-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BaMrouKv099d2egluaTwDc+JDTCjx3ib6XoE5IsJ4cuVhTXmd4aMopwa6IOYMPvB 3Fbg2DGGA06HTww0Sk7Hkw== 0000892569-97-002677.txt : 19970930 0000892569-97-002677.hdr.sgml : 19970930 ACCESSION NUMBER: 0000892569-97-002677 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA HOTEL & CASINO CENTRAL INDEX KEY: 0000824412 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880121743 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-51672-01 FILM NUMBER: 97687312 BUSINESS ADDRESS: STREET 1: 2950 S INDUSTRIAL RD CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 7027927216 MAIL ADDRESS: STREET 1: 2950 SOUTH INDUSTRIAL ROAD CITY: SAS VEGAS STATE: NV ZIP: 89109 10-K 1 FORM 10-K FOR THE PERIOD ENDED JUNE 30, 1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 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: 33-51672 CALIFORNIA HOTEL AND CASINO (Exact name of Registrant as specified in its charter) NEVADA 88-0121743 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2950 SOUTH INDUSTRIAL ROAD, LAS VEGAS NV 89109 (Address of principal executive offices)(Zip Code) (702) 792-7200 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 26, 1997, none of the voting stock was held by non-affiliates of the Registrant. As of September 26, 1997, the registrant had outstanding 1,000 shares of Common Stock. 2 CALIFORNIA HOTEL AND CASINO (A WHOLLY-OWNED SUBSIDIARY OF BOYD GAMING CORPORATION) 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
Page No. -------- Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Security-Holders . . . . . . . . . . . . 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . 14 Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 7A. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . 22 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . 22 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . 26 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . 26
3 PART I ITEM 1. BUSINESS GENERAL California Hotel and Casino (the "Company") is a gaming company with operations in the State of Nevada and is the only casino operator with properties in each of the three principal Las Vegas gaming markets: the Las Vegas Strip; the Boulder Strip in eastern Las Vegas; and downtown Las Vegas. The Company owns and operates seven properties in Las Vegas: the Stardust Resort and Casino (the "Stardust") located on the Las Vegas Strip; Sam's Town Hotel and the Gambling Hall ("Sam's Town Las Vegas"), the Eldorado Casino (the "Eldorado") and Jokers Wild Casino ("Jokers Wild") located on or near the Boulder Strip; and the California Hotel and Casino (the "California"), the Fremont Hotel and Casino (the "Fremont") and Main Street Station Hotel, Casino and Brewery ("Main Street Station") located in downtown Las Vegas. In total, the Company currently owns and operates an aggregate of 340,000 square feet of casino space containing 9,147 slot machines and 240 table games. As such, the Company derives the majority of its gross revenues from its casino operations, which produced over 60% of gross revenues during the last three fiscal years. Food and beverage revenue and rooms revenue, which produced approximately 20% and 10%, respectively, of gross revenues during the last three fiscal years, represent the Company's other revenue sources which produced more than 10% of gross revenues during this time frame. See "Properties" and " Business -- Properties." The Company is a wholly-owned subsidiary of Boyd Gaming Corporation ("Boyd Gaming"), a multi-jurisdictional gaming company which owns or operates twelve casino entertainment facilities. The Company directly owns and operates Sam's Town Las Vegas and the California and owns and operates the Stardust, the Fremont, the Eldorado, Jokers Wild and Main Street Station through wholly-owned subsidiaries. Unless the context otherwise requires, the "Company" refers to California Hotel and Casino and its subsidiaries. The Company was incorporated in Nevada in 1973. The executive offices of the Company are located at 2950 South Industrial Road, Las Vegas, Nevada 89109, and its telephone number is (702) 792-7200. OPERATING STRATEGY The Company believes that the following key elements have contributed to the success of the Company in the past and are central to its future success. Value-Oriented Casino Entertainment Experience The Company is committed to providing a high-quality casino entertainment experience to its primarily middle-income customers at an affordable price in order to develop customer loyalty. The Company delivers value to its customers through providing service in an inviting and entertaining environment. The Company delivers additional value to its customers through moderately-priced casino entertainment, hotel, restaurant and live entertainment offerings and regularly reinvests in its existing facilities in an effort to maintain the quality and competitiveness of its properties. Lively, Friendly Atmosphere Each of the Company's facilities is clean and modern and offers friendly service in an informal and lively atmosphere. The Company's employee training programs are designed to motivate employees to provide the type of friendly and attentive service which the Company seeks to provide at its facilities. The Company has an extensive customer feedback system, ranging from guest comment cards in its restaurants and hotel rooms, to other consumer surveys and research. In addition to providing a measure of customer -1- 4 service, comment cards and consumer research allow the Company to obtain valuable customer feedback and marketing information for its database. Emphasis on Slot Play The Company emphasizes slot machine wagering, the most consistently profitable segment of the casino entertainment business. Technological advances in slot product have resulted in sophisticated interactive games which offer customers greater variety, more generous payoffs and increased periods of play for their casino entertainment dollar. The Company continually invests in upgrading its machines to reflect advances in technology and the development of proprietary slot games and related equipment at all of its facilities in order to further enhance the slot customer's experience. Comprehensive Marketing and Promotion The Company actively promotes its casino entertainment offerings, its hotels, destination restaurants and live entertainment using a variety of promotional advertising media including outdoor advertising and print and broadcast media. The Company develops and maintains an extensive customer database. The database is expanded daily, adding new casino customers by obtaining their mailing addresses and other marketing information. To encourage repeat visitation, the Company employs a direct mail program targeting its database customers with a variety of product offerings, including incentives to visit the Company's facilities frequently. During fiscal 1997, the Company distributed over 9 million pieces of mail to its database customers. The Company also provides complimentary rooms, food and other services to valued customers, but maintains limits on such items consistent with its focus on middle-income patrons. PROPERTIES The Company currently owns and operates seven properties in Las Vegas, Nevada: the Stardust; Sam's Town Las Vegas; the Eldorado; Jokers Wild; the California; the Fremont; and Main Street Station. The Stardust The Stardust, situated on 52 acres of land owned and nine acres of land leased by the Company on the Las Vegas Strip, is a casino hotel complex with approximately 87,000 square feet of casino space, a conference center containing approximately 35,000 square feet of meeting space and a 900-seat showroom. The casino offers nearly 2,000 slot machines and 79 table games, including tables featuring "21," craps, roulette, baccarat, mini-baccarat, pai gow, Caribbean stud and poker, as well as keno. The Stardust features "Enter the Night," a production show that includes computerized lighting, lasers and digital surround sound. The Stardust also has one of the largest and best known race and sports books in the United States and is the home of the Stardust line, a racing and sports line service that is quoted throughout the United States and abroad. The Stardust features more than 2,300 guest rooms, 1,500 in its 32-story hotel tower. The Stardust complex, which is distinguished by dramatic building lighting, has seven restaurants, a shopping arcade, two swimming pools and parking spaces for approximately 2,900 cars. -2- 5 The Stardust caters primarily to adult Las Vegas visitors seeking the classic Las Vegas gaming experience. Using its extensive database, the property promotes customer loyalty and generates repeat customer business by communicating with its customers regarding special events, new product offerings and special incentive promotions at the property. The Company uses a network of tour operators and wholesalers to reach customers who prefer packaged trips and print and broadcast media to attract the independent traveler. The Company attracts proven slot and table game players through direct mail promotions for tournaments, events and a variety of special offers. With its conference center, the Stardust also attracts meeting and banquet business. In addition, the Stardust draws a significant number of walk-in customers. Patrons of the Stardust come primarily from the western United States, including Southern California and Arizona, and the Midwest. The Company is analyzing various alternatives to utilize the 61-acre Stardust site, including additional hotel rooms and amenities to more effectively compete with the new generation of Las Vegas properties. Boulder Strip Properties Sam's Town Las Vegas is situated on 56 acres of land owned and 7 acres of land leased by the Company on the Boulder Strip, approximately six miles east of the Las Vegas Strip. Sam's Town features an approximately 118,000-square foot casino, a 56-lane bowling center and the 25,000-square foot Western Emporium retail store. The gaming facilities now include 2,840 gaming machines and 54 table games, including tables featuring blackjack, craps, roulette, pai gow, poker and Caribbean stud, as well as keno, a race and sports book, and bingo. The property has 650 guest rooms, 16 restaurants, 500 spaces for recreational vehicles and approximately 3,200 parking spaces, including two parking garages which together can accommodate up to 2,000 cars. The resort features a 25,000-square foot atrium which contains extensive foliage and trees, streams, bridges, and a large waterfall with a laser light show. Adjacent to the atrium there are several restaurants and a large sports bar. Other features of the property include an outdoor recreation area, as well as banquet and meeting facilities. Sam's Town Las Vegas has a western theme and features an informal, friendly atmosphere that appeals to both local residents and visitors. Gaming and bowling tournaments, paycheck sweepstakes, costume contests and holiday parties create a social center that attracts many Las Vegas residents. The property is a major sponsor of the Ladies Professional Bowling Tour and hosts many bowling events which are televised throughout the United States and attract participants from around the world. Additionally, the Company attracts local market patrons, many of whom are repeat customers, by offering excellent price/value relationships in its food and beverage operations, and by slot marketing programs that include generous slot payouts. The popularity of Sam's Town Las Vegas among local residents allows it to benefit from the rapid development of the Las Vegas metropolitan area, which has been one of the fastest growing communities in the United States over the last decade. However, competition from the recently opened Sunset Station property may have a negative impact on the future performance of Sam's Town Las Vegas. In that regard, the Company has developed a master plan for Sam's Town Las Vegas calling for, among other things, a second hotel tower. Although the Company has not yet made any decision regarding a future Sam's Town Las Vegas expansion, it is currently exploring the feasibility of such a project. The Eldorado is situated on four acres of land owned by the Company in downtown Henderson, Nevada, which is southeast of Las Vegas. The casino has over 16,000 square feet of gaming space featuring approximately 600 slot machines and 11 table games, including tables featuring "21," craps, roulette and pai gow, as well as keno, bingo and a sports book. The facility also offers three restaurants and a parking garage for up to 500 cars. The principal customers at the Eldorado are Henderson residents. Jokers Wild is situated on 13 acres of land owned by the Company on the Boulder Strip. The property offers over 22,500 square feet of casino space with over 640 slot machines and 11 table games, including tables featuring "21," craps, roulette, pai gow, Caribbean stud and poker, as well as keno and a sports book. The facility also offers a buffet restaurant, a coffee shop, an entertainment lounge, a video arcade and approximately 800 parking spaces. Jokers Wild serves both local residents and visitors to the Las Vegas area traveling on the Boulder Highway. -3- 6 Downtown Properties The California is situated on 13.9 acres of land owned and 1.6 acres of land leased by the Company in downtown Las Vegas. The California was the Company's first property and has over 36,000 square feet of gaming space, 781 guest rooms, five restaurants, approximately 5,000 square feet of meeting space, more than 800 parking spaces, including a parking garage for up to 425 cars, and an approximately 95-space recreational vehicle park, the only such facility in the downtown area. The casino offers approximately 1,150 slot machines and 36 table games, including tables featuring "21," craps, roulette, pai gow and Caribbean stud, as well as keno and a sports book. The Fremont is situated on 1.4 acres of land owned and 0.9 acres of land leased by the Company on the principal thoroughfare in downtown Las Vegas. The property offers 32,000 square feet of casino space including approximately 1,100 slot machines, and 27 table games, including tables featuring "21," craps, roulette, pai gow, poker and Caribbean stud, as well as keno and a race and sports book. The hotel has 452 guest rooms and five restaurants, including the Second Street Grill, an upscale contemporary restaurant, and the Paradise Buffet, which features tropical-themed surroundings. The property also has approximately 8,200 square feet of meeting space and a parking garage for up to 350 cars. Main Street Station was acquired by the Company in December 1993 and was used to augment the rooms base for the California and Fremont prior to its opening as a full service hotel casino in November 1996. Main Street Station is situated on 15 acres of land owned by the Company in downtown Las Vegas and was renovated and expanded prior to its November 1996 opening. The property includes a 28,500-square foot, newly-equipped casino with 22 table games and approximately 865 slot machines. The property also includes 406 renovated hotel rooms and expanded and renovated food facilities, including a 500-seat buffet, a 130-seat specialty restaurant, a 100-seat cafe, a 200-seat brew pub and oyster bar and expanded parking to include 2,000 spaces. The Company coordinates marketing efforts and support functions and has standardized operating procedures and systems among its three Downtown Properties with the goal of enhancing revenues and reducing expenses. This effort includes a consolidated database and marketing program for all Downtown Properties. The Company believes these efforts will significantly reduce costs and provide it with a competitive advantage. While many casinos in downtown Las Vegas compete with other downtown properties and properties on the Las Vegas Strip for the same customers, the Company has developed a distinctive niche for its Downtown Properties by focusing primarily on customers from Hawaii. The Company's marketing strategy for the Downtown Properties focuses on gaming enthusiasts from Hawaii and tour and travel agents from Hawaii with whom the Company has cultivated relationships since it opened the California in 1975. Through the Company's Hawaiian travel agency, Vacations Hawaii, the Company currently operates six DC-10 charter flights from Honolulu to Las Vegas each week, helping to ensure stable, reasonably priced air seats. This, as well as the Company's strong, informal relationships with other Hawaiian travel agencies, its affordably priced, all-inclusive packages and its Hawaiian promotions have allowed the California and the Fremont to capture a significant share of the Hawaiian tourist trade in Las Vegas. For more than a decade the Downtown Properties have been the leading Las Vegas destination for visitors from Hawaii. The Company attributes this success to the amenities and atmosphere at the Downtown Properties, which are designed to appeal specifically to visitors from Hawaii, and to its marketing strategy featuring significant promotions in Hawaii and a bi-monthly newsletter circulated to over 84,000 households, primarily in Hawaii. For the fiscal year ended June 30, 1997, patrons from Hawaii comprised approximately 70% of the room nights at the California, 56% of the room nights at the Fremont and 79% of the room nights at Main Street Station. The Company, together with other downtown casino operators and the City of Las Vegas, developed the downtown attraction known as the Fremont Street Experience. The attraction features a semi-circular space frame nine stories above the street, stretching along four city blocks against which a sound and light spectacle is displayed. As part of the project, vehicular traffic on portions of Fremont Street has been eliminated, asphalt replaced by a patterned streetscape and special events brought to the downtown area to entertain visitors. -4- 7 The Company believes that, since its opening in December 1995, the Fremont Street Experience has significantly enhanced the experience of visiting downtown Las Vegas and has attracted additional customers to the downtown area. While the downtown area has experienced increased traffic flow as a result of the Fremont Street Experience, the increased traffic flow has not translated into increased gaming revenue for the Company's Downtown Properties. In addition, the entity which operates the Fremont Street Experience (Fremont Street Experience, Limited Liability Company or "FSE") experienced significant levels of operating loss and cash deficiency during its first full year of operation. Management expects this trend to continue and, therefore, does not expect to recover its investment in this entity. For these reasons, the Company recorded a $5.3 million impairment loss in fiscal 1997 to write-off its entire investment in FSE. See Note 2 of Notes to Consolidated Financial Statements. -5- 8 INVESTMENT CONSIDERATIONS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Discussions containing such forward-looking statements may be found in the material set forth under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as in the Annual Report generally. Also, documents subsequently filed by the Company with the Securities and Exchange Commission may contain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of the investment conditions set forth below and the matters set forth in the Annual Report generally. The Company cautions the reader, however, that this list of factors may not be exhaustive, particularly with respect to future filings. COMPETITION The gaming industry is highly competitive. Gaming activities include: traditional land-based casinos; riverboat and dockside gaming; casino gaming on Indian land; state-sponsored lotteries; video poker in restaurants, bars and hotels; pari-mutuel betting on horse racing, dog racing and jai-alai; sports bookmaking; and card rooms. The casinos owned and being developed by the Company compete and will in the future compete with all these forms of gaming and with any new forms of gaming that may be legalized in existing and additional jurisdictions, as well as with other types of entertainment. In addition, further expansion of gaming into other jurisdictions could adversely affect the Company's business by diverting its customers to competitors in such jurisdictions. In particular, the expansion of casino gaming in or near any geographic area from which the Company attracts or expects to attract a significant number of its customers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that successful gaming facilities compete based on the following factors: location; attractions; quality of gaming facilities, gaming experience and entertainment; quality of food, beverage and atmosphere; and price. Although the Company believes it competes favorably with respect to these factors in most of its markets, some of its competitors have significantly greater financial and other resources than the Company. The Company's properties compete primarily with other casino hotels on the Las Vegas Strip, the Boulder Strip and in downtown Las Vegas. Currently, there are approximately 25 major gaming properties located on or near the Las Vegas Strip, 13 located in the downtown area and several located in other areas of Las Vegas. Las Vegas gaming square footage and room capacity are continuing to increase. A number of marquee properties have opened in the last several years, and several others are currently under construction or planned for the Las Vegas Strip, including the 3,000-room Paris Casino-Resort and the 3,000-room Bellagio. Additionally, several properties have recently announced or begun significant expansion and renovation projects, including MGM Grand Hotel/Casino, Harrah's-Las Vegas and the Sahara Hotel and Casino. Each of the foregoing facilities has or may have a theme and attractions which have drawn or may draw significant numbers of visitors. Moreover, most of -6- 9 these facilities attract or may attract primarily middle-income patrons, who are the focus of the Company's marketing strategy. Also, competition from the recently opened Sunset Station property may have a negative impact on the future performance of Sam's Town Las Vegas. Although the Company believes that these additional facilities will draw more visitors to Las Vegas, these properties also may divert potential gaming activity from the Company. Future additions, expansions and enhancements to existing properties and construction of new properties by the Company's competitors could divert additional gaming activity from the Company's facilities. There can be no assurance that the Company will compete successfully in the Las Vegas market in the future. ADDITIONAL FINANCING REQUIREMENTS The Company intends to finance its current and future expansion projects primarily with cash flow from operations and borrowings under the Company's and Boyd Gaming's five-year $500 million reducing revolving bank credit facility (the "Bank Credit Facility"). If the Company is unable to finance such projects through cash flow from operations and borrowings under the Bank Credit Facility, it will have to adopt one or more alternatives, such as reducing or delaying planned expansion and capital expenditures, selling assets, restructuring debt or obtaining additional equity or debt financing. No assurance can be given that the aforementioned sources of funds will be sufficient to finance the Company's expansion or that other financing will be available on acceptable terms, in a timely manner or at all. In addition, the Company's 11% Senior Subordinated Notes due 2002 (the "11% Notes") and the Bank Credit Facility contain certain restrictions on the ability of the Company to incur additional indebtedness. If the Company is unable to secure additional financing, it could be forced to limit or suspend expansion, development and acquisition projects, which may adversely effect the Company's business, financial condition and results of operations. See "--Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." LEVERAGE AND DEBT SERVICE At June 30, 1997, the Company had total long-term debt of approximately $380 million. Debt service requirements on the Bank Credit Facility consist of interest expense on outstanding indebtedness. Beginning in December 1998, the total principal amount available under the Bank Credit Facility will be reduced by $25 million and reduced by an additional $50 million at the end of each six-month period thereafter until maturity in June 2001. In July 1997, the availability under the Bank Credit Facility was reduced by approximately $193 million in connection with Boyd Gaming's issuance of $250 million aggregate principal amount of 9.50% Senior Subordinated Notes Due 2007 (the "9.50% Boyd Notes"). Availability under the Bank Credit Facility will be subsequently increased if and to the extent the Company purchases or redeems the 11% Notes. No assurance can be given that any such purchase or redemption will be consummated. Debt service requirements on the 11% Notes issued by a financing subsidiary of the Company consist of semi-annual interest payments and repayment of the $185 million principal amount on December 1, 2002. The Company's ability to service its debt will be dependent on its future performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. Accordingly, no assurance can be given that the Company will maintain a level of operating cash flow that will permit it to service its obligations. If the Company is unable to generate sufficient cash flow or is unable to refinance or extend outstanding borrowings, it will have to adopt one or more alternatives, such as reducing or delaying planned expansion and capital expenditures, selling assets, restructuring debt or obtaining additional debt financing. There can be no assurance that any of these financing strategies could be effected on satisfactory terms, if at all. In addition, Nevada law contains restrictions on the ability of companies engaged in the gaming business to undertake certain financing transactions. Such restrictions may prevent the Company from obtaining necessary capital. See "--Additional Financing Requirements," "--Governmental Regulation," and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." -7- 10 GOVERNMENTAL REGULATION The Company is subject to a variety of gaming and other regulations. If additional gaming regulations are adopted, such regulations could impose restrictions or costs that could have a material adverse effect on the Company. From time to time, various proposals have been introduced in the Nevada legislature that, if enacted, could adversely affect the tax, regulatory, operational or other aspects of the gaming industry and the Company. No assurance can be given that such legislation will not be enacted. The federal government has also previously considered a federal tax on casino revenues and may consider such a tax in the future. In addition, gaming companies are currently subject to significant state and local taxes and fees in addition to normal corporate income taxes, and such taxes and fees are subject to increase at any time. Any material increase in these taxes or fees could adversely affect the Company. The ownership and operation of casino gaming facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii) various local regulation. The Company's gaming operations are subject to the licensing and regulatory control of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and the Clark County Liquor and Gaming Licensing Board (the "Clark County Board"). The Nevada Commission, the Nevada Board, and the Clark County Board are collectively referred to herein as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of responsible accounting practices and procedures; (iii) the maintenance of effective controls over the financial practice of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) the provision of a source of state and local revenues though taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. Corporations that operate casinos in Nevada are required to be licensed by the Nevada Gaming Authorities. A gaming license requires the periodic payment of fees and taxes and is not transferable. Boyd Gaming is registered by the Nevada Commission as a publicly-traded corporation (a "Registered Corporation") and as such, it is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. Boyd Gaming has been found suitable by the Nevada Commission to own the stock of the Company. The Company is licensed by the Nevada Commission to operate non-restricted gaming activities at the California and Sam's Town Las Vegas and is additionally registered as a holding corporation and approved by the Nevada Gaming Authorities to own the stock of Mare Bear, Inc. ("Mare Bear"), the operator of the Stardust; Sam Will, Inc. ("Sam Will"), the operator of the Fremont; and Eldorado, Inc., the operator of the Eldorado and Joker's Wild. No person may become a stockholder of, or receive any percentage of profits from, the Company or its subsidiaries without first obtaining licenses and approvals from the Nevada Gaming Authorities. Boyd Gaming, the Company, Mare Bear, Sam Will and Eldorado, Inc. have obtained from the Nevada Gaming Authorities the various registrations, approvals, permits and licenses required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, the Company or any of its licensed subsidiaries in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of the Company and its licensed subsidiaries must file applications -8- 11 with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of the Company who are actively and directly involved in gaming activities of the Company or its licensed subsidiaries may be required to be licensed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with the Company or any of its licensed subsidiaries, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require the Company or any of its licensed subsidiaries to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. The Company and its licensed subsidiaries are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by the Company and its subsidiaries must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by the Company or any of its licensed subsidiaries, the gaming licenses they hold could be limited, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, the Company, the subsidiary involved, the Company, and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate the Company's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for reasonable rental value of the Company's gaming properties) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect the Company's gaming operations. Any beneficial holder of the Company's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of the Company's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policies of the state of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires more than 5% of the Company's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of the Company's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor," as defined in the Nevada Act, which -9- 12 acquires more than 10%, but not more than 15%, of the Company's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Company, any change in the Company's corporate charter, bylaws, management, policies or operations of the Company, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Company's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes include only: (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within thirty days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. The Company is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with the Company or any of its licensed subsidiaries, the Company (i) pays that person any dividend or interest upon voting securities of the Company, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by that person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities for cash at fair market value. Additionally, the Clark County Board has taken the position that it has the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license. The Nevada Commission may, in its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it: (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. The Company is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. -10- 13 The Company is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require the Company's securities to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on the Company. The Company may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. Such approval, if given, does not constitute a finding, recommendation or approval by the Nevada Gaming Authorities as to the accuracy or adequacy of the prospectus or the investment merits of the securities. Any representation to the contrary is unlawful. On September 20, 1996, the Nevada Commission granted the Company prior approval to make public offerings for a period of one year, subject to certain conditions ("Shelf Approval"). However, the Shelf Approval may be rescinded for good cause without prior notice upon the issuance of an interlocutory stop order by the Chairman of the Nevada Board. This offering is made pursuant to the Shelf Approval. The Shelf Approval does not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. Changes in control of the Company through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Gaming Authorities in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchase of voting securities and corporate defense tactics affecting Nevada gaming licensees, and Registered Corporations that are affiliated with those licensees, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Company can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Company's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada, Clark County and the City of Las Vegas. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are -11- 14 based upon any of: (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling of food or refreshments. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employ a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. The sale of food or alcoholic beverages at the Company's Nevada casinos is subject to licensing, control and regulation by the applicable local authorities. All licenses are revocable and are not transferable. The agencies involved have full power to limit, condition, suspend or revoke any such license, and any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the affected casino or casinos. ENVIRONMENTAL RISKS The Company is subject to certain federal, state and local environmental, safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental, safety and health laws, regulations and ordinances. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in future additional costs to the Company's operations. Any significant environmental liability or compliance costs could have a material adverse effect on the Company's business, financial condition and results of operations. RELIANCE ON CERTAIN MARKETS The California, Fremont and Main Street Station derive a substantial portion of their customers from the Hawaiian market. In fiscal 1997, patrons from Hawaii comprised approximately 70% of the room nights at the California, over 56% at the Fremont and over 79% at Main Street Station. An increase in fuel costs or transportation prices, a decrease in airplane seat availability or a deterioration of relations with tour and travel agents, as they affect travel between the Hawaiian market and the Company's facilities, could materially adversely affect the Company's business, financial condition and results of operations. The Company's properties also draw a substantial number of customers from certain other specific geographic areas, including Southern California, Arizona, Las Vegas and the Midwest. Adverse economic conditions in any of these markets, or the failure of the Company's facilities to continue to attract customers from these geographic market as a result of increased competition -12- 15 in those markets could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES At June 30, 1997, the Company employed approximately 8,400 persons: approximately 2,600 at the Stardust; 2,400 at Sam's Town Las Vegas; 300 at the Eldorado; 340 at Joker's Wild; 1,000 at the California; 975 at the Fremont; and 775 at Main Street Station. On such date, the Company had collective bargaining relationships with 11 unions covering approximately 2,600 employees, substantially all of whom are employed at the Stardust and the Fremont. Several collective bargaining agreements are currently in effect; other agreements have expired and are in various stages of negotiation. Employees covered by expired agreements have continued to work during the negotiations, in some cases under the terms of the expired agreements and in others under modifications thereof. ITEM 2. PROPERTIES The following table sets forth certain information regarding the properties owned or operated by the Company as of June 30, 1997.
YEAR BUILT CASINO SPACE SLOT TABLE HOTEL LAND OR ACQUIRED (SQ. FT.) MACHINES GAMES ROOMS RESTAURANTS (ACRES) ----------- ------------ -------- ----- ----- ----------- ------- LAS VEGAS STRIP Stardust Resort and Casino................ 1985 87,000 1,961 79 2,320 7 61 DOWNTOWN LAS VEGAS California Hotel and Casino............... 1975 36,000 1,151 36 781 5 16 Fremont Hotel and Casino.................. 1985 32,000 1,088 27 452 5 2 Main Street Station Hotel, Casino and Brewery................................. 1993 28,500 865 22 406 4 15 BOULDER STRIP Sam's Town Las Vegas...................... 1979 118,000 2,841 54 650 16 63 Eldorado Casino........................... 1993 16,000 600 11 -- 3 4 Jokers Wild Casino........................ 1993 22,500 641 11 -- 2 13 ------- ------ --- ----- -- --- Total............................. 340,000 9,147 240 4,609 42 174 ======= ====== === ===== == ===
ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to various legal proceedings arising in the ordinary course of business. In the opinion of management, all pending claims in such matters, if adversely decided, would not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -13- 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is currently no established public trading market for the Company's Common Stock. Boyd Gaming is the sole stockholder of the Company. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below as of June 30, 1997 and 1996 and for the fiscal years ended June 30, 1997, 1996 and 1995, have been derived from the audited consolidated financial statements contained elsewhere in this Form 10-K. The selected consolidated financial data presented below as of June 30, 1995 and as of and for the fiscal years ended June 30, 1994 and 1993 have been derived from audited consolidated financial statements of the Company not contained herein. Operating results for the fiscal years shown below are not necessarily indicative of the results that may be expected for future fiscal years.
FOR THE YEAR ENDED JUNE 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS) INCOME STATEMENT DATA Net revenues............................................ $523,799 $523,430 $496,831 $458,712 $431,174 Operating expenses(a)................................... 489,241 463,846 439,969 399,778 367,740 -------- -------- -------- -------- -------- Operating income........................................ 34,558 59,584 56,862 58,934 63,434 Interest expense, net of amounts capitalized............ (33,622) (33,820) (38,492) (30,354) (33,672) Interest income......................................... 127 -- 40 199 1,449 Gain on investment...................................... -- -- -- -- 1,062 -------- -------- -------- -------- -------- Income before provision for income taxes, cumulative effect of a change in accounting principle and extraordinary item.................................... 1,063 25,764 18,410 28,779 32,273 Provision for income taxes.............................. 487 10,675 8,780 10,778 11,469 -------- -------- -------- -------- -------- Income before cumulative effect of a change in accounting principle and extraordinary item........... 576 15,089 9,630 18,001 20,804 Cumulative effect of a change in accounting for income taxes................................................. -- -- -- 2,035 -- -------- -------- -------- -------- -------- Net income before extraordinary item.................... 576 15,089 9,630 20,036 20,804 Extraordinary item, net of tax benefit.................. -- 842 -- -- 7,397 -------- -------- -------- -------- -------- Net income.............................................. $ 576 $ 14,247 $ 9,630 $ 20,036 $ 13,407 ======== ======== ======== ======== ========
JUNE 30, ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA Total assets............................................ $590,136 $577,520 $578,882 $585,996 $496,167 Long-term debt, net of current maturities............... 378,456 364,415 369,382 375,637 361,927 Stockholder's equity.................................... 130,426 129,850 104,353 94,723 72,553
- --------- (a) Includes $5,325 of impairment loss during the fiscal year ended June 30, 1997. See Note 2 to Notes to Consolidated Financial Statements. -14- 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating data for the Company's properties. As used herein, "Boulder Strip Properties" consist of Sam's Town Las Vegas, the Eldorado and the Jokers Wild and "Downtown Properties" consists of the California, the Fremont, and Main Street Station (opened November 1996). Net revenues displayed in this table and discussed in this section are net of promotional allowances; as such, references to rooms revenue and food and beverage revenue do not agree to the amounts on the Consolidated Statements of Income. Operating income from properties for the purpose of this table exclude corporate expense, including related depreciation and amortization, and preopening expense.
YEAR ENDED JUNE 30, ------------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Net revenues Stardust . . . . . . . . . . . . $180,387 $194,513 $193,563 Boulder Strip Properties . . . . 193,004 189,315 168,036 Downtown Properties . . . . . . . 150,408 139,602 135,232 -------- -------- -------- Total properties . . . . . . $523,799 $523,430 $496,831 ======== ======== ======== Operating income Stardust . . . . . . . . . . . . $ 19,086 $ 30,748 $ 30,688 Boulder Strip Properties . . . . 26,766 23,904 15,551 Downtown Properties . . . . . . . 10,390(a) 18,444 22,561 -------- -------- -------- Total properties . . . . . . $ 56,242 $ 73,096 $ 68,800 ======== ======== ========
- -------- (a) Before preopening expense. FISCAL 1997 COMPARED TO FISCAL 1996 Revenues - -------- Consolidated net revenues remained relatively flat during fiscal 1997 compared to fiscal 1996. Company-wide casino revenue decreased 1.2%, while food and beverage revenue increased 5.7% and rooms revenue increased 1.1%. Net revenues were enhanced by the opening of Main Street Station in November 1996, and offset by declines in net revenues experienced principally at the Stardust (7.3%), the California (13.1%) and the Fremont (5.7%). These declines in net revenues are attributable, in each case, to increased competition. In addition, the California was adversely impacted by construction disruption during the first quarter of fiscal 1997. Operating Income - ---------------- Consolidated operating income was $34.6 million during fiscal 1997 compared to $59.6 million in fiscal 1996. Consolidated operating income in fiscal 1997 was impacted by $3.5 million in preopening expense related to the November 1996 opening of Main Street Station and $5.3 million in impairment loss related to the Company's investment in FSE. Operating income before preopening expense and impairment loss declined 27.2% due to declines experienced at the Stardust and Downtown Properties, partially offset by an increase in operating income at the Boulder Strip Properties. -15- 18 Stardust - -------- Net revenues at the Stardust declined by 7.3% during fiscal 1997 compared to fiscal 1996. The majority of the decline is attributable to a 8.5% reduction in casino revenues, as a result of a decline in slot wagering and a lower win percentage in the sports book partially offset by increased wagering. Revenues from rooms, food and beverage also declined by approximately 6.2% during the fiscal year due to a decline in the number of occupied rooms and food covers. Operating income declined by 37.9% to $19.1 million in fiscal 1997 compared to fiscal 1996, and operating income margin declined from 15.8% in fiscal 1996 to 10.6% in fiscal 1997. These declines in operating income and operating income margin are primarily the result of the decline in revenues. Boulder Strip Properties - ------------------------ Net revenues at the Boulder Strip Properties increased 1.9% during fiscal 1997 compared to fiscal 1996. The increase is primarily attributable to a 2.2% increase in casino revenue as a result of increased wagering volume in table games and slots at Sam's Town Las Vegas. Rooms revenues and food and beverage revenue increased 11.0% and 2.2%, respectively, over the prior fiscal year's levels. The increase in rooms revenue is primarily attributable to a 24.3% increase in average daily room rates at Sam's Town Las Vegas. Operating income margin at the Boulder Strip Properties increased from 12.6% in fiscal 1996 to 13.9% in fiscal 1997, due to the increase in net revenues as well as improved operating margins in the rooms and food and beverage departments at Sam's Town Las Vegas. DOWNTOWN PROPERTIES - ------------------- Net revenues at the Downtown Properties increased 7.7% during fiscal 1997 compared to fiscal 1996. The increase is attributable to the November 1996 opening of Main Street Station which was partially offset by declines in net revenues at the California and Fremont of 13.1% and 5.7%, respectively. These two properties have been affected by the opening of Main Street Station, which has initially attracted patrons from their customer bases. In addition, each component of the California's net revenues was adversely impacted by a rooms remodel project which reduced its room availability by approximately 15% during the first fiscal quarter of 1997. Aggregate operating income for the Downtown Properties declined by 43.7% during fiscal 1997 to $10.4 million, and aggregate operating income margin for the Downtown Properties decreased from 13.2% in fiscal 1996 to 6.9% in fiscal 1997. These declines are a result of the reduction in net revenues at the California and Fremont. In addition, Main Street Station posted a $1.9 million operating loss before preopening expense since its opening in November 1996. Vacations Hawaii, an affiliate of the Company, was acquired by Boyd Gaming in October 1995 and operates as a travel agency for the benefit of the Downtown Properties. Hawaiian customers comprise a majority of the available room nights at the Downtown Properties. See "Business -- Properties." OTHER EXPENSES - -------------- Depreciation and amortization expense was $44.4 million in both fiscal 1997 and fiscal 1996 as increases in fixed assets primarily related to the opening of Main Street Station in November 1996 were offset by the increase in the level of fully depreciated assets at the Company's older properties. Corporate expenses remained relatively constant at $11.6 million in fiscal 1997 compared to $11.7 million in fiscal 1996. During fiscal 1997, the Company recorded a preopening charge of $3.5 million upon the opening of Main Street Station in November 1996. There were no such charges in fiscal 1996. -16- 19 IMPAIRMENT LOSS - --------------- The Company recorded a $5.3 million impairment loss related to its 17.4% ownership interest in FSE during fiscal 1997. This impairment loss is principally due to the significant levels of operating loss and operating cash deficiency reported in May 1997 by FSE relating to its first full year of operation. Management expects this trend to continue and, therefore, does not expect to recover its investment in this entity. OTHER INCOME (EXPENSE) - ---------------------- Other income and expense is primarily comprised of interest expense, net of amounts capitalized. Interest expense decreased slightly during fiscal 1997 to $33.6 million from $33.8 million in fiscal 1996 as slightly lower average interest rates offset slightly higher levels of average debt outstanding. PROVISION FOR INCOME TAXES - -------------------------- The Company's effective tax rate was 46% and 41%, respectively, for the fiscal years ended June 30, 1997 and 1996. The fluctuation in the rates is primarily attributable to the level of certain non-deductible Company provided benefits relative to the decline in pre-tax income in fiscal 1997 compared to fiscal 1996. EXTRAORDINARY ITEM - ------------------ The Company recorded an extraordinary loss of $.8 million, net of tax, during fiscal 1996 related to the write-off of unamortized bank loan fees in connection with the completion of the Company's current Bank Credit Facility in June 1996. NET INCOME (LOSS) - ----------------- As a result of the foregoing factors, the Company reported net income of $0.6 million for fiscal 1997 compared to net income of $14.2 million in fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 - ----------------------------------- REVENUES - -------- Consolidated net revenues increased 5.4% for fiscal 1996 compared to fiscal 1995. The increase in net revenues for fiscal 1996 resulted primarily from increased revenues at Sam's Town Las Vegas of 14.9%. Revenue growth on a consolidated basis in fiscal 1996 was achieved in all major revenue categories, with casino revenue increasing 5.5%, room revenue increasing 2.6%, food and beverage revenue increasing 6.0% compared to fiscal 1995. Slot revenue, which continued to account for more than 70% of casino revenue, increased 8.2% in fiscal 1996 compared to fiscal 1995. The increase in slot revenue was primarily attributable to a 24% increase in slot revenue at Sam's Town Las Vegas. Table games revenue, the only other significant component of casino revenue, decreased 3.6% in fiscal 1996 compared to fiscal 1995. Company-wide room revenue increased 2.6% in fiscal 1996 compared to fiscal 1995 as a result of a 2.1% increase in occupied rooms and a 6.4% increase in the average daily room rate. The increase in occupied rooms was attributable to the opening of the California rooms expansion (146 rooms opened in December 1994). The rooms expansion project was open for the entire fiscal 1996 but was only open for -17- 20 the last six months of fiscal 1995. Occupancy statistics did not include rooms at Main Street Station which the Company used until the November 1996 opening of Main Street Station to augment the rooms base at the California and the Fremont. The Main Street Station property was purchased in December 1993 as a closed casino hotel facility. In November 1996, the Company completed a major renovation of the facility and opened Main Street Station for business. OPERATING INCOME - ---------------- Consolidated operating income increased 4.8% for fiscal 1996 compared to fiscal 1995 while consolidated operating income margins remained at 11.4%. This increase in operating income and operating income margins was primarily attributable to increases at Sam's Town Las Vegas of 83% and 4.3 percentage points, respectively, offset by declines at the Downtown Properties of 18.2% and 3.5 percentage points, respectively. STARDUST - -------- Net revenues at the Stardust increased 0.5% for fiscal 1996 as compared to the prior fiscal year. Casino and food and beverage revenues declined 0.5% and 1.6%, respectively, while rooms revenue increased 3.4% and showroom revenue increased 9.3% for fiscal 1996 as compared to fiscal 1995. Slot revenue declined 1.3% in fiscal 1996 with a 2.3% increase in wagering offset by lower net winnings. Table games revenue declined 4.1% for fiscal 1996 as compared to fiscal 1995 as a result of an increase of 4.3% in wagering offset by lower net winnings. Other casino revenues increased 11.9% for fiscal 1996 primarily as a result of a 28% increase in revenue in the sports book. Rooms revenue at the Stardust increased 3.4% for fiscal 1996 compared to fiscal 1995 with a 1.3% decline in occupied rooms offset by a 7.9% increase in average daily room rate. The Stardust posted an occupancy rate of 96% in fiscal 1996 versus 97% in the prior fiscal year. Operating income increased slightly in fiscal 1996 compared to fiscal 1995 and operating income margin was 15.8% compared to 15.9%, respectively, for fiscal 1996 versus fiscal 1995. The slight decline in operating income margin was primarily the result of higher advertising and promotional expenses not fully offset by increased operating income and operating income margin in the rooms department. BOULDER STRIP PROPERTIES - ------------------------ Net revenues for the Boulder Strip Properties increased 12.7% for fiscal 1996 versus fiscal 1995 primarily as a result of increased revenues at Sam's Town Las Vegas. Sam's Town Las Vegas revenue increased 14.9% for fiscal 1996 while revenues increased 6.8% at Jokers Wild and declined slightly at the Eldorado. Casino revenues at the Boulder Strip Properties increased 16.7% for fiscal 1996 versus fiscal 1995, while rooms revenue increased 4.7% and food and beverage revenue increased 4.8%. Operating income at the Boulder Strip Properties increased 54% for fiscal 1996 compared to fiscal 1995 while operating income margin increased 3.3 percentage points to 12.6% for fiscal 1996. Sam's Town Las Vegas posted increases in operating income and operating income margin of 83% and 4.3 percentage points, respectively, for the 1996 fiscal year. Operating income margins increased 2.5 percentage points at the Eldorado and declined 2.3 percentage points at Jokers Wild for fiscal 1996 versus fiscal 1995. The increase in operating income margin at the Eldorado was a result of increased casino revenue while the decline in operating income margin at Jokers Wild was primarily a result of increased expenses in the food and beverage department for fiscal 1996 versus fiscal 1995. Management believes that the significant increases in revenues, operating income and operating income margin at Sam's Town Las Vegas for fiscal 1996 versus fiscal 1995 were primarily attributable to the implementation of successful marketing programs creating increased customer awareness and visitation. DOWNTOWN PROPERTIES - ------------------- Net revenues at the Downtown Properties increased 3.2% for fiscal 1996 compared to fiscal 1995. Net revenues at the California increased 1.4% while net revenues at the Fremont increased 5.2%. Casino revenues at the Downtown Properties were up slightly while food and beverage revenue increased 20% and -18- 21 rooms revenue declined slightly. Operating income and operating income margins at the Downtown Properties declined 18.2% and 3.5 percentage points, respectively in fiscal 1996 as compared to fiscal 1995. Operating income at the California declined 20% while operating income margin at the California declined 3.7 percentage points for fiscal 1996. The decline in operating income and operating income margin at the California was primarily the result of increased operating costs in the rooms and food and beverage departments and increased advertising and promotional costs. Operating income and operating income margin at the Fremont declined 15.6% and 3.1 percentage points, respectively for fiscal 1996 compared to fiscal 1995 primarily as a result of increased advertising and promotional costs. Construction of the Fremont Street Experience project, which was completed and opened to the public in December 1995, negatively impacted the Downtown Properties for the majority of the first and second fiscal quarter. OTHER EXPENSES - -------------- Interest expense, net of amounts capitalized, decreased $4.7 million or 12.1% for fiscal 1996 compared to fiscal 1995 primarily as a result of more capitalized interest related to projects under development and lower net borrowings. Depreciation and amortization expense for fiscal 1996 decreased $1.5 million or 3.3% compared to fiscal 1995. PROVISION FOR TAXES - ------------------- The Company's tax rate for fiscal 1996 was 41% compared to 48% in fiscal 1995. The Company's 1995 tax rate was affected by the increase in certain non-deductible Company provided benefits. EXTRAORDINARY ITEM - ------------------ The Company recorded an extraordinary loss, net of tax, of $.8 million in fiscal 1996. This extraordinary loss resulted from the write-off of unamortized bank loan fees in connection with its recent bank refinancing which was completed on June 19, 1996. NET INCOME - ---------- As a result of these factors, net income before extraordinary item increased $6.0 million and net income increased $5.1 million for fiscal 1996 compared to fiscal 1995. LIQUIDITY AND CAPITAL RESOURCES Cash Flow and Working Capital The Company's policy is to use operating cash flow in combination with debt financing to fund renovations of its properties and expansion of its business. During fiscal 1997, the Company completed an expansion and renovation of Main Street Station for approximately $48 million expended over the course of fiscal 1997 and 1996. -19- 22 During fiscal 1997, the Company's generated operating cash flows of $34.8 million compared to $66.5 million in fiscal 1996 and $39.6 million in fiscal 1995. Operating cash flows in fiscal 1997 were impacted by increased levels of competition as well as construction disruption at the California. As of June 30, 1997 and 1996, the Company had balances of cash and cash equivalents of approximately $30.1 million and $28.4 million, respectively, and working capital deficits of $5.8 million and $6.7 million, respectively. The Company has historically operated with negative working capital in order to minimize borrowings (and related interest costs) under its Bank Credit Facility. The working capital deficits are funded through cash generated from operations as well as borrowings under the Bank Credit Facility. Capital Expenditures During fiscal 1997, net cash used in investing activities was $47.3 million versus $41.2 million in fiscal 1996 and $37.6 million in fiscal 1995. The Company is committed to continually maintaining and enhancing its existing facilities, most notably by upgrading and remodeling its casinos, hotel rooms, restaurants and public space and by providing the latest slot machines for its customers. The Company's capital expenditures for these purposes were approximately $17.5 million, $25.4 million and $22.6 million during the years ended June 30, 1997, 1996 and 1995. Capital expenditures related to the expansion and renovation of Main Street Station were $33.6 million and $14.1 million during the years ended June 30, 1997 and 1996, respectively. In addition, the Fremont is currently undergoing a rooms remodel project which is expected to cost approximately $5 million and be completed by the end of calendar 1997. Debt Facilities Much of the funding for the Company's renovation and expansion projects comes from debt financings, as well as cash flows from existing operations. During fiscal 1997, cash flows from financing activities totalled $14.1 million, primarily as a result of net borrowings under the Company's and Boyd Gaming's Bank Credit Facility, which originated in June 1996 and matures in June 2001. At June 30, 1997, the Company's outstanding borrowings under the Bank Credit Facility were $190 million. The Company's and Boyd Gaming's unused availability under the Bank Credit Facility at June 30, 1997 was $149 million; however, the unused availability was subsequently reduced by approximately $193 million in July 1997 in connection with Boyd Gaming's issuance of $250 million principal amount of 9.50% Senior Subordinated Notes. Availability will be subsequently increased if, and to the extent, the Company purchases or redeems its $185 million principal amount of 11% Senior Subordinated Notes (the "11% Notes"). Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or London Interbank Offered Rate, at the discretion of the Company. The rate under the Bank Credit Facility at June 30, 1997 was 8.1%. The Company, through its wholly-owned subsidiary, California Hotel Finance Company, has $185 million principal amount of 11% Senior Subordinated Notes due December 2002. The 11% Notes contain certain covenants, including but not limited to limitations on restricted payments (as defined in the indenture related to the 11% Notes). As a result of these restrictions, at June 30, 1997 the Company had a portion of its retained earnings and net assets, in the amounts of $31.9 million and $87.1 million, respectively, that were not available for distribution as dividends to its parent, Boyd Gaming. The Company's ability to service its debt will be dependent on its future performance, which will be affected by, among other things, prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. -20- 23 New Expansion Projects The Company, as part of its ongoing strategic planning process, has recently completed a review of its current growth opportunities. Based on this review, the Company expects to be focusing its growth efforts on the Stardust. The Company is analyzing various alternatives to utilize the 61-acre Stardust site, including additional hotel rooms and other amenities to more effectively compete with the new generation of Las Vegas properties. Substantial funds would be required for the expansion project discussed above. There can be no assurance the above mentioned project will go forward or ultimately become operational. The source of funds required to meet the Company's working capital needs (including maintenance capital expenditures) and those required to complete the above-mentioned project is expected to be cash flow from operations and availability under the Company's Bank Credit Facility. Based on current plans, the Company does not anticipate obtaining new borrowings in excess of amounts available under the Bank Credit Facility in the next 12 months. Thereafter, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private debt financings or from other sources. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company. See "Investment Considerations -- Leverage and Debt Service," "-- Expansion," and "-- Additional Financing Requirements." The Company continues to pursue and investigate additional expansion opportunities. Such expansion will be affected and determined by several key factors, including identification of additional suitable investment opportunities and availability of acceptable financing. Additional projects will require the Company to make substantial investments, which the Company intends to fund through cash flow from operations and availability under the Bank Credit Facility. To the extent such sources of funds are not sufficient, the Company may also seek to raise such additional funds through public or private debt financings or from other sources. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company. Recently Issued Accounting Standards See Note 1 to Notes to Consolidated Financial Statements for a complete discussion of recently issued accounting standards and their expected impact on the Company's consolidated financial statements. -21- 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not required of the Company at this time. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the directors and executive officers of the Company as of August 31, 1997.
NAME AGE POSITION - ---- --- -------- William S. Boyd 65 President and Director Donald D. Snyder 50 Senior Vice President and Director Robert L. Boughner 44 Senior Vice President and Director Ellis Landau 53 Senior Vice President, Chief Financial Officer and Treasurer James W. Hippler 50 Senior Vice President - Administration Keith E. Smith 37 Vice President and Controller Charles E. Huff 52 Vice President, Secretary and General Counsel
-22- 25 William S. Boyd, a co-founder of the Company, has served as a director and President of the Company since its inception in 1973 and Chairman of the Board of Directors and Chief Executive Officer from January 1988. Prior to joining the Company, Mr. Boyd practiced law in Las Vegas for 15 years. Between 1970 and 1974 he also was Secretary and Treasurer and a member of the Board of Directors of the Union Plaza Hotel and Casino. Mr. Boyd is active in numerous business and civic organizations in Las Vegas. Donald D. Snyder has been Senior Vice President and director of the Company since January 1997. From July 1996 to January 1997, Mr. Snyder served as Boyd Gaming Corporation's Executive Vice President -- Administration. From 1993 to the present, Mr. Snyder served as Chairman, President and Chief Executive Officer of the Fremont Street Experience, Limited Liability Company, the developer and operator of the Fremont Street Experience in Downtown Las Vegas. From 1992 to 1993, he was President of Strategic Associates, Inc., a consulting firm. From 1987 through 1991, he served as Chairman of the Board and Chief Executive Officer of First Interstate Bank of Nevada. Robert L. Boughner has been Executive Vice President and Chief Operating Officer of Boyd Gaming Corporation since April 1990. From 1985 until April 1990, he served as Senior Vice President of CH&C and prior to that time he held various management positions in the Company. Mr. Boughner is active in civic and industry affairs, and serves on the Board of Directors of the Las Vegas Convention and Visitors Authority, the Nevada Hotel and Motel Association and the Nevada Restaurant Association. Ellis Landau has been Senior Vice President Chief Financial Officer and Treasurer of the Company since August 1990. From April 1990 through July 1990, he served as a consultant to the Company. Prior to joining the Company, Mr. Landau held various management positions with Ramada, Inc., a gaming and hospitality company whose gaming operations were transferred to Aztar Corporation, including Vice President and Treasurer of that company from 1978 to February 1990. James W. Hippler has been Senior Vice President-Administration of the Company since April 1990. From 1980 to 1990, Mr. Hippler held various positions with CH&C, including Director of Risk Management, Director of Internal Audit and Director of Human Resources. Keith E. Smith has served as Vice President and Controller from June 1993 to January 1997 and, from September 1990 to June 1993 he served as Corporate Controller of the Company. From May 1989 to September 1990, Mr. Smith was Vice President-Finance of the Dunes Hotel, Casino and Country Club in Las Vegas. From 1982 to May 1989, he was employed by Ramada, Inc., a gaming and hospitality company, in a variety of positions, including Controller of the Tropicana Resort and Casino in Las Vegas. Charles E. Huff has been Vice President, Secretary and General Counsel of Boyd Gaming Corporation since its inception. He has served as Vice President and General Counsel of CH&C since July 1986 and Secretary since January 1988. Prior to joining CH&C, Mr. Huff practiced law in Las Vegas for 13 years. -23- 26 Directors of the Company are elected annually to serve for one year and until their successors are duly elected and qualified. Officers serve at the discretion of the Board of Directors. Each director of the Company is also a director of Boyd Gaming. Each director who is not an employee of Boyd Gaming or the Company currently receives an annual fee of $25,000, meeting fees of $1,000 per board meeting attended and $500 per committee meeting attended and related expenses for services as a director of both Boyd Gaming and the Company. Employee and non-employee directors participate in the Directors' Medical Reimbursement Plan, which covers medical expenses incurred by directors and their spouses that are not covered by other medical plans. During fiscal 1997, Mr. Boyd received $4,439 as reimbursement under this Plan, and Messrs. Snyder and Boughner each received less than $250 in reimbursements under this Plan. Boyd Gaming pays the directors fees and provides the benefits described above. ITEM 11. EXECUTIVE COMPENSATION The Company is a wholly-owned subsidiary of Boyd Gaming. The following table sets forth the cash compensation earned for services performed for Boyd Gaming and the Company during the three fiscal years in the period ended June 30, 1997 by the Company's Chief Executive Officer and each of the other four most highly compensated executive officers of the Company. The Compensation and Stock Option Committee of Boyd Gaming has been responsible for recommending cash and other non-stock plan compensation for the named executive officers and the Board of Directors of the Company and Boyd Gaming, as well as for administration of Boyd Gaming's stock plans. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION(2) AWARDS -------------------------------- ------------- SECURITIES ALL OTHER FISCAL UNDERLYING COMPENSATION NAME AND POSITION(1) YEAR SALARY($) BONUS($) OPTIONS ($)(3) -------------------- ------ --------- -------- ------------ ------------ William S. Boyd........................ 1997 $1,000,000 $ -- $200,000 $5,601 Chairman and Chief Executive Officer 1996 1,000,000 -- -- 7,865 1995 1,000,000 574,137 140,000 5,706 Robert L. Boughner..................... 1997 525,000 7,875 50,000 5,601 Executive Vice President 1996 500,000 30,000 -- 4,250 and Chief Operating Officer 1995 400,000 115,680 40,000 5,706 Ellis Landau........................... 1997 367,500 5,513 35,000 5,340 Executive Vice President, Chief 1996 350,000 21,000 -- 5,592 Financial Officer and Treasurer 1995 300,000 86,760 30,000 5,445 Donald D. Snyder(4).................... 1997 350,000 3,750 50,000 2,340 President 1996 -- -- -- -- 1995 -- -- -- -- James W. Hippler(5).................... 1997 210,000 3,150 41,334 5,340 Senior Vice President 1996 200,000 12,000 -- 5,592 Administration 1995 175,000 33,740 6,500 5,445
-24- 27 - ------------- (1) Positions indicated are those currently held with Boyd Gaming. (2) The incremental cost to the Company of providing perquisites and other personal benefits during the last three years did not exceed, as to any executive officer, the lesser of $50,000 or 10% of the total salary and bonus paid to such executive officer for any such year and, accordingly, is omitted from the table. (3) Amounts represent Boyd Gaming's Profit Sharing and 401(k) Plan contributions and payment of term life insurance premiums. In fiscal 1997, Boyd Gaming's Profit Sharing and 401(k) Plan contributions were $3,000, $3,000, $3,000 and $3,000 for Messrs. Boyd, Boughner, Landau and Hippler, respectively. In fiscal 1997, life insurance premium payments by the Company for Messrs. Boyd, Boughner, Landau, Snyder and Hippler were $2,601, $2,601, $2,340, $2,340 and $2,340, respectively. (4) Mr. Snyder has been an officer of the Company since July 1996. (5) 16,334 shares represent options previously awarded and repriced in 1997. OPTION/SAR GRANTS IN LAST FISCAL YEAR
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR ----------------------------------------------------------------------------------------- Individual Grants Potential Realizable ----------------------------------------------------------- Value At Assumed Annual Number of % of Total Rates of Stock Price Securities Options/SARs Appreciation for Underlying Granted to Exercise or Option Term(2) Options/SARs Employees in Base Price Expiration ----------------------- Name Granted(#) Fiscal Year(1) ($/Share) Date 5%($) 10%($) - ---- ------------ -------------- ----------- ---------- -------- ----------- William S. Boyd 50,000 1.78% $11.50 8/28/06 $361,614 $ 916,402 150,000 5.31% $8.375 12/20/06 $790,049 $2,002,139 Robert L. Boughner 50,000 1.78% $8.375 12/20/06 $263,350 $ 667,380 Ellis Landau 35,000 1.24% $8.375 12/20/06 $184,345 $ 467,166 Donald D. Snyder 50,000 1.78% $8.375 12/20/06 $263,350 $ 667,380 James W. Hippler(3) 25,000 0.89% $8.375 12/20/06 $131,675 $ 333,690 12,000 0.43% $5.75 10/14/03 $ 25,138 $ 67,591 4,334 0.15% $5.75 4/21/05 $ 11,692 $ 27,916
- --------------- (1) Based on an aggregate of 2,823,671 options granted to directors, employees and consultants of the Company and its affiliates in the fiscal year ended June 30, 1997. The total number of options granted during such fiscal year included 1,277,971 that represent options granted in previous years that were repriced June 2, 1997. Repriced options will fully vest and become exercisable on December 31, 1998. All other options generally vest and become exercisable ratably over a three or four year period from the date of grant. (2) The potential realizable value is calculated based on the term of the option at its time of grant (10 years). It is calculated by assuming that the stock price appreciates at the indicated amount rate compounded annually for the entire term of the option and that the option is exercised and sold in the last day of its term for the appreciated stock price. No gain to the option holder is possible unless the stock price increases over the option term. (3) The grants of options representing 12,000 and 4,334 shares represent options granted in prior years and repriced in 1997. Pursuant to the terms of the repricing, one repriced option was granted for every two options originally priced at $17.00 and two repriced options were granted for every three options originally priced at $13.625. All repriced options will fully vest and become exercisable on December 31, 1998. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($) ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED UNEXERCISABLE UNEXERCISABLE(1) ---- ----------- -------- ----------------- ---------------- William S. Boyd 0 0 618,334/246,666 $0/$0 Robert L. Boughner 0 0 176,667/63,333 $0/$0 Ellis Landau 0 0 140,000/45,000 $0/$0 Donald D. Snyder 0 0 15,000/80,000 $0/$0 James W. Hippler 0 0 0/41,334 $0/$0
- ---------------------- (1) Value realized is based on estimated fair market value of Boyd Gaming Common Stock on the date of exercise less the exercise price. (2) Value is based on the closing price of Boyd Gaming Common Stock on the New York Stock Exchange on June 30, 1997 ($5.75) less the exercise price. -25- 28 COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Perry B. Whitt, a former member of the Compensation and Stock Option Committee of Boyd Gaming is a former executive officer of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the outstanding shares of stock of the Company are owned by Boyd Gaming Corporation. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements. The following financial statements are for the years ended June 30, 1997, 1996 and 1995 are filed as part of this report:
Page ---- Independent Auditors' Report ................................ F-2 Consolidated Balance Sheets at June 30, 1997 and 1996 ....... F-3 Consolidated Statements of Income for Years Ended June 30, 1997, 1996 and 1995 ................................ F-4 Consolidated Statements of Changes in Stockholder's Equity for the Years Ended June 30, 1997, 1996 and 1995 ..... F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995 .......................... F-6 Notes to Consolidated Financial Statements .................. F-7
2. Financial Statement Schedules. None. 3. Exhibits. Refer to (c) below. (b) Reports on Form 8-K. None. (c) Exhibits. Reference is made to the Index to Exhibits immediately preceding the exhibits hereto. -26- 29 CALIFORNIA HOTEL AND CASINO AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report................................. F-2 Consolidated Balance Sheets.................................. F-3 Consolidated Statements of Income............................ F-4 Consolidated Statements of Changes in Stockholder's Equity... F-5 Consolidated Statements of Cash Flows........................ F-6 Notes to Consolidated Financial Statements................... F-7 F-1 30 INDEPENDENT AUDITORS' REPORT California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) We have audited the accompanying consolidated balance sheets of California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) (the "Company") as of June 30, 1997 and 1996, and the related consolidated statements of income, changes in stockholder's equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of California Hotel and Casino and Subsidiaries at June 30, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Las Vegas, Nevada August 20, 1997 F-2 31 California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) CONSOLIDATED BALANCE SHEETS
June 30, ------------------- (In thousands, except share data) 1997 1996 - --------------------------------- -------- -------- ASSETS Current assets Cash and cash equivalents $ 30,050 $ 28,444 Accounts receivable, net 7,290 7,414 Inventories 7,395 5,822 Prepaid expenses and other 11,767 10,772 -------- -------- Total current assets 56,502 52,452 Property and equipment, net 498,265 490,675 Other assets and deferred charges 25,471 24,139 Goodwill, net 9,898 10,254 -------- -------- Total assets $590,136 $577,520 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Current maturities of long-term debt $ 1,554 $ 1,455 Accounts payable 19,419 18,703 Accrued liabilities Payroll and related 17,384 18,728 Interest and other 20,565 19,174 Income taxes payable 3,392 1,047 -------- -------- Total current liabilities 62,314 59,107 Long-term debt, net of current maturities 378,456 363,915 Long-term debt, due to related party -- 500 Deferred income taxes 18,940 24,148 Commitments and contingencies Stockholder's equity Preferred stock, $100 par value, 200,000 shares authorized -- -- Common Stock, no par value; 2,500 shares authorized 1,000 shares issued 22,328 22,328 Additional paid-in capital 32,856 32,856 Retained earnings 75,242 74,666 -------- -------- Total stockholder's equity 130,426 129,850 -------- -------- Total liabilities and stockholder's equity $590,136 $577,520 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 32 California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) CONSOLIDATED STATEMENTS OF INCOME
(In thousands) For the years ended June 30, - -------------- -------------------------------- 1997 1996 1995 --------- -------- -------- Revenues Casino $366,574 $370,841 $351,348 Food and beverage 123,070 116,133 108,381 Rooms 62,399 60,811 56,335 Other 34,522 34,975 32,803 -------- -------- -------- Gross revenues 586,565 582,760 548,867 Less promotional allowances 62,766 59,330 52,036 -------- -------- -------- Net revenues 523,799 523,430 496,831 -------- -------- -------- Costs and expenses Casino 195,659 186,470 174,038 Food and beverage 88,135 83,958 81,637 Rooms 21,214 23,043 22,465 Other 24,587 23,956 22,176 Selling, general and administrative 69,804 65,381 59,631 Maintenance and utilities 25,072 24,915 23,964 Depreciation and amortization 44,398 44,413 45,931 Corporate expense 11,566 11,710 10,127 Preopening expense 3,481 -- -- Impairment loss 5,325 -- -- -------- -------- ------- Total 489,241 463,846 439,969 -------- -------- ------- Operating income 34,558 59,584 56,862 -------- -------- ------- Other income (expense) Interest income 127 --- 40 Interest expense, net of amounts capitalized (33,622) (33,820) (38,492) -------- -------- -------- Total (33,495) (33,820) (38,452) -------- -------- -------- Income before provision for income taxes and extraordinary item 1,063 25,764 18,410 Provision for income taxes 487 10,675 8,780 -------- -------- -------- Income before extraordinary item 576 15,089 9,630 Extraordinary item, net of tax benefit of $520 -- 842 --- -------- -------- -------- Net income $ 576 $ 14,247 $ 9,630 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 33 California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY For the years ended June 30, 1997, 1996 and 1995
Common Stock Additional Total (In thousands, ---------------------------- Paid-In Retained Stockholder's except share data) Shares Amount Capital Earnings Equity - ----------------------------------------------------------------------------------------------------------------------- BALANCES, JULY 1, 1994 1,000 $22,328 $ 9,606 $ 62,789 $ 94,723 Net income 9,630 9,630 - ----------------------------------------------------------------------------------------------------------------------- BALANCES, JUNE 30, 1995 1,000 22,328 9,606 72,419 104,353 Contributed capital from parent 23,250 23,250 Dividends (12,000) (12,000) Net income 14,247 14,247 - ----------------------------------------------------------------------------------------------------------------------- BALANCES, June 30, 1996 1,000 22,328 32,856 74,666 129,850 Net income 576 576 - ----------------------------------------------------------------------------------------------------------------------- BALANCES, June 30, 1997 1,000 $22,328 $32,856 $ 75,242 $130,426 =======================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. F-5 34 California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, ------------------------------------ (In thousands) 1997 1996 1995 - -------------- -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................... $ 576 $ 14,247 $ 9,630 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............... 44,398 44,413 45,931 Impairment loss ............................ 5,325 -- -- Loss on early retirement of debt ........... -- 1,362 -- Deferred income taxes....................... (5,208) 4,081 -- Other....................................... -- (236) (114) Changes in assets and liabilities: (Increase) decrease in accounts receivable, net......................... 124 (539) 1,822 (Increase) decrease in inventories........ (1,573) (335) 295 (Increase) decrease in prepaid expenses... (995) (387) 1,766 (Increase) decrease in other assets....... (7,232) 3,184 (7,589) Increase (decrease) in other current liabilities............................. (2,951) 3,326 (15,008) Increase (decrease) in income taxes payable................................. 2,345 (2,606) 2,885 -------- --------- --------- Net cash provided by operating activities....... 34,809 66,510 39,618 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property, equipment and other assets.......................... (47,343) (41,181) (37,636) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt.... -- 146,750 7,850 Payments on long-term debt.................. (1,994) (166,683) (22,027) Net borrowings under credit agreements...... 16,134 (10,000) 13,000 Capital contribution from parent............ -- 23,250 -- Dividends paid.............................. -- (12,000) -- -------- --------- -------- Net cash provided by (used in) financing activities.................................... 14,140 (18,683) (1,177) -------- --------- -------- Net increase in cash and cash equivalents....... 1,606 6,646 805 Cash and cash equivalents, beginning of year.... 28,444 21,798 20,993 -------- --------- -------- Cash and cash equivalents, end of year.......... $ 30,050 $ 28,444 $ 21,798 ======== ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest, net of amounts capitalized................................. $ 32,289 $ 37,826 $ 37,662 Cash paid for income taxes.................... 2,175 7,300 3,250 ======== ========= ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Property additions acquired on contracts and trade payables which were accrued, but not yet paid............................ $ 6,854 $ 3,140 $ 4,867 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 35 California Hotel and Casino and Subsidiaries (a wholly-owned subsidiary of Boyd Gaming Corporation) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of California Hotel and Casino and its wholly-owned subsidiaries, collectively referred to herein as the "Company". The Company owns and operates seven casino entertainment facilities in Las Vegas, Nevada. All material intercompany accounts and transactions have been eliminated. The Company is a wholly-owned subsidiary of Boyd Gaming Corporation. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. These investments are stated at cost which approximates fair value. Inventories Inventories are stated at lower of cost or market. Cost is determined using the first-in, first-out and retail inventory methods. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Costs of major improvements are capitalized, while costs of normal repairs and maintenance are charged to expense as incurred. Gains or losses on disposal of assets are recognized as incurred. Capitalized Interest Interest costs associated with major projects are capitalized. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using the Company's weighted average cost of borrowing. Capitalization of interest ceases when the project is substantially complete. Capitalized interest during the fiscal years ended June 30, 1997, 1996 and 1995 was $1.4 million, $2.0 million and $0.3 million, respectively. Goodwill The excess of total acquisition costs over the fair value of assets acquired is amortized using the straight-line method over forty years. Management periodically assesses the recoverability of goodwill and other intangible assets by comparing its carrying value to the discounted cash flows expected to be generated by the acquired operation during the anticipated period of benefit. As of June 30, 1997 and 1996, accumulated amortization was $4.4 million and $4.0 million, respectively. F-7 36 Revenues and Promotional Allowances Casino revenues represent the net win from gaming activities, which is the difference between gaming wins and losses. Revenues include the retail value of room, food, beverage and other goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is charged to the casino department in the following amounts:
Years ended June 30, -------------------------------- (In thousands) 1997 1996 1995 - -------------- ------- ------- ------- Rooms $10,174 $ 9,482 $ 8,408 Food and Beverage 45,150 44,469 40,358 Other 1,355 1,593 1,087 ------- ------- ------- Total $56,679 $55,544 $49,853 ======= ======= =======
Preopening Expenses Expenses incurred prior to the opening of new facilities are capitalized and charged to expense upon commencement of operations. During the year ended June 30, 1997, the Company expensed $3.5 million upon the opening of Main Street Station. There were no preopening expenses recorded during the years ended June 30, 1996 and 1995. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates used by the Company include the estimated useful lives for depreciable and amortizable assets, the estimated allowance for doubtful accounts receivable, the estimated valuation allowance for deferred tax assets, and estimated cash flows in assessing the recoverability of long-lived assets. Actual results could differ from those estimates. Reclassifications Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. These reclassifications had no effect on the Company's net income. Change in Fiscal Year Effective September 1997, the Company changed its fiscal year from a June 30 year end to a December 31, year end. F-8 37 Recently Issued Accounting Standards The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital Structure," which is effective for fiscal years ending after December 15, 1997. This Statement establishes standards for disclosing information about an entity's capital structure. Management intends to comply with the disclosure requirements of this statement in the stub period ending December 31, 1997. The FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. This statement requires businesses to disclose comprehensive income and its components in their financial statements. Management intends to comply with the disclosure requirements of this statement in the year ending December 31, 1998. The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement redefines how operating segments are determined and requires qualitative disclosure of certain financial and descriptive information about a company's operating segments. The Company will adopt SFAS No. 131 in the year ending December 31, 1998. Management has not yet completed its analysis of which operating segments it will report to comply with SFAS No. 131. - ------------------------------------------------------------------------------- NOTE 2. - IMPAIRMENT LOSS During the year ended June 30, 1997, the Company recorded a $5.3 million impairment loss related to its 17.4% ownership interest in the Fremont Street Experience, Limited Liability Company ("FSE"). This impairment loss is principally due to the significant levels of operating loss and operating cash deficiency reported in May 1997 by FSE relating to its first full year of operation. Management expects this trend to continue and, therefore, does not expect to recover its investment in this entity. - ------------------------------------------------------------------------------- NOTE 3. - ACCOUNTS RECEIVABLE Components of accounts receivable at June 30 are as follows:
(In thousands) 1997 1996 - -------------- ------ ------ Casino $5,145 $4,834 Hotel 2,731 2,988 Other 1,427 1,151 ------ ------ Total 9,303 8,973 Less allowance for doubtful accounts 2,013 1,559 ------ ------ Total $7,290 $7,414 ====== ======
- ------------------------------------------------------------------------------- NOTE 4. - PROPERTY AND EQUIPMENT Property and equipment consist of the following at June 30:
(In thousands) 1997 1996 - -------------- -------- -------- Land $101,431 $101,934 Buildings and leasehold improvements 464,411 423,099 Furniture and equipment 275,243 259,583 Construction in progress 1,937 16,938 -------- -------- Total 843,022 801,554 Less accumulated depreciation and amortization 344,757 310,879 -------- -------- Property and equipment, net $498,265 $490,675 ======== ========
F-9 38 - ------------------------------------------------------------------------------ NOTE 5. - LONG-TERM DEBT Long-term debt at June 30 consists of the following:
(In thousands) 1997 1996 - -------------- -------- --------- Bank Credit Facility $190,134 $174,000 11% Senior Subordinated Notes 185,000 185,000 Other 4,876 6,870 -------- -------- Total long-term debt 380,010 365,870 Less current maturities 1,554 1,455 -------- -------- Total $378,456 $364,415 ======== ========
The Company and its parent, Boyd Gaming Corporation, have a $500 million five-year reducing, revolving bank credit facility which matures in June 2001 (the "Bank Credit Facility"). Total availability under the Bank Credit Facility will be reduced by $25 million at the end of two and one-half years and reduced by an additional $50 million at the end of each six-month period thereafter until maturity. As of June 30, 1997, the Company and its parent had unused availability of $149 million under the Bank Credit Facility. Interest on the Bank Credit Facility is based upon the agent bank's quoted reference rate or London Interbank Offered Rate, at the discretion of the Company. The interest rate under the Bank Credit Facility at June 30, 1997 was 8.1%. The Company and its parent incur a commitment fee on the unused portion of the Bank Credit Facility which ranges from 0.375% to 0.50% per annum, depending upon the level of a certain predefined ratio. The Bank Credit Facility is collateralized by the real and personal property comprising eight casino properties owned by the Company and its parent and by related security agreements with assignment of rents. The Bank Credit Facility contains certain financial covenants, limitations on the incurrence of debt and limitations on the incurrence of capital expenditures and investments, all as defined in the Bank Credit Facility. In connection with the closure of the Bank Credit Facility in June 1996, the Company recorded a $0.8 million extraordinary loss (net of $.5 million tax benefit) related to the write-off of unamortized fees. In July 1997, in connection with Boyd Gaming's issuance of $250 million principal amount of Senior Subordinated Notes, availability under the Bank Credit Facility was reduced by approximately $193 million. Availability will subsequently increase if and to the extent the Company purchases or redeems the 11% Senior Subordinated Notes. F-10 39 The Company, through its wholly-owned subsidiary California Hotel Finance Company, has $185 million principal amount of 11% Senior Subordinated Notes (the "11% Notes") due December 2002. The 11% Notes are unconditionally guaranteed on a senior subordinated and unsecured basis by the Company. The guarantee is subordinated to all existing and future senior debt (as defined in the indenture related to the 11% Notes) of the Company (approximately $145.0 million at June 30, 1997) and is effectively subordinated to all existing and future senior indebtedness and other liabilities (including trade payables) of the subsidiaries of the Company (approximately $17.5 million at June 30, 1997). The Company is not in default and there are no payment blockages with respect to the 11% Notes. The net proceeds were used to refinance certain indebtedness of the Company and provide for working capital needs and expansion of the Company's operations. The 11% Notes require semi-annual interest payments on June 1 and December 1 of each year until December 1, 2002, at which time the principal balance is due and payable. The 11% Notes may be redeemed at the Company's option any time after December 1, 1997 at redemption prices ranging from 104.125% in 1997 to 100% in 1999. The 11% Notes contain certain covenants regarding incurrence of debt, sales and disposition of assets, mergers or consolidations and limitations on restricted payments (as defined in the indenture relating to the 11% Notes). As a result of these restrictions, at June 30, 1997 the Company had a portion of its retained earnings and its net assets in the amounts of $31.9 million and $87.1 million, respectively, that were not available for distribution as dividends to Boyd Gaming. The estimated fair value of the Company's long-term debt at June 30, 1997 was approximately $390 million, versus its book value of $380 million. At June 30, 1996 the estimated fair value of the Company's long-term debt was approximately $374 million, versus its book value of $366 million. The estimated fair value amounts were based on the quoted market price of the Company's debt security that is traded. For the debt securities that are not traded, fair value was based on estimated discounted cash flows using current rates offered to the Company for debt securities having the same remaining maturities. Interest rates on the Company's other long-term debt range from 7.3% to 16.8%. Management believes the Company and its subsidiaries are in compliance with all covenants contained in its long-term agreements at June 30, 1997. F-11 40 The scheduled maturities of long-term debt for the years ending June 30 are as follows:
(In thousands) - -------------- 1998 $ 1,554 1999 1,615 2000 1,155 2001 190,436 2002 250 Thereafter 185,000 -------- Total $380,010 ========
- ------------------------------------------------------------------------------- NOTE 6. - COMMITMENTS AND CONTINGENCIES Future minimum lease payments required under noncancelable operating leases (principally for land) as of June 30, 1997 are as follows:
(In thousands) - -------------- 1998 $ 2,060 1999 2,010 2000 1,996 2001 2,008 2002 2,056 Thereafter 85,518 ------- Total $95,648 =======
Rent expense for the years ended June 30, 1997, 1996 and 1995 was $1.8 million, $2.7 million and $2.6 million, respectively and is included in selling, general and administrative expenses on the consolidated statements of income. The Company is subject to various claims and litigation in the normal course of business. In the opinion of management, all pending legal matters are either adequately covered by insurance or, if not insured, will not have a material effect on the Company's consolidated financial statements. - ------------------------------------------------------------------------------ NOTE 7. - EMPLOYEE BENEFIT PLANS The Company contributes to multi-employer pension plans under various union agreements. Contributions, based on wages paid to covered employees, totaled approximately $2.2 million, $2.2 million and $2.0 million in 1997, 1996 and 1995, respectively. The Company's share of the unfunded liability related to multi-employer plans, if any, is not determinable. The Company participates in Boyd Gaming Corporation's retirement savings plan under Section 401(k) of the Internal Revenue Code covering its non-union employees. The plan allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 15% of their income on a pre-tax basis through contributions to the plan. On January 1, 1996, the Company combined its profit sharing plan into the 401(k) plan. The Company expensed its portion of voluntary contributions of $1.5 million, $1.2 million and $.7 million in 1997, 1996 and 1995, respectively, to the Company's 401(k) profit sharing plan and trust. F-12 41 - ------------------------------------------------------------------------------- NOTE 8. - INCOME TAXES A summary of the provision for income taxes for the years ended June 30 is as follows: Provision for Income Taxes:
(In thousands) 1997 1996 1995 - -------------- ------- ------ ------ Current $ 2,877 $ 7,677 $6,752 Deferred (2,390) 2,998 2,028 ------- ------- ------- $ 487 $10,675 $ 8,780 ======= ======= =======
The following table provides a reconciliation between the federal statutory rate and the effective income tax rate at June 30 where both are expressed as a percentage of income:
1997 1996 1995 ------ ------ ------ Tax provision at statutory rate 35.0% 35.0% 35.0% Increase/(decrease) resulting from: Company provided benefits 11.6 4.3 8.8 Other, net (0.8) 2.1 3.9 ----- ----- ----- 45.8% 41.4% 47.7% ===== ===== =====
The tax items comprising the Company's net deferred tax liability as of June 30 are as follows:
(In thousands) 1997 1996 1995 - -------------- ------- ------- ------- Deferred tax liabilities: Difference between book and tax basis of property $26,056 $27,053 $25,856 Reserve differential for gaming activities 1,280 1,882 903 Difference between book and tax basis of amortizable assets 922 995 1,115 Other 815 194 134 ------- ------- ------- Gross deferred tax liability 29,073 30,124 28,008 ------- ------- ------- Deferred tax assets: Alternative minimum tax credit carryforward 7,448 4,474 6,826 Preopening expense amortized for tax purposes 1,076 -- -- Provision for doubtful accounts 917 759 752 Other 692 743 363 ------- ------- ------- Gross deferred tax asset 10,133 5,976 7,941 ------- ------- ------- Net deferred tax liability $18,940 $24,148 $20,067 ======= ======= =======
The Company, as a wholly-owned subsidiary of Boyd Gaming Corporation, is included in Boyd Gaming Corporation's consolidated tax return. Boyd Gaming Corporation allocates income tax expense or benefit to the Company as if the Company was filing separate tax returns. - ------------------------------------------------------------------------------- F-13 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 26, 1997. CALIFORNIA HOTEL AND CASINO By /s/ KEITH SMITH ----------------------------- Keith Smith Vice President and Controller II-1 43 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William S. Boyd, Ellis Landau and Keith Smith and each of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------------------------- --------------------------- ------------------ /s/ WILLIAM S. BOYD President and Director September 26, 1997 - ---------------------------- (Principal Executive Officer) William S. Boyd /s/ ELLIS LANDAU Senior Vice President, Chief September 26, 1997 - ---------------------------- Financial Officer and Treasurer Ellis Landau (Principal Financial Officer) /s/ KEITH SMITH Vice President and Controller September 26, 1997 - ---------------------------- (Principal Accounting Officer) Keith Smith /s/ DONALD D. SNYDER Senior Vice President and September 26, 1997 - ---------------------------- Director Donald D. Snyder /s/ ROBERT L. BOUGHNER Senior Vice President and September 26, 1997 - ---------------------------- Director Robert L. Boughner
II-2 44 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT PAGE - --------------- ------------------------------------------------------------ ------------ 2.1 (2) Agreement and Plan of Reorganization dated as of June 25, 1993, by and between Eldorado, Inc., Boyd Gaming Corporation, the Company and certain stockholders and noteholders of Eldorado. 3.1 (1) Articles of Incorporation of the Company. 3.2 (1) Bylaws of the Company. 4.1 (1) Form of Indenture relating to $185,000,000 aggregate principal amount of 11% Senior Subordinated Notes due 2002 of California Hotel Finance Corporation ("Finance"), including the Form of Note. 10.1 (2) First Amended and Restated Credit Agreement dated as of September 2, 1993, among the Company, Certain Commercial Lending Institutions, CIBC Inc., First Interstate Bank of Nevada and Bank of America and related Exhibits. 10.2 (2) Loan Agreement dated March 2, 1989, by and between First Interstate Bank of Nevada and Eldorado, Inc., including related Promissory Note, and related Revision Agreement dated October 31, 1989, between First Interstate Bank of Nevada, N.A. and Eldorado, Inc. 10.3 (1) Ninety-Nine Year Lease dated June 30, 1954, between Fremont Hotel, Inc., and Charles L. Ronnow, C.L. Ronnow and J.L. Ronnow, and Alice Elizabeth Ronnow. 10.4 (1) Lease Agreement dated October 31, 1963, between Fremont Hotel, Inc., and Cora Edith Garehime. 10.5 (1) Lease Agreement dated December 31, 1963, between Fremont Hotel, Inc., Bank of Nevada and Leon H. Rockwell, Jr. 10.6 (1) Lease Agreement dated June 7, 1971, between Anthony Antonacci, Margaret Fay Simon and Bank of Nevada, as Co- Trustees under Peter Albert Simon's Last Will and Testament, and related Assignment of Lease dated February 25, 1985 to Sam-Will, Inc. and Fremont Hotel, Inc. 10.7 (1) Lease Agreement dated July 25, 1873, between CH&C and William Peccole, as Trustee of the Peter Peccole 1970 Trust. 10.8 (1) Lease Agreement dated July 1, 1974, between Fremont Hotel, Inc., and Bank of Nevada, Leon H. Rockwell, Jr. and Margorie Rockwell Riley. 10.9 (1) Ground Lease Agreement dated July 5, 1978, between the Company and Irene Elizabeth Carey, as Trustee of the Carey Survivor's Trust U/A October 18, 1972 and Irene Elizabeth Carey, as Trustee of the Carey Family Trust U/A October 18, 1972.
45
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT PAGE - --------- ------------------------------------------------------------ ------------ 10.10 (1) Ninety-Nine Year Lease dated December 1, 1978, between Matthew Paratore, and George W. Morgan and LaRue Morgan, and related Lease Assignment dated November 10, 1987 to Sam-Will, Inc., d/b/a Fremont Hotel and Casino. 10.11 (3) Collective Bargaining Agreement effective as of January 17, 1994, between Sam-Will, Inc., d/b/a Fremont Hotel and Casino and the International Union of Operating Engineers, Local No. 501, AFL-CIO (slot technician unit). 10.12 (2) Labor Agreement dated as of January 13, 1993, between Mare-Bear, Inc., d/b/a Stardust Hotel & Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.13 (2) Labor Agreement dated as of January 13, 1993, between Sam-Will, Inc., d/b/a Fremont Hotel and Casino, and the International Union of Operating Engineers, Local No. 501, AFL-CIO. 10.14 (2) Labor Agreement dated January 13, 1993, between the Company and the International Union of Operating Engineers, Local No. 501; AFL-CIO. 10.15 (1) Agreement dated as of May 1, 1991, between Mare-Bear, Inc., d/b/a Stardust Hotel and Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers Union, Local No. 226 and Bartenders Union, Local No. 165. 10.16 (1) Agreement dated May 1, 1991, between Sam-Will, Inc., d/b/a Fremont Hotel and Casino, and the Local Joint Executive Board of Las Vegas for and on behalf of the Culinary Workers Union, Local No. 226 and Bartenders Union, Local No. 165. 10.17 (2) Collective Bargaining Agreement dated September 12, 1991, between Eldorado Casino and the Local Joint Executive Board of Las Vegas for and on behalf of Culinary Workers Union, Local No. 226 and Bartenders Union, Local 165. 10.18 (1) Collective Bargaining Agreement dated March 14, 1991, between Mare-Bear, Inc., d/b/a Stardust Hotel and Casino, and the Musicians Union of Las Vegas, Local No. 369, American Federation of Musicians, AFL-CIO. 10.19 (1) Labor Agreement dated May 1, 1991, between Mare-Bear, Inc., d/b/a Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada.
46
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT PAGE - --------- ------------------------------------------------------------ ------------ 10.20 (1) Labor Agreement dated May 1, 1991, between Mare-Bear, Inc., d/b/a Stardust Hotel & Casino, and the International Alliance of Theatrical Stage Employees and Moving Picture Machine Operators of the United States and Canada, Local 720, Las Vegas, Nevada. (Theatrical Wardrobe Employees). 10.21 (1) Labor Agreement dated June 14, 1983, between Stardust Hotel and Casino and the International Brotherhood of Painters and Allied Trades, Local Union No. 159, AFL-CIO. 10.22 (1) Labor Agreement dated June 1, 1983, between Stardust Hotel and Casino and the United Brotherhood of Carpenters and Joiners of America, Local Union No. 1780, Las Vegas, Nevada. 10.23 (1) Labor Agreement dated August 1, 1983, between Stardust Hotel and the International Brotherhood of Electrical Workers, Local Union No. 357, AFL-CIO. 10.24 (1) Implemented Proposal dated June 15, 1992, between Stardust Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.25 (1) Implemented Proposal dated June 15, 1992, between Fremont Hotel and Casino and the Back-End Teamsters Local Union No. 995. 10.26 (3) Promissory Note dated December 30, 1991, from Eldorado, Inc., to Samuel A. Boyd in the principal sum of $600,000. 10.27 (3) Building Contract dated July 15, 1993, between Marnell Corrao Associates, Inc. and Sam's Town Hotel and Gambling Hall for Sam's Town Addition Phase V. 10.28 (4) Credit Agreement dated as of June 19, 1996, by and among Boyd Gaming and Registrant on the borrowers, certain commercial lending instructions as the lenders, Canadian Imperial Bank of Commerce as the Agent, Bank of America National Trust and Savings Association and Wells Fargo Bank N.A. as co-managing Agents and Bankers Trust Company, Credit Lyonnais and Societe Generale as co-Agents. 10.29 (5) First Amendment to Credit Agreement, dated as of March 28, 1997, among Boyd Gaming and Registrant, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce as letter of credit issuer, Bank of America N.T. & S.A. and Wells Fargo Bank, N.A. as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and Canadian Imperial Bank of Commerce as administrative agent and collateral agent. 10.31 (6) Second Amendment to Credit Agreement, dated as of June 11, 1997, among the Registrant and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender. Canadian Imperial Bank of Commerce, as letter of credit issuer, Bank of America National Trust and Savings Association and Wells Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais Los Angeles Branch and Societe Generale as co-agents, and Canadian Imperial Bank of Commerce as administrative agent and collateral agent.
47
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DOCUMENT PAGE - --------- ------------------------------------------------------------ ------------ 10.32 (6) Third Amendment to Credit Agreement, dated as of June 24, 1997, among the Registrant and California Hotel and Casino, and Wells Fargo Bank, N.A., as Swingline Lender, Canadian Imperial Bank of Commerce, as letter of credit issuer, Bank of America National Trust and Savings Association and Wells 13 Fargo Bank, N.A., as co-managing agents, Bankers Trust Company, Credit Lyonnais, Los Angeles Branch and Societe Generale as co-agents, and Canadian Imperial Bank of Commerce as administrative agent and collateral agent. 10.33 (6) Form of Indenture relating to $200,000,000 aggregate principal amount of 9.25% Senior Notes due 2003 of Boyd 13 Gaming, including the form of note. 10.34 (6) First Supplemental Indenture, among Boyd Gaming, as Issuer, Registrant and certain subsidiaries of Boyd Gaming, as 13 guarantors, and the Bank of New York, as Trustee, dated as of December 31, 1996. 21.1 Subsidiaries of the Registrant. 24.1 Powers of Attorney. Reference is made to Page II-2. 27 Financial Data Schedule.
- ----------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1, File No. 33-51672, which became effective on November 18, 1992. (2) Incorporated by reference to the Registration Statement on Form S-1, File No. 33-64006, of Boyd Gaming Corporation, which became effective on October 15, 1993. (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. (4) Incorporated by reference to Exhibit 10.1 of Boyd Gaming's Current Report on Form 8-K dated June 19, 1996. (5) Incorporated by reference to Exhibit 10.59 of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (6) Incorporated by reference to Exhibits 4.4, 4.5, 10.53 and 10.54 of Boyd Gaming's Annual Report on Form 10-K for the year ended June 30, 1997. EX-21.1 2 SUSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 California Hotel and Casino Significant Subsidiaries Mare-Bear, Inc. (State of Incorporation or Organization) Nevada (IRS Employer Identification Number) 88-0203692 Sam-Will, Inc. (State of Incorporation or Organization) Nevada (IRS Employer Identification Number) 88-0203673 Eldorado, Inc. (State of Incorporation or Organization) Nevada (IRS Employer Identification Number) 88-0093922 MSW, Inc. (State of Incorporation or Organization) Nevada (IRS Employer Identification Number) 88-0310765 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1997 JUN-30-1997 30,050 0 9,303 2,013 7,395 56,502 843,022 344,757 590,136 62,314 378,456 0 0 22,328 108,098 590,136 0 523,799 0 489,241 0 0 33,495 1,063 487 576 0 0 0 576 0 0
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