-----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, F9wKkcRvWtJb0xymObkJLstjhL7LgItciEeZQPS4gZr69p93eAcs64yliOCkFCED cjDtYK89K2GIQQf8skGQiw== 0000089966-96-000024.txt : 19961118 0000089966-96-000024.hdr.sgml : 19961118 ACCESSION NUMBER: 0000089966-96-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOWBOAT INC CENTRAL INDEX KEY: 0000089966 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880090766 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07123 FILM NUMBER: 96662775 BUSINESS ADDRESS: STREET 1: 2800 FREMONT ST CITY: LAS VEGAS STATE: NV ZIP: 89104 BUSINESS PHONE: 7023859123 FORMER COMPANY: FORMER CONFORMED NAME: NEW HOTEL SHOWBOAT INC DATE OF NAME CHANGE: 19690122 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES __ EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 --------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 to For the transition period from ------------ ----------------- Commission file number 1-7123 ------------------------------------------- SHOWBOAT, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEVADA 88-0090766 ------------------------------ --------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2800 FREMONT STREET, LAS VEGAS NEVADA 89104-4035 ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (702) 385-9123 ----------------------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ----------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date. Common Stock - $1 Par Value, and Preferred Stock Purchase Rights 16,177,649 shares outstanding -------------------------------- ---------------------------------- SHOWBOAT, INC. AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed Consolidated Balance Sheets- September 30, 1996 and December 31, 1995 1-2 Condensed Consolidated Statements of Income- For the three months ended September 30, 1996 and 1995 3-4 Condensed Consolidated Statements of Income- For the nine months ended September 30, 1996 and 1995 5-6 Condensed Consolidated Statements of Cash Flows- For the nine months ended September 30, 1996 and 1995 7 Notes to the Condensed Consolidated Financial Statements 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-22 PART II OTHER INFORMATION ITEMS 1 - 6 23-24 SIGNATURES 25 EXHIBIT INDEX 26 Item 1. Financial Statements SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 September 30, December 31, Assets 1996 1995 --------- (unaudited) (In thousands) Current assets: Cash and cash equivalents $89,609 $106,927 Receivables, net 9,763 8,448 Income tax receivable 2,241 2,076 Inventories 2,680 2,808 Prepaid expenses 5,746 4,728 Current deferred income taxes 8,356 9,744 ----------- ----------- Total current assets 118,395 134,731 ----------- ----------- Property and equipment 613,473 541,786 Less accumulated depreciation and amortization (203,131) (186,872) -------------------------- 410,342 354,914 -------------------------- Other assets: Restricted cash and investment 101,591 - Investments in unconsolidated affiliates 133,266 120,090 Deposits and other assets 36,320 28,911 Debt issuance costs, net of accumulated amortization of $2,672,000 and $1,860,000 at September 30, 1996 and December 31, 1995, respectively 9,937 10,749 -------------------------- 281,114 159,750 -------------------------- $809,851 $649,395 ========================== See accompanying notes to condensed consolidated financial statements. 1 (continued) SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (continued) LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31, ------------------------------------ 1996 1995 (unaudited) Current liabilities: (In thousands) Current maturities of long-term debt $24 $22 Accounts payable 15,123 15,143 Dividends payable 405 392 Accrued liablilities 39,626 37,524 -------------------------- Total current liabilities 55,178 53,081 -------------------------- Long-term debt, excluding current maturities 532,632 392,369 -------------------------- Other liabilities 6,617 5,662 -------------------------- Deferred income taxes 23,457 22,319 -------------------------- Minority Interest 791 2,023 -------------------------- Shareholders' equity: Preferred stock, $1 par value; 1,000,000 shares authorized; none issued Common stock, $1 par value; 50,000,000 shares authorized; issued 16,176,049 shares at September 30, 1996 and 15,794,578 at December 31, 1995. 16,176 15,795 Additional paid-in capital 87,688 80,078 Retained earnings 84,465 80,434 -------------------------- 188,329 176,307 Cumulative foreign currency translation adjustment 4,543 285 Cost of common stock in treasury, -0- shares at September 30, 1996 and 74,333 shares at December 31, 1995 - (587) Unearned compensation for restricted stock (1,696) (2,064) -------------------------- Total shareholders' equity 191,176 173,941 -------------------------- Total liabilities & shareholders' equity $809,851 $649,395 ========================== See accompanying notes to condensed consolidated financial statements. 2 SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands except per share data) 1996 1995 -------------------------- Revenues: Casino $109,262 $106,741 Food and beverage 16,323 15,057 Rooms 7,222 7,149 Sports and special events 875 1,012 Other 1,613 1,385 -------------------------- 135,295 131,344 Less complimentaries 13,053 11,775 -------------------------- Net revenues 122,242 119,569 -------------------------- Operating costs and expenses: Casino 54,035 46,871 Food and beverage 8,625 8,905 Rooms 1,557 2,047 Sports and speical eves 694 880 General and administrative 31,715 31,706 Selling, advertising and promotion 2,379 2,520 Depreciation and amortization 8,170 7,646 -------------------------- 107,175 100,575 -------------------------- Income from operations from consolidated subsidiaries 15,067 18,994 Equity in income of unconsolidated affiliate 1,526 - -------------------------- Income from operations 16,593 18,994 -------------------------- (continued) 3 SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands except per share data) (continued) 1996 1995 -------------------------- Income from operations $16,593 $18,994 -------------------------- Other (income) expense: Interest income (2,818) (1,657) Interest expense 15,541 10,768 Interest capitalized (4,852) (3,349) Foreign currency transaction (gain)loss 1 (267) -------------------------- 7,872 5,495 -------------------------- Income before income taxes and minority interest 8,721 13,499 Minority interest (income) (474) - -------------------------- Income before income tax expense 9,195 13,499 -------------------------- Income tax expense 4,294 5,673 -------------------------- Net income $4,901 $7,826 ========================== Weighted average shares outstandin 16,274,570 15,730,786 Net income per common and equivalent share $0.30 $0.50 ========================== See accompanying notes to condensed consolidated financial statements. 4 SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands except per share data) 1996 1995 -------------------------- Revenues: Casino $295,110 $292,838 Food and beverage 43,433 41,425 Rooms 19,650 19,282 Sports and special events 2,778 2,957 Management fees - 190 Other 4,524 3,938 -------------------------- 365,495 360,630 Less complimentaries 31,438 30,518 -------------------------- Net revenues 334,057 330,112 -------------------------- Operating costs and expenses: Casino 146,136 135,108 Food and beverage 24,892 24,955 Rooms 5,564 6,394 Sports and special events 2,145 2,506 General and administrative 89,497 88,833 Selling, advertising and promotion 7,739 7,693 Depreciation and amortization 24,496 23,909 -------------------------- 300,469 289,398 -------------------------- Income from operations from consolidated subsidiaries 33,588 40,714 Equity in income (loss) of unconsolidated affiliate 1,526 (22) -------------------------- Income from operations 35,114 40,692 -------------------------- (continued) 5 SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands except per share data) (continued) 1996 1995 -------------------------- Income from operations $35,114 $40,692 -------------------------- Other (income) expense: Interest income (7,164) (4,547) Interest expense 42,051 32,019 Interest capitalized (12,087) (9,916) Gain on sale of affiliate - (2,558) Write-down of investment in affiliate 3,902 - Foreign currency transaction gain (83) (267) -------------------------- 26,619 14,731 -------------------------- Income before income taxes and minority interest 8,495 25,961 Minority interest (income) (1,309) - -------------------------- Income before income tax expense 9,804 25,961 -------------------------- Income tax expense 4,568 11,393 -------------------------- Net income $5,236 $14,568 ========================== Weighted average shares outstanding 16,418,749 15,548,448 Net income per common and equivalent share $0.32 $0.94 ========================== See accompanying notes to condensed consolidated financial statements. 6 SHOWBOAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 1996 1995 ----------------------- Cash flows from operating activities: (In thousands) Net cash provided by operating activities $35,301 $55,508 -------------------------- Cash flows from investing activities: Acquisition of property and equipmen (68,424) (28,812) Proceeds from sale of equipment 466 288 Investments in unconsolidated affiliates (8,735) (39,163) Advances to unconsolidated affiliates (3,990) (3,340) Repayment of advances to unconsolidated affiliates 4,186 3,928 Proceeds from sale of unconsolidated affiliates - 51,366 Restricted Cash and Investments (111,440) - (Increase) decrease in deposits and other assets 251 (3,615) Deposit for Casino Reinvestment Development Authority obligation (2,900) (2,721) Other - (42) -------------------------- Net cash used in investing activities (190,586) (22,111) -------------------------- Cash flows from financing activities: Principal payments of long-term debt $ (16) $ (15) Proceeds from issuance of long-term debt 140,000 - Proceeds from employee stock option exercises 5,395 1,767 Debt issuance costs (6,297) (533) Payment of dividends (1,192) (1,154) Minority interest contributions 77 1,824 Other - (121) -------------------------- Net cash provided (used) by financing activities 137,967 1,768 -------------------------- Net increase (decrease) in cash and cash equivalents (17,318) 35,165 Cash and cash equivalents at beginning of period 106,927 90,429 Cash and cash equivalents at -------------------------- end of period $89,609 $125,594 ========================== Supplemental disclosures of cash flow information and non-cash investing and financing activities: Cash paid during the period for: Interest, net of amounts capitalized 25,389 18,337 Income taxes 2,209 6,867 Foreign currency translation adjustmen 4,258 (2,154) See accompanying notes to condensed consolidated financial statements. 7 SHOWBOAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The condensed consolidated financial statements include all domestic and foreign subsidiaries which are more than 50% owned and controlled. Investments in unconsolidated affiliates which are at least 20% owned are carried at cost plus equity in undistributed earnings or loss since acquisition. All material intercompany balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1995 Annual Report on Form 10-K. The accompanying unaudited condensed consolidated financial statements contain all adjustments which are only of a recurring nature, in the opinion of management, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not indicative of results of operations for an entire year. Certain prior period balances have been reclassified to conform to the current period's presentation. On March 28, 1996 the Company's 55% owned affiliates, Showboat Marina Casino Partnership(SMCP) and Showboat Marina Finance Corporation (SMFC), issued $140.0 million, 13 1/2% First Mortgage Notes due 2003, (the First Mortgage Notes). The net proceeds of the First Mortgage Notes plus cash contributions by the Company are classified as restricted cash and investments in the Company's Condensed Consolidated Balance Sheet. These funds are being used to develop a riverboat casino complex in East Chicago, Indiana to be operated on Lake Michigan. 8 (continued) SHOWBOAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. LONG-TERM DEBT Long-term debt increased by approximately $140.0 million from December 31, 1995 to September 30, 1996. This increase is due to the issuance of $140.0 million, 13 1/2% First Mortgage Notes, by SMCP and SMFC. SMCP and SMFC are effectively owned 55% by the Company and therefore are consolidated for financial reporting purposes. The First Mortgage Notes are due 2003 and pay interest semiannually on March 15, and September 15, of each year commencing September 15, 1996. 3. WRITE-DOWN OF INVESTMENT IN AFFILIATE In March 1995, the Company, with an unrelated corporation (the majority member), formed Showboat Mardi Gras, L.L.C. (SMG), to own and operate, subject to licensing, a riverboat casino near Kansas City, Missouri. The Company owns 35% of the equity of SMG. SMG was not selected by the Missouri Gaming Commission for investigation for a license. Due to a decline in the market value of the assets of SMG, principally a riverboat, the Company has recorded a pre-tax write-down of $3,902,000 which is included in the 1996 Condensed Consolidated Statement of Income as write-down of investment in affiliate. This write-down includes the Company's remaining investment in SMG. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Showboat, Inc., and subsidiaries, collectively the Company or SBO, is an international gaming company with over 40 years of gaming experience that owns and operates the Atlantic City Showboat Casino and Hotel in Atlantic City, New Jersey, (Atlantic City Showboat), the Las Vegas Showboat, Hotel, Casino and Bowling Center in Las Vegas, Nevada (Las Vegas Showboat), owns an interest in, and manages through subsidiaries, the Sydney Harbour Casino located in Sydney, Australia and owns through subsidiaries a 55% interest in, and will manage, the East Chicago Showboat riverboat casino project in East Chicago, Indiana (East Chicago Showboat), which is under construction and scheduled to open sometime in the second quarter of 1997. Until March 31, 1995, the Company owned an equity interest in and managed a riverboat casino on Lake Pontchartrain in New Orleans, Louisiana (Star Casino). Information contained in this quarterly report is supplemental to disclosures in the Company's year end financial reports. This management's discussion and analysis of financial condition and results of operations should be read in conjunction with the management's discussion and analysis of financial condition and results of operations included in the Company's December 31, 1995 Annual Report on Form 10-K. As used in this management's discussion and analysis of financial condition and results of operations, amounts in Australian dollars are denoted as "A$". As of September 30, 1996, the exchange rate was approximately $0.7916 for each A$1.00. MATERIAL CHANGES IN RESULTS OF OPERATIONS Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1995. Revenues Net revenues for the Company increased $2.7 million or 2.2% in the third quarter 1996 compared to the same period in 1995. This increase was principally due to the $2.5 million or 2.4% increase in casino revenues in the quarter ended September 30, 1996. Non casino revenues, which consist principally of food, beverage and room revenues were up $1.4 million or 5.8% in the third quarter 1996. The increases in gross revenues were partially offset by the $1.3 million or 10.9% increase in complimentaries. Due to the Company's agreement to forgive the first A$19.1 million of management fees due it from Sydney Harbour Casino, the Company has not yet received management fees from Sydney Harbour Casino. For the quarter ended September 30, 1996, approximately A$2.9 million of management fees were forgiven and approximately A$6.8 million in management fees remain to be forgiven. 10 (continued) Revenues (continued) Quarter ended September 30, (Unaudited) (in thousands) 1996 1995 Variance Percent -------------------------------------------------- Consolidated: Casino revenues $ 109,262 $ 106,741 $ 2,521 2.4% Non casino revenues 26,033 24,603 1,430 5.8% Less complimentaries 13,053 11,775 1,278 10.9% -------------------------------------------------- Net revenues Consolidated $ 122,242 $ 119,569 $ 2,673 2.2% -------------------------------------------------- Atlantic City: Table game revenues $ 23,291 $24,075 $ (784) -3.3% Slot revenues 74,538 73,497 1,041 1.4% Other gaming revenues 605 781 (176) -22.5% -------------------------------------------------- Total casino 98,434 98,353 81 0.1% -------------------------------------------------- Non casino revenues 19,954 19,855 99 0.5% Less complimentaries 11,920 10,897 1,023 9.4% -------------------------------------------------- Net revenues Atlantic City $ 106,468 $ 107,311 $ (843) -0.8% -------------------------------------------------- Las Vegas: Table game revenues $ 1,231 $998 $ 233 23.3% Slot revenues 9,484 7,225 2,259 31.3% Other gaming revenues 113 165 (52) -31.5% -------------------------------------------------- Total casino 10,828 8,388 2,440 29.1% -------------------------------------------------- Non casino revenues 6,079 4,748 1,331 28.0% Less complimentaries 1,133 878 255 29.0% -------------------------------------------------- Net revenues Las Vegas $ 15,774 $ 12,258 $ 3,516 28.7% -------------------------------------------------- 11 (continued) Revenues (continued) The Atlantic City Showboat's net revenues declined $.8 million or .8% in the third quarter 1996 compared to the third quarter of 1995. This decline is principally due to a $1.0 million or 9.4% increase in complimentaries. The increase in complimentaries is due principally to an increase in complimentary rooms offered to patrons in the third quarter 1996 compared to the same period in 1995. The $.8 million decline in table games revenues was offset by $1.0 million increase in slot revenues or 1.4% increase in the third quarter 1996. The Atlantic City industry's slot revenue growth slowed to .4% in the third quarter of 1996 compared to a 9.5% increase in the same quarter of 1995. The increase in slot revenues is attributable to approximately 350 additional slot units or an increase of 11.0% in the third quarter 1996 compared to the same period in 1995. The industry's slot unit growth in the third quarter 1996 was 13.1% compared to a 7.7% growth in the same quarter of 1995. The decline in other gaming revenues of $.2 million or 22.5% is principally due to the decline in keno revenues during the quarter ended September 30, 1996. For the quarter ended September 30, 1996 the Las Vegas Showboat's net revenues increased $3.5 million or 28.7% to $15.8 million compared to $12.3 million in the same period in 1995. The increase in total casino revenues and non casino revenues in the quarter ended September 30, 1996 as compared to the same period in 1995 is principally due to the increased casino and food and beverage capacity. During the third quarter of 1995, the casino was operating at approximately 60% of capacity due to the renovation project and the coffee shop was closed for a full month during the third quarter. Income from Operations The Company's income from operations declined $2.4 million or 12.6% in the quarter ended September 30, 1996 compared to the same period in the prior year. The decrease was due principally to a decline in income from operations at both the Atlantic City Showboat and Las Vegas Showboat. These declines were partially offset by a $1.5 million contribution from the Company's Australian operations and $1.0 million or 19.2% decrease in operating expenses for the Company's corporate and development functions. 12 (continued) Income From Operations (continued) Quarter ended September 30, (Unaudited) (in thousands) 1996 1995 Variance Percent Income from operations: -------------------------------------------------- Atlantic City $ 23,069 $ 26,727 $ (3,658) -13.7% Las Vegas (3,671) (2,382) (1,289) -54.1% Australia 1,478 (48) 1,526 N/A Corporate and development (4,283) (5,303) 1,020 19.2% -------------------------------------------------- Consolidated $ 16,593 $ 18,994 $ (2,401) -12.6% -------------------------------------------------- EBITDA:* Atlantic City $ 29,600 $ 33,387 $ (3,787) -11.3% Las Vegas (2,132) (1,456) (676) -46.4% Australia 1,478 (48) 1,526 N/A Corporate and development (4,183) (5,243) 1,060 20.2% -------------------------------------------------- Consolidated $ 24,763 $ 26,640 $ (1,877) -7.0% -------------------------------------------------- *EBITDA is defined as income from operations before depreciation and amortization. EBITDA should not be construed as a substitute for income from operations, net earnings (loss) and cash flows from operating activities determined in accordance with Generally Accepted Accounting Principles ("GAAP"). The Company has included EBITDA because it believes it is commonly used by certain investors and analysts to analyze and compare gaming companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. Atlantic City Showboat's income from operations, before management fees, decrease of $3.7 million or 13.7% is principally due to a decrease in industry revenue growth and an increase in operating expenses of $2.8 million or 3.5% to $83.4 million for the September 30, 1996 quarter up from $80.6 million for the same period in the prior year. The increase in operating expenses is primarily attributable to increased marketing expenses in response to aggressive competition for slot patrons in the Atlantic City market during the third quarter 1996. 13 (continued) Income From Operations (continued) The $1.3 million decrease in income from operations at the Las Vegas Showboat, before management fees and inter-company rent, was due primarily to an increase in operating expenses, partially offset by the increase in net revenues. Operating expenses increased $4.8 million or 32.8% during the third quarter of 1996 to $19.4 million compared to $14.6 million for the same period in 1995. The increase in operating expenses is due principally to the increased casino and food and beverage capacity during the third quarter 1996 as compared to when the casino was under renovation in the same quarter of 1995 and an increase in marketing expenses during the quarter ended September 30, 1996. The $1.0 million decline in operating expenses for corporate and development is attributable to a reduction in the scope of development activities in the third quarter of 1996 compared to the same period of 1995. Net income In the quarter ended September 30, 1996 the Company recorded net income of $4.9 million or $.30 per share compared to net income of $7.8 million or $.50 per share for the quarter ended September 30, 1995. The decline in net income for the third quarter of 1996 is attributable to the $2.4 million decrease in income from operations reported in the quarter ended September 30, 1995, and a $1.6 million increase in net interest expense, due principally to the East Chicago, Indiana project financing. Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30, 1995 Revenues Net revenues for the Company increased $3.9 million or 1.2% in the first nine months of 1996 compared to the same period in 1995. The Company received no management fees in the nine months ended September 30, 1996 due to the Company's agreement to forgive the first A$19.1 million of management fees due it from Sydney Harbour Casino. For the nine months ended September 30, 1996, approximately A$8.3 million of management fees were forgiven and approximately A$6.8 million in management fees remain to be forgiven. The $.2 million management fee received in 1995 was attributable to the Company's investment in the Star Casino which was sold in March of 1995. 14 (continued) Revenues (continued) Nine months ended September 30, (Unaudited) (in thousands) 1996 1995 Variance Percent -------------------------------------------------- Consolidated: Casino revenues $ 295,110 $292,838 $ 2,272 0.8% Non casino revenues 70,385 67,602 2,783 4.1% Management fees - 190 (190) -100.0% Less complimentaries 31,438 30,518 (920) -3.0% -------------------------------------------------- Net revenues Consolidated $ 334,057 $330,112 $ 3,945 1.2% -------------------------------------------------- Atlantic City: Table game revenues $ 60,797 $64,453 $ (3,656) -5.7% Slot revenues 199,563 192,220 7,343 3.8% Other gaming revenues 1,608 2,298 (690) -30.0% -------------------------------------------------- Total casino 261,968 258,971 2,997 1.2% -------------------------------------------------- Non casino revenues 51,860 51,499 361 0.7% Less complimentaries 28,077 27,252 825 3.0% -------------------------------------------------- Net revenues Atlantic City $ 285,751 $ 283,218 $ 2,533 0.9% -------------------------------------------------- Las Vegas: Table game revenues $ 3,908 $3,649 $ 259 7.1% Slot revenues 28,000 28,658 (658) -2.3% Other gaming revenues 1,234 1,560 (326) -20.9% -------------------------------------------------- Total casino 33,142 33,867 (725) -2.1% -------------------------------------------------- Non casino revenues 18,525 16,103 2,422 15.0% Less complimentaries 3,361 3,266 95 2.9% -------------------------------------------------- Net revenues Las Vegas $ 48,306 $ 46,704 $ 1,602 3.4% -------------------------------------------------- 15 (continued) Revenues (continued) The Atlantic City Showboat's net revenues were up $2.5 million or .9% principally due to a $7.3 million or 3.8% increase in slot revenue in the nine months ended September 30, 1996 over the same period in 1995. The increase in slot revenue is attributable to the addition of approximately 370 slot units or 11.7% increase during the nine months ended September 30, 1996. The Atlantic City industry's slot revenue growth slowed to 2.4% in the first nine months of 1996 compared to growth of 13.4% in the same period in 1995. In addition, there was a 9.6% increase in slot units in the nine months ended September 30, 1996 compared to a slot unit growth of 11.0% in the same period of 1995. The increase in slot revenues for the Atlantic City Showboat was partially offset by a $3.7 million or 5.7% decrease in table game revenues. This decline is attributable to a reduction in table games marketing during the nine months ended September 30, 1996. The decline in other gaming revenues of $.7 million or 30.0% is principally due to the decline in keno revenues during the nine months ended September 30, 1996. For the nine months ended September 30, 1996 the Las Vegas Showboat net revenues increased $1.6 million or 3.4% to $48.3 million compared to $46.7 million in the same period in 1995. Although casino revenues decreased only $.7 million or 2.1% for the nine months ended September 30, 1996 compared to the same period in 1995, the 1995 net revenues reflect a reduced casino capacity in the third quarter due to the property's renovation project. The non-casino revenues increased $2.4 million or 15.0% to $18.5 million for the nine months ended September 30, 1996 compared to $16.1 million in the same period in 1995. This increase is due to the increased food and beverage capacity as compared with the same period in the prior year. Income From Operations The Company's income from operations decreased $5.6 million or 13.7% in the nine months ended September 30, 1996 compared to the same period in the prior year. The decrease was due principally to a decline in income from operations at both the Atlantic City Showboat and Las Vegas Showboat. These declines were partially offset by the $1.5 million contribution from the Company's Australian operations and the $2.9 million or 18.9% decrease in operating expenses for the Company's corporate and development functions. 16 (continued) Income From Operations (continued) Nine Months ended September 30, (Unaudited) (in thousands) 1996 1995 Variance Percent -------------------------------------------------- Income from operations: Atlantic City $ 53,206 $ 58,313 $ (5,107) -8.8% Las Vegas (6,981) (2,081) (4,900) -235.5% Australia 1,401 (105) 1,506 N/A Corporate and development (12,512) (15,435) 2,923 18.9% -------------------------------------------------- Consolidated $ 35,114 $ 40,692 $ (5,578) -13.7% -------------------------------------------------- EBITDA:* Atlantic City $ 73,037 $ 79,010 $ (5,973) -7.6% Las Vegas (2,589) 961 (3,550) -369.4% Australia 1,401 (105) 1,506 N/A Corporate and development (12,239) (15,265) 3,026 19.8% -------------------------------------------------- Consolidated $ 59,610 $ 64,601 $ (4,991) -7.7% -------------------------------------------------- *EBITDA is defined as income from operations before depreciation and amortization. EBITDA should not be construed as a substitute for income from operations, net earnings (loss) and cash flows from operating activities determined in accordance with Generally Accepted Accounting Principles ("GAAP"). The Company has included EBITDA because it believes it is commonly used by certain investors and analysts to analyze and compare gaming companies on the basis of operating performance, leverage and liquidity and to determine a company's ability to service debt. The Atlantic City Showboat's income from operations, before management fees, decreased $5.1 million or 8.8% in the nine months ended September 30, 1996 compared to the same period in 1995. This decrease is attributable to an increase in operating expenses of $7.6 million or 3.4% to $232.5 million and the slower industry revenue growth for the nine months ended September 30, 1996 compared to the same period in the prior year. The increase in operating expenses is primarily attributable to increased marketing expenses in response to aggressive competition for slot patrons in the Atlantic City Market during the nine months ended September 30, 1996. This was partially offset by the $2.5 million increase in net revenues for the nine months ended September 30, 1996. 17 (continued) Income From Operations (continued) The $4.9 million decline in income from operations at the Las Vegas Showboat, before management fees and inter-company rent, for the nine months ended September 30, 1996 was due principally to an increase in operating expenses, partially offset by an increase in net revenues. Operating expenses increased $6.5 million during the nine months ended September 30, 1996 to $55.3 million compared to $48.8 million for the same period in 1995. The increased operating expense is due primarily to an increase in advertising and marketing promotions and an increase in all operating expenses in the third quarter of 1996 compared to the third quarter of 1995. During the third quarter of 1995, the casino was operating at approximately 60% of capacity due to the property's renovation project. The $2.9 million decrease in operating expenses for corporate and development is attributable to a reduction in the scope of development activities for the nine months ended September 30, 1996 compared to 1995. The Company capitalized $1.1 million of costs related to the Company's St. Louis project in the first nine months of 1996 compared to $3.7 million capitalized for the Company's East Chicago and Randolph riverboat projects in the same period in 1995. Net income In the nine months ended September 30, 1996 the Company recorded net income of $5.2 million or $.32 per share compared to net income of $14.6 million or $.94 per share for the nine months ended September 30, 1995. Unusual items totaling $5.1 million are contributing factors to the decline in net income for the nine months ended September 30, 1996 compared to September 30, 1995. The 1996 results reflect an after tax loss of $2.0 million or $.12 per share for the write down of the Company's investment in Showboat Mardi Gras, L.L.C. (SMG). SMG was formed to develop a riverboat casino operation in Randolph, Missouri. In comparison, the first nine months of 1995 net income results included an after tax gain of $1.4 million or $.09 per share on the sale of the Star Casino. The 1996 results also reflect net interest expense for the East Chicago, Indiana project of $.9 million or $.06 per share and a reduction of interest income of $.8 million or $.05 per share due to the investment of corporate cash in the East Chicago Subsidiary. 18 (continued) MATERIAL CHANGES IN FINANCIAL CONDITION As of September 30, 1996 the Company held cash and cash equivalents of $89.6 million compared to $106.9 million at December 31, 1995. This decline is due principally to the funding of the East Chicago project. On March 28, 1996 the Company's 55% owned subsidiaries, Showboat Marina Casino Partnership (SMCP) and Showboat Marina Finance Corporation (SMFC), sold $140.0 million, 13 1/2% First Mortgage Notes due 2003 (the "First Mortgage Notes"). The funds were raised to support the development of the East Chicago Showboat riverboat casino project in East Chicago, Indiana (the "East Chicago Showboat") Interest expense incurred on the First Mortgage Notes will be capitalized to the extent permitted under generally accepted accounting principles and as a result the Company anticipates that a portion of this expense will impact results in reporting periods preceding the opening of the East Chicago Showboat project, currently anticipated for sometime in the second quarter of 1997. As a result, for the period ended December 31, 1996, the Company anticipates that net interest expense of approximately $2.0 million to $3.0 million will be recorded. The First Mortgage Notes are senior secured obligations of SMCP and rank senior in right of payment to all existing and future subordinated indebtedness of SMCP and pari passu with SMCP's senior indebtedness. Terms not otherwise defined herein have the meanings assigned to them in the First Mortgage Note Indenture. The First Mortgage Notes are secured by a first lien on substantially all of SMCP's assets. The First Mortgage Note Indenture places significant restrictions on SMCP for the incurrence of additional Indebtedness, the creation of additional Liens on the Collateral securing the First Mortgage Notes, transactions with Affiliates and making Restricted Payments unless certain conditions are met. Restricted Payments include paying a management fee to the Manager of the East Chicago Showboat, an entity which is 55% owned by the Company. In order to pay the management fee, among other things, SMCP's Fixed Charge Coverage Ratio must be greater than 1.5 to 1.0 for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment. To make any other Restricted Payment SMCP must, among other things, have a Fixed Charge Coverage Ratio greater than 2.0 to 1.0 for the most recently ended four full fiscal quarters, after giving effect to such Restricted Payment. 19 (continued) In addition, subject to certain qualifications and exceptions, the Company entered into a standby equity commitment with SMCP, pursuant to which it will cause to be made up to an aggregate of $30.0 million in additional capital contributions to SMCP if, during the first three full four fiscal quarters following the commencement of operations at the East Chicago Showboat, the project's combined cash flow (as defined) is less than $35.0 million for any one such full four quarter period. However, in no event will the Company be required to cause to be contributed to SMCP more than $15.0 million in respect of any such full four quarter period. In addition, subject to certain qualifications and exceptions, the Company entered into a completion guarantee with SMCP to complete the East Chicago project so that it becomes operational, including the payment of all costs owing prior to such completion, up to a maximum aggregate amount of $30.0 million. The Company's obligation to complete the East Chicago project will be suspended during the pendency of any force majeure event or other event outside the control of the Company. The East Chicago project budget recently was increased by $5.0 million to $200.0 million to provide for an enhanced pavilion and enhanced employee training. Currently, the Company believes that SMCP has sufficient resources to complete the East Chicago Showboat. However, no assurance can be given that SMCP will be able to complete the East Chicago Showboat from its available financing resources. The Company's ability to make certain payments and to incur additional indebtedness is restricted due to the covenants contained in its indentures governing its 9 1/4% First Mortgage Notes due 2008 and 13% Senior Subordinated Notes due 2009. A description of these restrictions is contained in management's discussion and analysis of financial condition and results of operations contained in the Company's Form 10-k for the period ended December 31, 1995. During the nine months ended September 30, 1996 the Company expended approximately $68.4 million on capital improvements at its Las Vegas and Atlantic City facilities (which were funded from operations) and construction costs at the East Chicago Showboat(which were principally funded from the proceeds of the First Mortgage Notes). Approximately $48.3 million of the $68.4 million related to the East Chicago Showboat. On April 1, 1996, an affiliate of the Company, Sydney Harbour Casino Holdings Limited, ("SHCH") through its wholly owned subsidiary, Sydney Harbour Casino Properties Pty Limited, ("SHCP") renegotiated its agreement with Leighton Properties Pty Limited ("Leighton Properties") for the design and construction of the interim and permanent Sydney Harbour Casino. The renegotiated project cost is approximately A$867.2 million, a A$176.1 million increase over the April 1994 projected project cost of A$691.1 million, and includes the administration and management of the project, enhancement of the interior theming, an accelerated completion date of December 1997, the firming up of monetary allowances and resolution of certain claims by Leighton Properties to SHCP. The design element changes incorporated in the renegotiated 20 (continued) contract for the permanent casino were made with a view towerd improving its operational efficiency and product quality and to match the changing competitive environment. The increased project cost is being funded in part by the sale of 35,250,000 preferred ordinary shares of stock by SHCH on May 13, 1996, providing net proceeds of approximately A$64.0 million. Additional financing of A$150.0 million has been negotiated with local banks. Bank documents have been finalized with the banks and are awaiting final regulatory approval. As with any construction contract, the final amount of such contract will be subject to modification based upon change orders and the occurrence of events such as costs associated with certain types of construction delays. No assurance can be given that the construction costs for the Sydney Harbour will not exceed the announced project cost estimate. The sale of the additional equity by SHCH reduced the Company's equity in the project to 24.6% from 26.3%. The Company through its subsidiary, Showboat Lemay, Inc. ("Showboat Lemay"), has an 80% general partner interest in Southboat Limited Partnership ("SLP") which, subject to licensing, plans to build and operate a riverboat casino project and related facilities (the "Southboat Casino Project") on the Mississippi River near Lemay, Missouri. Pursuant to the limited partnership agreement, Showboat Lemay is responsible for borrowing up to $75.0 million (the "Development Financing') on behalf of SLP. The Company has committed to use its best efforts to obtain a commitment letter for the Development Financing within 60 days after SLP is selected for investigation for a gaming license by the Missouri Gaming Commission or obtain the Development Financing within a commercially reasonable time following such selection. The Company's commitment replaced a previous commitment letter from an unrelated party. No assurance can be given that SLP will be successful in obtaining the necessary funds to finance its gaming project or that SLP will successfully obtain a casino license. The Company continues to examine, and if appropriate, may pursue potential gaming opportunities in jurisdictions where gaming is legalized and in other jurisdictions that, in the future, may legalize private for profit casino gaming. There can be no assurance that legislation will be enacted in any additional jurisdictions, that any properties in which the Company may have invested will be compatible with any gaming legislation so enacted, that legalized gaming will continue to be authorized in any jurisdictions or the Company will be able to obtain the required licenses in any jurisdiction. Further, no assurance can be given that any of the announced or unannounced projects under development will be completed, licensed or result in any significant contribution to the Company's cash flow or earnings. Casino gaming operations are highly regulated and new casino developments are subject to a number of risks and uncertainties, many of which are beyond the Company's control. 21 (continued) The Company believes that it has sufficient capital resources, including its existing cash balances, cash provided by operations and existing borrowing capacity, to cover the cash requirements of its existing operations. The ability of the Company to satisfy its cash requirements, will be dependent upon the future performance of its casino hotels which will continue to be influenced by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. As the Company realizes expansion opportunities, the Company will need to make significant capital investments in such opportunities and additional financing will be required. The Company anticipates that additional funds will be obtained through loans or public offerings of equity or debt securities, although no assurance can be made that such funds will be available or at interest rates acceptable to the Company. All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's current business strategy, the Company's prospective joint ventures, expansions of existing projects, and the Company's plans for future development and operations, are based upon current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as legalization of gaming in jurisdictions from which the Company draws significant numbers of patrons and an increase in the number of casinos serving the markets in which the Company's casinos are located; changes in labor, equipment and capital costs; the ability of the Company to consummate its contemplated joint ventures on terms satisfactory to the Company and to obtain necessary regulatory approvals therefore; changes in regulations affecting the gaming industry; the ability of the Company to comply with its Indentures for its 9 1/4% First Mortgage Bonds and 13% Senior Subordinated Indebtedness; future acquisitions or strategic partnerships; general business and economic conditions; and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution the readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Litigation Reform Act of 1995 and, as such, speak only as of the date made. 22 SHOWBOAT, INC. AND SUBSIDIARIES PART II, OTHER INFORMATION Item 1. Legal Proceedings "Larry Schreier v. Caesars World, Inc. et al.", Case No. 95-923-LDG (RJJ), instituted on September 26, 1995, in the United States District Court for the District of Nevada, Southern District. An individual, purportedly representing a class, filed a complaint against four manufacturers, three distributors and 38 casino operators, including the Company, that manufacture, distribute or offer for play video poker and electronic slot machines. The individual allegedly intends to seek class certification of the interests he claims to represent. The complaint alleges that the defendants have engaged in a course of conduct intended to induce persons to play such games based on a false belief concerning how the gaming machines operate, as well as the extent to which there is an opportunity to win on a given play. The complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $1.0 billion without any substantiation of that amount. The Company filed a motion to dismiss the complaint. The Nevada District Court entered an order granting the motions to dismiss based on defects in the pleadings, and denying as moot all other pending motions, including those of the Company. The Court granted plaintiff until September 30, 1996 within which to file an amended complaint that complies with the applicable pleading requirements. The plaintiff filed an amended complaint on or about September 30, 1996. The Company renewed its motion to dismiss based on abstention and related doctrines, and based on defects in the pleadings. Management believes that the complaint is without merit and intends to vigorously defend the allegations. "Global Gaming Technology, Inc. v. Trump Plaza Funding, Inc., et al.", Case No.94-2021 (JHR), instituted on May 5, 1994, in the United States District Court for the District of New Jersey. The plaintiff, Global Gaming Technology, Inc., filed a complaint against eight casino operators in Atlantic City, New Jersey. The complaint alleges a patent infringement with respect to certain of the electronic slot machines used by the defendants, including the Atlantic City Showboat. The plaintiff seeks to recover damages for copyright infringement in excess of $500 million. The manufacturers of the slot machines in question have assumed the defense and have indemnified the Atlantic City Showboat and other casinos in this matter. The manufacturers filed a complaint against the plaintiff in the United States District Court for the District of Nevada, Southern District. The United States District Court for the District of New Jersey stayed the New Jersey action pending resolution of the issues in the pending Nevada action. In September 1996, the trial of the Nevada action was held and the parties are awaiting the decision of the trial judge. 23 (continued) SHOWBOAT, INC. AND SUBSIDIARIES PART II, OTHER INFORMATION (continued) Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ---------- ---------------------------------- 10.01 Showboat, Inc. 1996 Stock Appreciation Rights Plan, effective date September 3, 1996. 27.1 Finanical Data Schedules (b) Reports on Form 8-K None 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Showboat, Inc. Registrant Date: November 13, 1996 s/ J. Kell Houssels, III --------------------- -------------------------------------- J. KELL HOUSSELS, III, President and Chief Executive Officer Date: November 13, 1996 s/ R. Craig Bird --------------------- -------------------------------------- R. CRAIG BIRD, Executive Vice President - Finance and Administration and Chief Financial Officer 25 EXHIBIT INDEX Exhibit No. Description ------------ ---------------------------------- 10.01 Showboat, Inc. 1996 Stock Appreciation Rights Plan, effective date September 3, 1996. 27.1 Financial Data Schedules 26 SHOWBOAT, INC. 1996 STOCK APPRECIATION RIGHTS PLAN I. PURPOSES Showboat, Inc. (the "Company") desires to afford certain of its key employees and certain key employees of its subsidiaries who are responsible for the continued growth of the Company, an opportunity to participate in the growth of the Company, and thus to create in such persons an increased interest in and a greater concern for the welfare of the Company and its subsidiaries. The stock appreciation rights ("Rights") offered pursuant to this 1996 Stock Appreciation Rights Plan (the Plan) are a matter of separate inducement and are not in lieu of any salary or other compensation for the services of any key employee. II. GRANT OF STOCK APPRECIATION RIGHTS PURSUANT TO THE PLAN The Company may, from time to time during the period beginning on September 3, 1996 (the "Effective Date") and ending on the tenth anniversary thereof grant Rights to certain key employees of the Company, or certain key employees of any subsidiary of the Company, under the terms hereinafter set forth. The total number of shares of common stock, $1.00 par value per share, of the Company ("Common Stock") subject to Rights which may be issued pursuant to this Plan shall not exceed 800,000, with no individual employee to receive in excess of 120,000 Rights, in both cases subject to adjustment in accordance with Article VIII of the Plan. III. ADMINISTRATION The board of directors of the Company (the "Board of Directors") shall designate from among its members a committee (the "Committee") to administer the Plan. The Committee shall consist of no less than two members of the Board of Directors, each of whom shall be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code") and any regulations promulgated thereunder, and the Committee 1 shall administer the Plan so as to comply at all time with Section 162(m) of the Code. A majority of the members of the Committee shall constitute a quorum (or if the Committee consists of only two members, then both members shall constitute a quorum), and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all members of the Committee, shall be the acts of the Committee. Any member of the Committee may be removed at any time with or without cause by resolution adopted by the Board of Directors and any vacancy on the Committee at any time may be filled by resolution adopted by the Board of Directors. Subject to and not inconsistent with the express provisions of the Plan, the Committee shall have authority, in its sole discretion, to: (a) determine the key employees to whom Rights shall be granted, the time when such Rights shall be granted, the number of shares of Common Stock subject to Rights, the period(s) during which such Rights shall be exercisable (whether in whole or in part), the restrictions to be applicable to Rights and all other terms and provisions thereof (which need not be identical); (b) require, as a condition to the granting of any Rights, that the person receiving such Rights agree not to sell or otherwise dispose of such Rights; (c) provide (in accordance with Article X hereof or otherwise) the establishment of a procedure whereby the necessary amounts may be withheld from the total payments made to any person upon exercise of a Right to meet the obligation of withholding for income, social security and other taxes incurred by such person upon such exercise or required to be withheld by the Company in connection with such exercise; (d) prescribe, amend, modify and rescind rules and regulations relating to the Plan; (e) make all determinations permitted or deemed necessary, appropriate or advisable for the administration of the Plan, interpret any Plan or Rights provision, perform all other acts, exercise all other powers, and establish any other procedures determined by the Committee to be necessary, appropriate or advisable in administering the Plan or for the conduct of the Committee's business. Any act of the Committee, including interpretations of the 2 provisions of the Plan or any Rights and determinations under the Plan or any Rights shall be final, conclusive and binding on all parties. The Committee may employ attorneys, consultants, accountants, or other persons as it may deem desirable for the administration of the Plan and may rely upon the advice, opinions or computations of any such persons. Expenses incurred by the Committee in the engagement of such persons shall be paid by the Company. No member or former member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or any Rights granted hereunder. IV. ELIGIBILITY; TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS Rights may be granted only to key employees of the Company or any subsidiary of the Company. The Plan does not create a right in any person to participate in, or be granted Rights under, the Plan. Any Rights granted hereunder shall, unless otherwise provided in such Rights, vest immediately upon the grant of such Rights. The exercise price of a Right shall be $24.58 in the case of the initial grant of any Rights hereunder (which shall not be less than one hundred percent (100%) of the fair market value of one share of Common Stock on the date of grant of such Right) and the exercise price of a Right granted after such initial grant shall be equal to one hundred and fifteen percent (115%) of the fair market value of one share of Common Stock on the date of grant of such Right. Any Right granted hereunder shall be exercisable at any time during a period of not more than thirty (30) days after the date of a Change in Control of the Company (as hereinafter defined) (the "Exercise Period"); provided, however, that a Right shall not be exercisable after the expiration of ten (10) years from the Effective Date. Any Right remaining unexercised at the earlier of (i) the expiration of ten (10) years from the Effective Date or Period, shall expire on such date. Any Right shall be exercisable upon such additional terms and conditions as may from time to time be prescribed by the Committee. 3 The Committee shall have the right to accelerate, in whole or in part, from time to time, conditionally or unconditionally, rights to exercise any Right granted hereunder. Except as otherwise provided below or in the terms of the grant of any Right, the exercise of a Right, in the manner described in Article V below, shall entitle the holder to receive from the Company, cash, in an aggregate amount equal to the excess, if any, of fair market value per share of Common Stock on the date of the Change in Control of the Company over the exercise price of the Right as specified in such Right. For purposes of the Plan, "fair market value," with respect to any date of determination, means: (i) if the shares of Common Stock are listed or admitted to trading on a national securities exchange in the United States or reported through the NASDAQ Stock Market ("NASDAQ"), then the closing sale price on such exchange or NASDAQ on such date or, if no trading occurred or quotations were available on such date, then on the closest preceding date on which the shares of Common Stock were traded or quoted; or (ii) if not so listed or reported but an active public market for the shares of Common Stock exists (as determined in the sole discretion of the Committee, whose decision shall be conclusive and binding), then the average of the closing bid and ask quotations per share of Common Stock in the over-the-counter market for such shares of Common Stock in the United States on such date or, if no such quotations are available on such date, then on the closest date preceding such date. For purposes of the foregoing, a market in which trading is sporadic and the ask quotations generally exceed the bid quotations by more than 15% shall not be deemed to be an "active public market"; or (iii) in the case of a Change in Control of the Company, (A) the highest price per share of Common Stock paid by the "person" described in clause (a) of the definition of "Change in Control of the Company", (B) the fair market value per share of Common Stock (determined as provided in (i) and (ii) above) on the date of a transaction described in clause (b) of the definition of Change in Control of the Company and (C) the amount of cash (or the fair market value of other property, as determined by the Committee in its sole discretion) paid per share of Common Stock in the 4 case of a transaction described in clause (c) of the definition of "Change in Control of the Company". If the Committee determines that an active public market does not exist for the shares of Common Stock, or in the case of a determination to be made by the Committee pursuant to (iii) above, the Committee shall determine the fair market value of the shares of Common Stock in its good faith judgment based on the total number of shares of Common Stock then outstanding, taking into account all outstanding options, warrants, rights or other securities exercisable or exchangeable for, or convertible into, shares of Common Stock. For purposes of the Plan, a "Change in Control of the Company" shall occur (a) if any person or other entity, including any person as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act, directly or indirectly, of more than fifty percent (50%) of the total combined voting power of all classes of capital stock of the Company normally entitled to vote for the election of directors of the Company (the "Voting Stock"), (b) upon the closing of the sale of all or substantially all of the property or assets of the Company or (c) upon the closing of a consolidation or merger of the Company with another corporation, the consummation of which results in the stockholders of the Company immediately before the occurrence of the consolidation or merger owning, in the aggregate, less than 50% of the Voting Stock of the surviving entity. In the event that any payment or benefit received or to be received by a holder of a Right pursuant to the terms of this Plan or the Rights (the "Rights Payments") or of any other plan, arrangement or agreement of the Company (or any affiliate) ("Other Payments" and, together with the Rights Payments, the "Payments") would, in the opinion of independent tax counsel selected by the Company and reasonably acceptable to the employee ("Tax Counsel"), be subject to the excise tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (in whole or in part), as determined as provided below, the Rights Payments shall be reduced (but not below zero) until no portion of the Payments would be subject to the Excise Tax. For purposes of this limitation, which the employee shall have effectively waived in writing shall be taken into account, (ii) only the portion of the Payments which in the opinion of Tax Counsel constitute a parachute payment within the meaning of Section 280G(b)(2) 5 of the Code shall be taken into account, (iii) the Payments shall be reduced only to the extent necessary so that the Payments would not be subject to the Excise Tax, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in such payments shall be determined in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. V. EXERCISE OF STOCK APPRECIATION RIGHTS A holder shall exercise a Right by submitting to the Company at its principal office a written notice (the Notice) specifying the number of Rights being exercised and the exercise price(s) of such Rights. Except as otherwise provided herein, the exercise of a Right shall entitle the holder to receive from the Company, within ten (10) business days of the date of receipt of the Notice by the Company at its principal office, an amount of cash determined as set forth in Article IV hereof. VI. NONTRANSFERABILITY OF STOCK APPRECIATION RIGHTS Any Right granted hereunder shall not be transferable, other than by will or the laws of descent and distribution, and any Right granted hereunder shall, subject to Article VIII hereof, be exercisable, during the lifetime of the holder, only by such holder. VII. TERMINATION OF EMPLOYMENT Upon termination of employment of any key employee with the Company and all subsidiary corporations of the Company, any Right previously granted to such employee, unless otherwise specified by the Committee in the Right shall, to the extent not theretofore exercised, terminate and become null and void; provided, however, that: (A) if any key employee shall die while in the employ of such corporation or during either the one (1) year or three (3) month period, whichever is applicable, specified in clauses (B) and (C) below, any Right granted hereunder, unless otherwise specified by the Committee in the Right, shall be exercisable by the legal representative of such employee or such person who acquired such Right by bequest or inheritance or by reason of the death of such 6 employee, at any time up to and including one (1) year after the date of death; (B) if the employment of any key employee shall terminate by reason of such employee's disability (as described in Section 22(e)(3) of the Code), any Right granted hereunder, unless otherwise specified by the Committee in the Right, shall be exercisable at any time up to and including one (1) year after the effective date of such termination of employment; (C) if the employment of any key employee shall terminate (i) by reason of the employee's retirement (at such age or upon such conditions as shall be specified by the Committee), (ii) by the key employee for "good reason" cause (as defined below), such Right, unless otherwise specified by the Committee in the Right, shall be exercisable at any time up to and including three (3) months after the effective date of such termination of employment; and (D) if the employment of any employee shall terminate by any reason other than that provided for in clauses (A), (B) or (C) above, such Right, unless otherwise specified by the Committee in such Right shall, to the extent not theretofore exercised, become null and void. None of the events described above shall extend the period of exercisability of the Right beyond the expiration date thereof. If a Right granted hereunder shall be exercised by the legal representative of a deceased grantee or by a person who acquired a Right granted hereunder by bequest or inheritance or by reason of the death of any employee or former employee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Right. For purposes of the Plan, the term "for cause" shall mean (a) with respect to an employee who is a party to a written severance agreement with, or, alternatively, participates in a compensation or benefit plan (other than the Plan) of, the Company or a subsidiary corporation of the Company, which agreement or plan contains a definition of for cause or "cause" (or words of like import) for purposes of termination of employment or services thereunder by the Company or such subsidiary corporation of the Company, "for cause" or "cause" as defined therein (if an 7 employee is both party to a severance agreement and participates in such a plan, the definition contained in such agreement shall control); or (b) in all other cases, as determined by the Committee in its sole discretion, the willful and continued misconduct of an employee or the willful and continued failure of an employee to substantially perform the duties of such employee to the Company or a subsidiary corporation of the Company (other than due to physical or mental illness), if such failure or misconduct is materially damaging or materially detrimental to the business and operations of the Company and has not been cured within thirty (30) days after written notice thereof has been given to the employee by the Committee. For purposes of the Plan, the term "good reason" shall mean: (i) the assignment to the employee of any duties inconsistent with the position in the Company that the employee held immediately prior to the Change in Control of the Company, or a significant adverse alteration in the nature or status of the responsibilities or the conditions of employment of the employee from those in effect immediately prior to such Change in Control of the Company; (ii) a reduction by the Company in the annual base salary of the employee as in effect immediately prior to the Change in Control of the Company; (iii) the relocation of the Company's offices at which the employee is principally employed immediately prior to the Change in Control of the Company to a location more than 25 miles from such location or the Company's requiring the employee to be based anywhere other than the Company's offices at such location except for required travel on the Company's business to an extent substantially consistent with the employee's business travel obligations prior to the Change in Control of the Company; (iv) the failure by the Company to pay to the employee any portion of current compensation or to pay to the employee any portion of an installment of deferred compensation under any deferred compensation program of the Company within seven (7) days of the date such compensation is due; (v) the failure by the Company to continue in effect any material compensation or benefit plan in which the employee participates immediately prior to 8 the Change in Control of the Company unless an equitable arrangement (embodied in an on-going substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the employee's participation relative to other participants, as existed at the time of the Change in Control of the Company; (vi) the failure by the Company to continue to provide the employee with benefits substantially similar to those enjoyed by the employee under any of the Company's life insurance, medical, health and accident, or disability plans in which the employee participates at the time of the Change in Control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Company to provide the employee with the number of paid vacation days to which the employee is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control of the Company; or (vii) any purported termination of employment that is not effected in a manner satisfying the definition of "for cause" hereunder. For purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of determination, the individual was an "employee" of such corporation for purposes of Section 422(a) of the Code. If an individual is on leave of absence taken with the consent of the corporation by which such individual was employed, or is on active military service, and is determined to be an employee for purposes of the exercise of Right, such individual shall not be entitled to exercise such Right during such period and while the employment is treated as continuing intact unless such individual shall have obtained the prior written consent of such corporation, which consent shall be signed by the chairman of the board of directors, the president, a senior vice-president or other duly authorized officer of such corporation. A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a subsidiary 9 corporation of the Company or (ii) the transfer of an employee from employment by a subsidiary corporation of the Company to employment by the Company or by another subsidiary corporation. VIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTIONS Notwithstanding any other provision contained herein, in the event of any change in the shares of Common Stock subject to the Plan or to any Right granted under the Plan (through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or other like change in the capital structure of the Company), the Committee shall make any appropriate adjustments to the total number of shares of Common Stock which may be subject to Rights under the Plan, the maximum number of shares of Common Stock for which Rights may be granted to any employee and the number of shares of Common Stock and fair market value per share of Common Stock subject to outstanding Rights as shall be equitable to prevent dilution or enlargement of rights under such Rights, and the determination of the Committee as to these matters shall be conclusive and binding on the holder. IX. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not impose any obligation on the Company or on any subsidiary corporation to continue the employment of any holder of a Right and it shall not impose any obligation on the part of any holder of a Right to remain in the employ of the Company or of any subsidiary corporation. X. WITHHOLDING TAXES The Company shall have the right to withhold the amount of any taxes required by any governmental authority to be withheld or otherwise deducted and paid by the Company in respect of any sums due or to become due from the Company to the employee from such sums upon such terms and conditions as the Committee shall prescribe. In lieu thereof, the Company may require an employee exercising any Right to reimburse the Company for such taxes. 10 XI. AMENDMENT OF THE PLAN The Committee may, from time to time, amend the Plan, provided that no amendment shall be made, without the approval of the stockholders of the Company, that will (a) increase the total number of shares of Common Stock subject to Rights under the Plan or the maximum number of shares of Common Stock for which Rights may be granted to any employee (other than an increase resulting from an adjustment provided for in Article VIII hereof), (b) reduce the exercise price of any Right granted hereunder, (c) modify the provisions of the Plan relating to eligibility, or (d) materially increase the benefits accruing to participants under the Plan. The Rights and obligations under any Rights granted before amendment of the Plan or any unvested or unexercised portion of such Rights shall not be adversely affected by amendment of the Plan or the Rights without the consent of the holder of the Rights. XII. TERMINATION OR SUSPENSION OF THE PLAN The Committee may at any time suspend or terminate the Plan. Rights may not be granted while the Plan is suspended or after it is terminated. Rights and obligations under any Rights granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except upon the consent of the person to whom the Rights were granted. The power of the Committee to construe and administer any Rights granted prior to the termination or suspension of the Plan under Article III nevertheless shall continue after such termination or during such suspension. XIII. GOVERNING LAW The Plan, such Rights as may be granted thereunder and all related matters shall be governed by, and construed and enforced in accordance with, the laws of the State of Nevada. 11 XIV. PARTIAL INVALIDITY The invalidity or illegality of any provision herein shall not be deemed to affect the validity of any other provision. XV. Notices All notices hereunder shall be sent by registered mail, postage prepaid, to the Company at its principal place of business, or to a holder of any Rights, or any permitted transferee, at his last known address, or the address, if any, appearing on the books of the Company. XVI. EFFECTIVE DATE The Plan shall become effective at 5:00 P.M., Las Vegas, Nevada time, on the Effective Date; provided, however, that if the Plan is not approved by a vote of the stockholders of the Company at the first meeting of stockholders after such date, the Plan and any Rights granted thereunder shall terminate. 12 EX-5 2 [ARTICLE] 5 [MULTIPLIER] 1000 [PERIOD-TYPE] 9-MOS [FISCAL-YEAR-END] DEC-31-1996 [PERIOD-END] SEP-30-1996 [CASH] 25235 [SECURITIES] 64374 [RECEIVABLES] 11813 [ALLOWANCES] 2050 [INVENTORY] 2680 [CURRENT-ASSETS] 118395 [PP&E] 613473 [DEPRECIATION] (203131) [TOTAL-ASSETS] 809851 [CURRENT-LIABILITIES] 55178 [BONDS] 530650 [PREFERRED-MANDATORY] 0 [PREFERRED] 0 [COMMON] 16176 [OTHER-SE] 170457 [TOTAL-LIABILITY-AND-EQUITY] 809851 [SALES] 329533 [TOTAL-REVENUES] 334057 [CGS] 0 [TOTAL-COSTS] 178737 [OTHER-EXPENSES] 121732 [LOSS-PROVISION] 2050 [INTEREST-EXPENSE] 22800 [INCOME-PRETAX] 9804 [INCOME-TAX] 4568 [INCOME-CONTINUING] 5236 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 5236 [EPS-PRIMARY] .32 [EPS-DILUTED] .32
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