilities and stockholders' equity .................... $1,684,527 $1,577,614 ========== ========== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3
4 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues Gaming ...................................... $ 231,267 $ 215,490 $ 462,465 $ 441,118 Food and beverage ........................... 40,616 38,821 81,827 79,731 Room ........................................ 19,955 19,305 39,409 37,700 Other ....................................... 19,949 18,863 39,994 36,071 Management fee .............................. -- -- -- 3,815 Termination fee, net ........................ -- -- -- 70,988 --------- --------- --------- --------- Gross revenues ................................. 311,787 292,479 623,695 669,423 Less promotional allowances .................... 30,506 27,659 61,993 57,163 --------- --------- --------- --------- Net revenues ........................ 281,281 264,820 561,702 612,260 --------- --------- --------- --------- Costs and expenses Gaming ...................................... 107,983 101,784 216,022 206,332 Food and beverage ........................... 27,421 25,603 55,103 50,878 Room ........................................ 6,136 5,848 11,615 11,554 Other ....................................... 20,395 18,495 40,447 35,010 Selling, general and administrative ......... 43,455 42,398 87,538 84,037 Maintenance and utilities ................... 13,722 12,100 27,004 23,806 Depreciation ................................ 22,002 19,682 43,719 38,784 Amortization of intangible license rights and acquisition costs ........................ 2,457 2,450 4,907 4,900 Corporate expense ........................... 4,596 4,769 11,217 12,107 Preopening expense .......................... 51 1,950 412 2,332 --------- --------- --------- --------- Total ............................... 248,218 235,079 497,984 469,740 --------- --------- --------- --------- Operating income ............................... 33,063 29,741 63,718 142,520 --------- --------- --------- --------- Other income (expense) Interest income ............................. 2 328 2 462 Interest expense, net of amounts capitalized (18,932) (19,250) (39,407) (39,368) --------- --------- --------- --------- Total ............................... (18,930) (18,922) (39,405) (38,906) --------- --------- --------- --------- Income before provision for income taxes ....... 14,133 10,819 24,313 103,614 Provision for income taxes ..................... 5,724 4,166 9,847 39,892 --------- --------- --------- --------- Net income ..................................... $ 8,409 $ 6,653 $ 14,466 $ 63,722 ========= ========= ========= ========= Basic and diluted net income per common share .. $ 0.14 $ 0.11 $ 0.23 $ 1.02 ========= ========= ========= ========= Average basic shares outstanding ............... 62,235 62,230 62,235 62,229 Average diluted shares outstanding ............. 62,262 62,302 62,248 62,303 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4
5 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTH PERIOD ENDED JUNE 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 INCOME EQUITY ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Balances, January 1, 2001.. 62,234,954 $ 622 $ 142,020 $ 187,136 $ -- $ 329,778 Net income ................ -- -- -- 14,466 -- 14,466 Derivative instruments market adjustment ....... -- -- -- -- 488 488 Stock options exercised.... 1,000 -- 4 -- -- 4 ---------- ---------- ---------- ---------- ---------- ---------- BALANCES, JUNE 30, 2001.... 62,235,954 $ 622 $ 142,024 $ 201,602 $ 488 $ 344,736 ========== ========== ========== ========== ========== ========== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5
6 BOYD GAMING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................................. $ 14,466 $ 63,722 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .......................... 48,626 43,684 Deferred income taxes .................................. 5,564 14,018 Preopening expense ..................................... 412 2,332 Equity (income) loss in unconsolidated subsidiaries .... (216) 678 Changes in assets and liabilities: Accounts receivable, net ............................. 2,708 4,697 Inventories .......................................... 849 936 Prepaid expenses and other ........................... (1,255) 1,180 Other assets ......................................... (1,966) 290 Other current liabilities ............................ 2,311 6,748 Other liabilities .................................... 335 338 Income taxes receivable .............................. 66 1,108 Income taxes payable ................................. 253 10,662 --------- --------- Net cash provided by operating activities ................... 72,153 150,393 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, equipment and other assets ...... (34,595) (55,975) Net cash paid for acquisition of Delta Downs ............. (60,000) -- Investments in and advances to unconsolidated subsidiaries (5,037) (4,514) Preopening expense ....................................... (412) (2,332) --------- --------- Net cash used in investing activities ....................... (100,044) (62,821) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on long-term debt ............................... (235) (429) Net borrowings (payments) under credit agreements ........ 24,000 (101,300) Proceeds from issuance of common stock ................... 5 34 --------- --------- Net cash provided by (used in) financing activities ......... 23,770 (101,695) --------- --------- Net decrease in cash and cash equivalents ................... (4,121) (14,123) Cash and cash equivalents, beginning of period .............. 88,059 86,192 --------- --------- Cash and cash equivalents, end of period .................... $ 83,938 $ 72,069 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized ....... $ 38,416 $ 36,612 Cash paid for income taxes, net of refunds ............... 3,964 14,104 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Property additions acquired on construction and trade payables which were accrued, but not yet paid .......... $ 4,060 $ 15,966 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
7 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying condensed consolidated financial statements include the accounts of Boyd Gaming Corporation and its wholly-owned subsidiaries. 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 six month periods ended June 30, 2001 and 2000 and cash flows for the six month periods ended June 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 six month periods ended June 30, 2001 and 2000 and cash flows for the six month periods ended June 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 six month periods ended June 30, 2001 was $3.6 million and $6.6 million, respectively. Capitalized interest during the three and six month periods ended June 30, 2000 was $1.3 million and $2.2 million, respectively. 7
8 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 six month periods ended June 30, 2001, we expensed $0.1 million and $0.4 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 six month periods ended June 30, 2000, we expensed $2.0 million and $2.3 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 six month periods ended June 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 instruments to comply with the requirements of its bank credit agreement. These derivative instruments have an initial aggregate notional amount of approximately $310 million and cover various periods ranging from 2002 to 2005. These derivative instruments received cash flow hedging designation on May 1, 2001. During the three month period ended June 30, 2001, we recorded $0.9 million of preopening income on the accompanying condensed consolidated statement of operations, and other comprehensive income of $0.5 million, net of $0.3 million in taxes, representing our portion of the increase in fair value of the derivative instruments. During the six month period ended June 30, 2001, we recorded $0.5 million of preopening income on the accompanying condensed consolidated statement of operations and other comprehensive income of $0.5 million, net of $0.3 million in taxes, representing our portion of the increase in fair value of the derivative 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 six month periods ended June 30, 2001. Amounts in the condensed consolidated statement of operations for the three and six month periods ended June 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 8
9 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- 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 determined the impact of this standard on our future goodwill and intangible asset amortization expense. Reclassifications Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform to the June 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 six month periods ended June 30, 2001 and 2000 is determined considering the dilutive effects of outstanding stock options. The effect of stock options outstanding to purchase approximately 5.2 million and 7.6 million shares, respectively, were not included in the diluted calculation during the three and six month periods ended June 30, 2001, and 5.4 million shares were not included in the diluted calculation during the three and six month periods ended June 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. We plan to begin casino operations upon receiving the appropriate licenses and approvals and completing necessary improvements to the facility, including the purchase of slot machines and related equipment, which improvements are expected to cost $35 million. We expect to open the Delta Downs casino in October 2001. We funded the acquisition through borrowings under our bank credit facility and the issuance of a $65 million note payable to the sellers. We plan to fund the improvements to the facility through our bank credit facility. 9
10 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- 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. 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 are obligated to pay the sellers, subject to certain conditions, $65 million, together with simple interest assessed at a rate per annum pursuant to the following schedule: 7% from May 31, 2001 through July 31, 2001; 10% from August 1, 2001 through March 31, 2002; and 12% from April 1, 2002 until the seller note is paid. The seller note is secured by a mortgage on the property and security interests in all personal property. The Delta Downs mortgage is subject and subordinate to $60 million of the mortgage under our bank credit facility. In addition, the principal amount due under the seller note may be reduced pursuant to offsets in certain instances and may be prepaid in full or in part without penalty. Pursuant to the terms of the seller note, we are required to pay the sellers accrued interest monthly beginning on June 30, 2001. In addition, we are required to pay the sellers a principal payment of $15 million on December 31, 2001 if the seller note is still outstanding as of that date. The entire unpaid balance of the seller note, including any additional amounts due to the sellers pursuant to the seller note, are due and payable in full upon the earlier of: - five business days after the State of Louisiana issues all required permits under the applicable laws for the operation of slot machines at Delta Downs; - the closing of any sale of the Delta Downs business we acquired; or - June 30, 2003. The following items constitute events of default under the seller note, entitling the seller to accelerate the maturity date of the amounts due and to foreclose on the property encumbered by the Delta Downs mortgage: - acceleration or maturity of our bank loans; and - our failure to pay the seller note in full on the date it is due. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Indebtedness." Subsequent Event. 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. Upon consummation of the offering, our bank credit facility availability was permanently reduced by approximately $69 million. 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 10
11 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- 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. 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. 11
12 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Gaming Revenues Stardust .................................. $ 23,915 $ 24,172 $ 49,462 $ 49,868 Sam's Town Las Vegas ...................... 29,278 26,506 58,816 57,466 Eldorado and Jokers Wild .................. 7,680 7,099 15,403 14,855 Downtown Properties ....................... 34,938 34,109 69,526 67,688 Sam's Town Tunica ......................... 25,704 20,140 50,239 42,533 Par-A-Dice ................................ 34,494 32,327 68,813 64,531 Treasure Chest ............................ 29,318 25,926 58,838 52,971 Blue Chip ................................. 45,340 45,211 90,768 91,206 Delta Downs ............................... 600 -- 600 -- -------- -------- -------- -------- Total gaming revenues ............. $231,267 $215,490 $462,465 $441,118 ======== ======== ======== ======== EBITDA(1) Stardust .................................. $ 3,662 $ 4,044 $ 8,617 $ 8,801 Sam's Town Las Vegas ...................... 6,183 5,353 11,377 14,080 Eldorado and Jokers Wild .................. 1,690 1,468 3,613 3,388 Downtown Properties ....................... 11,523 11,511 21,676 21,598 Sam's Town Tunica ......................... 2,013 1,002 3,014 4,005 Par-A-Dice ................................ 13,394 12,132 26,458 24,314 Treasure Chest ............................ 4,242 4,224 10,362 9,929 Silver Star ............................... -- -- -- 74,803 Blue Chip ................................. 19,450 18,858 38,844 39,725 Delta Downs ............................... 12 -- 12 -- -------- -------- -------- -------- Property EBITDA .................... 62,169 58,592 123,973 200,643 -------- -------- -------- -------- Other Costs and Expenses Corporate expense ......................... 4,596 4,769 11,217 12,107 Depreciation and amortization ............. 24,459 22,132 48,626 43,684 Preopening expense ........................ 51 1,950 412 2,332 Other expense, net ........................ 18,930 18,922 39,405 38,906 -------- -------- -------- -------- Total other costs and expenses .... 48,036 47,773 99,660 97,029 -------- -------- -------- -------- Income before provision for income taxes .... 14,133 10,819 24,313 103,614 Provision for income taxes .................. 5,724 4,166 9,847 39,892 -------- -------- -------- -------- Net income .................................. $ 8,409 $ 6,653 $ 14,466 $ 63,722 ======== ======== ======== ======== </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. 12
13 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- NOTE 6. GUARANTOR INFORMATION 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 June 30, 2001 and December 31, 2000 and for the three and six month periods ended June 30, 2001 and 2000. CONDENSED CONSOLIDATING BALANCE SHEET INFORMATION AS OF JUNE 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> ASSETS Current assets ............................... $ 2,213 $ 86,126 $ 34,390 $ (98)(1) $ 122,631 Property and equipment, net .................. 49,066 750,933 172,195 -- 972,194 Investments in unconsolidated subsidiaries, net ........................ -- 1,590 111,710 -- 113,300 Other assets and deferred charges, net ....... 1,317,412 (404,016) 520,525 (1,395,984)(1)(2) 37,937 Intangible assets, net ....................... -- 111,220 327,245 -- 438,465 ----------- ----------- ----------- ----------- ----------- Total assets $ 1,368,691 $ 545,853 $ 1,166,065 $(1,396,082) $ 1,684,527 =========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities .......................... $ 40,460 $ 71,805 $ 41,623 $ 72(1) $ 153,960 Long-term debt, net of current maturities .... 983,150 57,440 65,000 -- 1,105,590 Deferred income taxes and other liabilities .. 833 72,332 7,076 -- 80,241 Stockholders' equity ......................... 344,248 344,276 1,052,366 (1,396,154)(2) 344,736 ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity .............................. $ 1,368,691 $ 545,853 $ 1,166,065 $(1,396,082) $ 1,684,527 =========== =========== =========== =========== =========== </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany payables and receivables. (2) To eliminate investment in subsidiaries and subsidiaries' equity. 13
14 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. 14
15 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED JUNE 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................ $ -- $ 156,010 $ 75,257 $ -- $ 231,267 Food and beverage ................. -- 36,045 4,571 -- 40,616 Room .............................. -- 19,119 836 -- 19,955 Other ............................. 3,357 8,015 12,377 (3,800)(1) 19,949 Management fee and equity income .. 31,156 687 15,872 (47,715)(1) -- --------- --------- --------- --------- --------- Gross revenues ...................... 34,513 219,876 108,913 (51,515) 311,787 Less promotional allowances ......... -- 25,534 4,972 -- 30,506 --------- --------- --------- --------- --------- Net revenues .............. 34,513 194,342 103,941 (51,515) 281,281 --------- --------- --------- --------- --------- Costs and expenses Gaming ............................ -- 79,312 28,671 -- 107,983 Food and beverage ................. -- 22,620 4,801 -- 27,421 Room .............................. -- 5,818 318 -- 6,136 Other ............................. -- 10,872 17,938 (8,415)(1) 20,395 Selling, general and administrative -- 29,453 14,002 -- 43,455 Maintenance and utilities ......... -- 10,513 3,209 -- 13,722 Depreciation and amortization ..... 654 17,996 5,809 -- 24,459 Corporate expense ................. 8,113 26 262 (3,805)(1) 4,596 Preopening expense ................ 21 -- 30 -- 51 --------- --------- --------- --------- --------- Total ..................... 8,788 176,610 75,040 (12,220) 248,218 --------- --------- --------- --------- --------- Operating income .................... 25,725 17,732 28,901 (39,295) 33,063 Other income (expense), net ......... (17,414) (1,280) (236) -- (18,930) --------- --------- --------- --------- --------- Income before income taxes .......... 8,311 16,452 28,665 (39,295) 14,133 Provision for income taxes .......... (98) 3,528 2,294 -- 5,724 --------- --------- --------- --------- --------- Net income .......................... $ 8,409 $ 12,924 $ 26,371 $ (39,295) $ 8,409 ========= ========= ========= ========= ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 15
16 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE THREE MONTHS ENDED JUNE 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................ $ -- $ 144,353 $ 71,137 $ -- $ 215,490 Food and beverage ................. -- 34,476 4,345 -- 38,821 Room .............................. -- 18,525 780 -- 19,305 Other ............................. 2,999 7,222 12,388 (3,746)(1) 18,863 Management fee and equity income .. 30,797 708 17,152 (48,657)(1) -- --------- --------- --------- --------- --------- Gross revenues ...................... 33,796 205,284 105,802 (52,403) 292,479 Less promotional allowances ......... -- 24,119 3,540 -- 27,659 --------- --------- --------- --------- --------- Net revenues .............. 33,796 181,165 102,262 (52,403) 264,820 --------- --------- --------- --------- --------- Costs and expenses Gaming ............................ -- 75,493 26,291 -- 101,784 Food and beverage ................. -- 20,607 4,996 -- 25,603 Room .............................. -- 5,465 383 -- 5,848 Other ............................. -- 9,603 17,103 (8,211)(1) 18,495 Selling, general and administrative -- 27,969 14,429 -- 42,398 Maintenance and utilities ......... -- 8,759 3,341 -- 12,100 Depreciation and amortization ..... 624 16,182 5,326 -- 22,132 Corporate expense ................. 8,059 31 425 (3,746)(1) 4,769 Preopening expense ................ 1,549 133 268 -- 1,950 --------- --------- --------- --------- --------- Total ..................... 10,232 164,242 72,562 (11,957) 235,079 --------- --------- --------- --------- --------- Operating income .................... 23,564 16,923 29,700 (40,446) 29,741 Other income (expense), net ......... (17,823) (1,264) 165 -- (18,922) --------- --------- --------- --------- --------- Income before income taxes .......... 5,741 15,659 29,865 (40,446) 10,819 Provision for income taxes .......... (912) 2,771 2,307 -- 4,166 --------- --------- --------- --------- --------- Net income .......................... $ 6,653 $ 12,888 $ 27,558 $ (40,446) $ 6,653 ========= ========= ========= ========= ========= </TABLE> - ---------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 16
17 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................ $ -- $ 312,259 $ 150,206 $ -- $ 462,465 Food and beverage ................. -- 72,612 9,215 -- 81,827 Room .............................. -- 37,787 1,622 -- 39,409 Other ............................. 6,714 17,147 23,756 (7,623)(1) 39,994 Management fee and equity income .. 62,824 1,824 34,759 (99,407)(1) -- --------- --------- --------- --------- --------- Gross revenues ...................... 69,538 441,629 219,558 (107,030) 623,695 Less promotional allowances ......... -- 51,487 10,506 -- 61,993 --------- --------- --------- --------- --------- Net revenues .............. 69,538 390,142 209,052 (107,030) 561,702 --------- --------- --------- --------- --------- Costs and expenses Gaming ............................ -- 160,188 55,834 -- 216,022 Food and beverage ................. -- 45,490 9,613 -- 55,103 Room .............................. -- 10,981 634 -- 11,615 Other ............................. -- 22,504 34,924 (16,981)(1) 40,447 Selling, general and administrative -- 60,107 27,431 -- 87,538 Maintenance and utilities ......... -- 20,327 6,677 -- 27,004 Depreciation and amortization ..... 1,359 35,844 11,423 -- 48,626 Corporate expense ................. 18,257 50 533 (7,623)(1) 11,217 Preopening expense ................ 73 -- 339 -- 412 --------- --------- --------- --------- --------- Total ..................... 19,689 355,491 147,408 (24,604) 497,984 --------- --------- --------- --------- --------- Operating income .................... 49,849 34,651 61,644 (82,426) 63,718 Other income (expense), net ......... (36,766) (2,552) (87) -- (39,405) --------- --------- --------- --------- --------- Income before income taxes .......... 13,083 32,099 61,557 (82,426) 24,313 Provision for income taxes .......... (1,383) 6,618 4,612 -- 9,847 --------- --------- --------- --------- --------- Net income .......................... $ 14,466 $ 25,481 $ 56,945 $ (82,426) $ 14,466 ========= ========= ========= ========= ========= </TABLE> - ----------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 17
18 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- ELIMINATION PARENT GUARANTORS GUARANTORS ENTRIES CONSOLIDATED --------- --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Revenues Gaming ............................ $ -- $ 296,941 $ 144,177 $ -- $ 441,118 Food and beverage ................. -- 70,950 8,781 -- 79,731 Room .............................. -- 36,584 1,116 -- 37,700 Other ............................. 5,998 14,426 23,140 (7,493)(1) 36,071 Management fee and equity income .. 135,430 5,598 37,612 (174,825)(1) 3,815 Termination fee, net .............. -- 70,988 -- -- 70,988 --------- --------- --------- --------- --------- Gross revenues ...................... 141,428 495,487 214,826 (182,318) 669,423 Less promotional allowances ......... -- 50,488 6,675 -- 57,163 --------- --------- --------- --------- --------- Net revenues .............. 141,428 444,999 208,151 (182,318) 612,260 --------- --------- --------- --------- --------- Costs and expenses Gaming ............................ -- 153,474 52,858 -- 206,332 Food and beverage ................. -- 41,188 9,690 -- 50,878 Room .............................. -- 10,974 580 -- 11,554 Other ............................. -- 69,553 33,448 (67,991)(1) 35,010 Selling, general and administrative -- 56,427 27,610 -- 84,037 Maintenance and utilities ......... -- 17,157 6,649 -- 23,806 Depreciation and amortization ..... 1,128 32,142 10,414 -- 43,684 Corporate expense ................. 18,628 93 879 (7,493)(1) 12,107 Preopening expense ................ 1,563 161 608 -- 2,332 --------- --------- --------- --------- --------- Total ..................... 21,319 381,169 142,736 (75,484) 469,740 --------- --------- --------- --------- --------- Operating income .................... 120,109 63,830 65,415 (106,834) 142,520 Other income (expense), net ......... (36,634) (2,625) 353 -- (38,906) --------- --------- --------- --------- --------- Income before income taxes .......... 83,475 61,205 65,768 (106,834) 103,614 Provision for income taxes .......... 19,753 15,252 4,887 -- 39,892 --------- --------- --------- --------- --------- Net income .......................... $ 63,722 $ 45,953 $ 60,881 $(106,834) $ 63,722 ========= ========= ========= ========= ========= </TABLE> - ----------- Elimination Entries (1) To eliminate intercompany revenues and expenses. 18
19 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2001 <TABLE> <CAPTION> COMBINED COMBINED NON- PARENT GUARANTORS GUARANTORS CONSOLIDATED --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> Cash flows from operating activities .................. $ 41,822 $ 14,499 $ 15,832 $ 72,153 --------- --------- --------- --------- Cash flows from investing activities Acquisition of property, equipment and other assets .. (5,932) (24,127) (4,536) (34,595) Net cash paid for acquisition of Delta Downs ......... -- -- (60,000) (60,000) Investments in and advances to unconsolidated subsidiaries ....................................... -- -- (5,037) (5,037) Investment in consolidated subsidiaries .............. (60,000) -- 60,000 -- Preopening expense ................................... (73) -- (339) (412) --------- --------- --------- --------- Net cash used in investing activities ................. (66,005) (24,127) (9,912) (100,044) --------- --------- --------- --------- Cash flows from financing activities Net borrowings under credit agreements .............. 24,000 -- -- 24,000 Receipt/(payment) of dividends ...................... -- 1,109 (1,109) -- Payments on long-term debt .......................... (27) (208) -- (235) Proceeds from issuance of common stock .............. 5 -- -- 5 --------- --------- --------- --------- Net cash provided by (used in) financing activities ... 23,978 901 (1,109) 23,770 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents .. (205) (8,727) 4,811 (4,121) Cash and cash equivalents, beginning of period ........ 358 61,219 26,482 88,059 --------- --------- --------- --------- Cash and cash equivalents, end of period .............. $ 153 $ 52,492 $ 31,293 $ 83,938 ========= ========= ========= ========= </TABLE> 19
20 BOYD GAMING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - -------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2000 <TABLE> <CAPTION> COMBINED COMBINED NON- PARENT GUARANTORS GUARANTORS CONSOLIDATED --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> Cash flows from operating activities .................. $ 93,614 $ 39,392 $ 17,387 $ 150,393 --------- --------- --------- --------- Cash flows from investing activities Acquisition of property, equipment and other assets .. (3,866) (47,818) (4,291) (55,975) Investments in and advances to unconsolidated subsidiaries ....................................... -- -- (4,514) (4,514) Preopening expense ................................... (1,563) (161) (608) (2,332) --------- --------- --------- --------- Net cash used in investing activities ................. (5,429) (47,979) (9,413) (62,821) --------- --------- --------- --------- Cash flows from financing activities Net payments under credit agreements ................ (101,300) -- -- (101,300) Proceeds from issuance of common stock .............. 34 -- -- 34 Receipt/(payment) of dividends ...................... 3,459 911 (4,370) -- Receipt/(payments) on long-term debt ................ 9,766 (10,195) -- (429) --------- --------- --------- --------- Net cash used in financing activities ................. (88,041) (9,284) (4,370) (101,695) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents .. 144 (17,871) 3,604 (14,123) Cash and cash equivalents, beginning of period ........ 138 62,755 23,299 86,192 --------- --------- --------- --------- Cash and cash equivalents, end of period .............. $ 282 $ 44,884 $ 26,903 $ 72,069 ========= ========= ========= ========= </TABLE> 20
21 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. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Net revenues Stardust ...................... $ 37,574 $ 37,050 $ 76,442 $ 75,546 Boulder Strip Properties ...... 45,474 41,103 92,541 87,899 Downtown Properties (a) ....... 57,997 57,452 114,309 112,018 Central Region Properties ..... 140,236 129,215 278,410 265,809 -------- -------- -------- -------- Total properties ....... $281,281 $264,820 $561,702 $541,272 ======== ======== ======== ======== Operating income Stardust ...................... $ 285 $ 205 $ 1,696 $ 1,273 Boulder Strip Properties ...... 2,788 3,290 5,119 10,428 Downtown Properties ........... 7,211 7,392 13,123 13,387 Central Region Properties ..... 28,274 26,630 57,158 62,887 -------- -------- -------- -------- Total properties ....... $ 38,558 $ 37,517 $ 77,096 $ 87,975 ======== ======== ======== ======== </TABLE> - -------- (a) Includes revenues related to Vacations Hawaii, our Honolulu Travel Agency, of $11,458 and $11,029, respectively, for the three month periods ended June 30, 2001 and 2000 and revenues of $21,910 and $20,680, respectively, for the six month periods ended June 30, 2001 and 2000. REVENUES Consolidated net revenues increased 6.2% during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. Company-wide gaming revenues increased 6.5%, food and beverage revenues increased 9.0%, and room revenues declined 1.9%. Net revenues from the Stardust, Boulder Strip and Downtown Properties (the "Nevada Region") increased 4.0% during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. Net revenues in the Central Region increased 8.5% during the quarter ended June 30, 2001 compared to the same period in the prior year. These increases in net revenues in both the 21
22 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 3.8% during the six month period ended June 30, 2001 compared to the six month period ended June 30, 2000. Company-wide gaming revenues increased 4.0%, food and beverage revenues increased 8.1% and room revenues decreased 1.3%. Net revenues from the Nevada Region increased 2.8% during the six month period ended June 30, 2001 compared to the six month period ended June 30, 2000. Net revenues in the Central Region increased 4.7% during the six month period ended June 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 six month period ended June 30, 2001 are due to aggressive marketing in the areas of advertising, promotions, and entertainment. OPERATING INCOME Consolidated operating income before preopening expense increased 4.5% to $33 million during the quarter ended June 30, 2001 from $32 million during the quarter ended June 30, 2000. Operating income in the Nevada Region declined $0.6 million or 5.5% primarily due to the $0.7 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 increased $1.6 million or 6.2% due primarily to the increase in net revenues. Consolidated operating income before preopening expense and termination fee decreased 13.2% to $64 million during the six month period ended June 30, 2001 from $74 million during the six month period ended June 30, 2000. Operating income in the Nevada Region declined $5.2 million or 21% primarily due to the $5.5 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 $5.7 million or 9.1% due primarily to the termination of the Silver Star management contract in January 2000 and the $3.3 million operating loss experienced at Sam's Town Tunica due to the competitive environment in that gaming market. STARDUST For the quarter ended June 30, 2001, net revenues at the Stardust increased 1.4% as compared to the same period in the prior year. Non-gaming revenues increased 7.7% while gaming revenues declined 2.2% primarily due to a decline in table game wagering. Operating income and operating income margin at the Stardust increased slightly during the quarter ended June 30, 2001 as compared to the quarter ended June 30, 2000 as an increase in utility costs partially offset the increase in net revenues. For the six months ended June 30, 2001, net revenues at the Stardust increased by 1.2% versus the six month period ended June 30, 2000. Non-gaming revenues increased 6.7% while gaming revenues declined 1.9% primarily due to a decline in table game wagering. Operating income at the Stardust increased $0.4 million or 33% and operating income margin increased slightly to 2.2% during the six month period ended June 30, 2001 as compared to 1.7% during the same period in the prior year. 22
23 BOULDER STRIP PROPERTIES Net revenues at the Boulder Strip Properties increased 10.6% during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 due primarily to a 11.3% increase in net revenues at Sam's Town Las Vegas. Sam's Town Las Vegas recently completed an $84 million renovation and expansion project during the fourth quarter of 2000. Gaming revenues at the Boulder Strip Properties increased 8.3% due primarily to an increase in slot wagering at all three properties. Non gaming revenues increased 21% due to the new food and beverage and entertainment amenities at Sam's Town Las Vegas. Operating income at the Boulder Strip Properties declined $0.5 million or 15.3% during the quarter ended June 30, 2001 as 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. For the six month period ended June 30, 2001, net revenues at the Boulder Strip Properties increased 5.3% as compared to the same period in the prior year. Gaming revenues at the Boulder Strip Properties increased 1.7% due primarily to an increase in slot win and non-gaming revenues increased 21% due to the new food and beverage and entertainment amenities at Sam's Town Las Vegas. Operating income at the Boulder Strip Properties declined $5.3 million or 51% during the six month period ended June 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 slightly during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 due primarily to a 3.9% increase in revenues from Vacations Hawaii, our Honolulu travel agency. Operating income at the Downtown Properties decreased 2.4% to $7.2 million during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. The decline in operating income is attributable to slightly higher marketing expenses at the Downtown casino properties. During the six month period ended June 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 5.9% increase in revenues from Vacations Hawaii. Operating income at the Downtown Properties decreased 2.0% to $13.1 million during the six month period ended June 30, 2001 compared to the six month period ended June 30, 2000. This decline in operating income is attributable to slightly higher marketing expenses at the Downtown casino properties. CENTRAL REGION Net revenues from the Central Region increased 8.5% during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000. 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 increased $1.6 million or 6.2% due primarily to the increase in net revenues, partially offset by higher gaming taxes at Treasure Chest that accompanied the April 1, 2001 implementation of dockside gaming in Treasure Chest's market. In addition, Sam's Town Tunica experienced a decline in its operating loss to $1.1 million during the quarter ended June 30, 2001 as compared to an operating loss of $1.4 million during the quarter ended June 30, 2000. 23
24 Net revenues from the Central Region increased 4.7% during the six month period ended June 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. 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 $5.7 million or 9.1% due primarily to the termination of the Silver Star contract. In addition, Sam's Town Tunica experienced a $2.4 million increase in its operating loss to $3.3 million during the six month period ended June 30, 2001 as compared to the same period in the prior year. Much of the decline in operating income at Sam's Town Tunica is attributable to the increase in marketing and promotional expenses due to the competitive environment in that gaming market. 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. 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 11.8% during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000 and increased 12.7% during the six month period ended June 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 $23 million and $21 million, respectively, during the quarter ended June 30, 2001 compared to the quarter ended June 30, 2000, and $46 million and $42 million, respectively, during the six month periods ended June 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. 24
25 NET INCOME As a result of these factors, the Company reported net income of $8.4 million and $6.7 million, respectively, during the quarters ended June 30, 2001 and 2000 and $14.5 million and $63.7 million, respectively, during the six month periods ended June 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 six month period ended June 30, 2001, we generated operating cash flow of $72 million compared to $150 million during the six month period ended June 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 June 30, 2001 and 2000, we had balances of cash and cash equivalents of $84 million and $72 million, respectively, and working capital deficits of $31 million and $47 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. Our capital expenditures primarily related to these purposes were approximately $28 million and $26 million, respectively, during the six month periods ended June 30, 2001 and 2000. We also paid approximately $1.8 million for capital expenditures related to the renovation and expansion of Sam's Town Las Vegas and $4.3 million for capital expenditures related to the renovation of Sam's Town Tunica during the six month period ended June 30, 2001. During the six month period ended June 30, 2000, we paid $30 million for capital expenditures related to the renovation and expansion of Sam's Town Las Vegas. 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, subject to certain conditions. See "Expansion and Other Projects -- Delta Downs". We funded the acquisition with $60 million of cash borrowed under our bank credit facility and the issuance of a $65 million note payable to the sellers. 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. During the six month period ended June 30, 2001, we incurred an additional $24 million in debt on our bank credit facility due primarily to the $60 million cash 25
26 payment for the acquisition of Delta Downs. During the six month period ended June 30, 2000, we reduced debt by $102 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 will be 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 $107 million in cash as of June 30, 2001 and MGM MIRAGE has also contributed approximately $107 million, consisting of land, personal property and intangible property valued at $90 million and cash of approximately $17 million. We expect that we will each invest an additional $75 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 $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. We plan to begin casino operations upon receiving the appropriate licenses and approvals and completing necessary improvements to the facility, including the purchase of slot machines and related equipment, which improvements are expected to cost $35 million. We expect to open the Delta Downs casino in October 2001. We funded the acquisition through borrowings under our bank credit facility and the issuance of a $65 million note payable to the sellers. We plan to fund the improvements to the facility through our bank credit facility. Customer Information System. We have undertaken a Customer Information System, or CIS, project that will standardize our customer tracking systems. During the three month period ended June 30, 2001, we incurred $2.2 million in costs associated with the CIS project, $2.0 million of which was capitalized. We 26
27 expect to spend $10 million in 2001 on the next phases of the CIS project. The Company has incurred $28 million in cumulative costs related to the CIS Project, $25 million of which has been capitalized. There can be no assurance that the CIS project will be completed successfully, on schedule, or within budget. Substantial funds are required for the completion of The Borgata and the expansion and improvements at Delta Downs. There can be no assurances that any of the above mentioned projects will go forward on a timely basis, if at all, or ultimately become operational. The source of funds required to meet 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. 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. At June 30, 2001, $197.3 million of borrowings were outstanding under our term loans and $388.8 million was outstanding under our revolving credit facility, leaving availability under the bank credit facility of $111.1 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. 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. 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 June 30, 2001 was 6.8%. 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. The bank credit facility is secured by substantially all of our real and personal property and that of our subsidiaries. Our obligations under the bank credit facility are guaranteed by all our significant subsidiaries. 27
28 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 June 30, 2001. 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 and transfers of assets. We believe we are in compliance with the covenants related to these notes at June 30, 2001. 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 are obligated to pay the sellers, subject to certain conditions, $65 million, together with simple interest ranging from 7% to 12% until the seller note is paid. The seller note is secured by a mortgage on the property and security interests in all personal property. The Delta Downs mortgage is subject and subordinate to $60 million of the mortgage under our bank credit facility. In addition, the principal amount due under the seller note may be reduced pursuant to offsets in certain instances and may be prepaid in full or in part without penalty. Pursuant to the terms of the seller note, we are required to pay the sellers accrued interest monthly beginning on June 30, 2001. In addition, we are required to pay the sellers a principal payment of $15 million on December 31, 2001 if the seller note is still outstanding as of that date. The entire unpaid balance of the seller note, including any additional amounts due to the sellers pursuant to the seller note, are due and payable in full upon the earlier of: - five business days after the State of Louisiana issues all required permits under the applicable laws for the operation of slot machines at Delta Downs; - the closing of any sale of the Delta Downs business we acquired; or - June 30, 2003. See "Note 4. to the Notes to Condensed Consolidated Financial Statements." Subsequent Event. 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 28
29 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. Upon consummation of the offering, our bank credit facility availability was permanently reduced by approximately $69 million. 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. 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. 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. In particular, 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. 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. 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. 29
30 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, the amount of outstanding borrowings is expected to fluctuate and may be reduced from time to time. At June 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 instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. These derivative instruments received cash flow hedging designation on May 1, 2001. During the three month period ended June 30, 2001, we recorded $0.9 million of preopening income on the accompanying condensed consolidated statement of operations, and other comprehensive income of $0.5 million, net of $0.3 million in taxes, representing our portion of the increase in fair value of the derivative instruments. During the six month period ended June 30, 2001, we recorded $0.5 million of preopening income on the accompanying condensed consolidated statement of operations and other comprehensive income of $0.5 million, net of $0.3 million in taxes, representing our portion of the increase in fair value of the derivative instruments. 30
31 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting was held on May 17, 2001. The stockholders re-elected William S. Boyd, Philip J. Dion, and Perry B. Whitt to three year terms, ending on the date of the Company's Annual Meeting in 2004. The number of shares voting as to the election of each nominee and the ratification of the appointment of Deloitte & Touche LLP to serve as independent auditors for the year ending December 31, 2001 is set forth below: <TABLE> <CAPTION> Votes --------------------------------- Election of Class I Directors For Withheld - ----------------------------- ---------- ------- <S> <C> <C> William S. Boyd 58,657,587 937,716 Philip J. Dion 58,915,388 679,915 Perry B. Whitt 59,003,160 592,143 </TABLE> The Stockholders ratified the selection of Deloitte & Touche LLP as independent auditors for the Company for the year ending December 31, 2001 with voting as follows: 59,232,721 for; 301,666 against; 60,916 non-votes. 31
32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.31 Second Amendment to First Amended and Restated Credit Agreement dated as of May 21, 2001, by and among the Company as the Borrower, and certain commercial lending institutions as named therein. (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. 32
33 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 9, 2001. BOYD GAMING CORPORATION By: /s/ JEFFREY G. SANTORO ------------------------------------- Jeffrey G. Santoro Vice President and Controller (Principal Accounting Officer) 33
34 EXHIBIT INDEX Exhibits 10.31 Second Amendment to First Amended and Restated Credit Agreement dated as of May 21, 2001, by and among the Company as the Borrower, and certain commercial lending institutions as named therein.