10-Q continued, -
OTHER INCOME (EXPENSE)
Other income and expense is primarily comprised of interest expense, net of capitalized interest. Net interest expense increased by $2.6 million during the quarter ended June 30, 2000 as compared to the quarter ended June 30, 1999. The increase is attributable to higher average debt levels as a result of the borrowings related to the November 1999 acquisition of Blue Chip. Net interest expense was partially offset by $1.3 million in capitalized interest costs during the quarter ended June 30, 2000 compared to $0.3 million during the quarter ended June 30, 1999.
For the six month period ended June 30, 2000, net interest expense increased $5.6 million as compared to the same period of the prior year. The increase is attributable to higher average debt levels as a result of the borrowings related to the November 1999 acquisition of Blue Chip. Net interest expense was partially offset by $2.2 million in capitalized interest costs during the six month period ended June 30, 2000 compared to $0.4 million during the comparable period in the prior year.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR START-UP ACTIVITIES
During the quarter ended March 31, 1999, the Company reported a charge of $1.7 million, net of $0.9 million in tax benefit, as the cumulative effect of a change in accounting for start-up activities. The American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" that required the Company to expense certain previously capitalized costs of start-up activities as a cumulative effect of change in accounting principle.
NET INCOME
As a result of these factors, the Company reported net income of $6.7 million and $9.7 million, respectively, during the quarters ended June 30, 2000 and 1999 and $63.7 million and $18.6 million, respectively, during the six month periods ended June 30, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATING ACTIVITIES AND WORKING CAPITAL
The Company's policy is to use operating cash flow in combination with debt financing to fund renovations and expansion of its business.
During the six month period ended June 30, 2000, the Company generated operating cash flow of $150 million compared to $80 million during the six month period ended June 30, 1999. The increase in operating cash flow is primarily attributable to the $72 million termination payment received from Silver Star as well as the incremental earnings from Blue Chip, which was acquired in November 1999, partially offset by declines in earnings at Sam's Town Tunica and Treasure Chest. As of June 30, 2000 and 1999, the Company had balances of cash and cash equivalents of $72 million and a working capital deficit of $47 million at June 30, 2000 compared to working capital of $12.2 million at June 30, 1999. Much of the working capital deficit at June 30, 2000 is attributable to the decrease in cash and cash equivalents as well as $10.7 million in income taxes payable principally related to the income generated from the $72 million termination payment and $15.6 million in construction payables mainly associated with the Sam's Town Las Vegas renovation and expansion project. The Company has historically operated with minimal or negative levels of working capital in order to minimize borrowings and related interest costs under its $600 million bank credit facility (the "Bank Credit Facility").
CASH FLOWS FROM INVESTING ACTIVITIES
The Company is committed to continually maintaining and enhancing its existing facilities, most notably by upgrading and remodeling its casinos, hotel rooms, restaurants, and other public spaces and by providing the latest slot machines for its customers. The Company's capital expenditures primarily related to these purposes were approximately $26 million and $31 million, respectively, during the six month periods ended June 30, 2000 and 1999. The Company also incurred approximately $30 million in capital expenditures during the six months ended June 30, 2000 for the renovation and expansion of Sam's Town Las Vegas and the renovation of Sam's Town Tunica. During the six month period ended June 30, 1999, the Company incurred approximately $6.9 million in capital expenditures for the renovation of the Stardust.
CASH FLOWS FROM FINANCING ACTIVITIES
Substantially all of the funding for the Company's acquisitions and renovation and expansion projects comes from cash flows from existing operations as well as debt financing. During the six month period ended June 30, 2000, the Company paid down debt by $102 million as compared to $42 million during the six month period ended June 30, 1999. The termination payment accounted for $72 million of the debt reduction during the six month period ended June 30, 2000. At June 30, 2000, outstanding borrowings and unused availability under the Bank Credit Facility were $425 million and $174.3 million, respectively.
The Company's Bank Credit Facility consists of a $500 million revolver component (the "Revolver") and a term loan component (the "Term Loan") with an original principal balance of $100 million, both of which mature in June 2003. Availability under the Revolver will be reduced by $15.6 million on December 31, 2001 and at the end of each quarter thereafter until March 31, 2003. The Term Loan is being repaid in increments of $0.25 million per quarter which began on September 30, 1999 and will continue through March 31, 2003, bringing the June 30, 2000 outstanding balance to $99 million. The interest rate on the Bank Credit Facility is based upon either the agent bank's quoted base rate or the Eurodollar rate, plus an applicable margin that is determined by the level of a predefined financial leverage ratio. In addition, the Company incurs a commitment fee on the unused portion of the Revolver which ranges from 0.375% to 0.50% per annum. The blended rate on outstanding borrowings under the Bank Credit Facility as of June 30, 2000 was 8.4%. The Bank Credit Facility is secured by substantially all of the real and personal property of the Company and its subsidiaries, including eleven casino properties. The obligations of the Company under the Bank Credit Facility are guaranteed by the significant subsidiaries of the Company.
Effective July 28, 2000, the Company amended its bank credit facility primarily to allow for an increase of up to $225 million in its joint venture investment in The Borgata and to reduce and modify the Company's capital raising requirements for The Borgata.
The Bank Credit Facility contains certain financial and other covenants, including, without limitation, various covenants (i) requiring the maintenance of a minimum net worth, (ii) requiring the maintenance of a minimum interest coverage ratio, (iii) establishing a maximum permitted total leverage ratio and senior secured leverage ratio, (iv) imposing limitations on the incurrence of additional indebtedness, (v) imposing limitations on the maximum permitted expansion capital expenditures during the term of the Bank Credit Facility, (vi) imposing limits on the maximum permitted maintenance capital expenditures during each year of the term of the Bank Credit Facility, and (vii) imposing restrictions on investments, dividends and certain other payments. Management believes the Company and its subsidiaries are in compliance with the Bank Credit Facility covenants.
The Company's $200 million principal amount of Senior Notes (the "9.25% Notes") and $250 million principal amount of Senior Subordinated Notes (the "9.50% Notes") contain limitations on, among other things, (a) the ability of the Company and its Restricted Subsidiaries (as defined in the Indenture Agreements) to incur additional indebtedness, (b) the payment of dividends and other distributions with respect to the capital stock of the Company and its Restricted Subsidiaries and the purchase, redemption or retirement of capital stock of the Company and its Restricted Subsidiaries, (c) the making of certain investments, (d) asset sales, (e) the incurrence of liens, (f) transactions with affiliates, (g) payment restrictions affecting restricted subsidiaries and (h) certain consolidations, mergers and transfers of assets. Management believes the Company and its subsidiaries are in compliance with the covenants related to the 9.25% and 9.50% Notes at June 30, 2000.
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.
EXPANSION AND OTHER PROJECTS
The Company continues to explore development opportunities in the Las Vegas locals market. The Company is in the midst of an $86 million expansion and renovation project at Sam's Town Las Vegas. The expansion project includes, among other things, an 18 screen state-of-the-art movie theatre complex, childcare facilities, an arcade, additional casino space for 500 slot machines, an 11,200 square foot multi-purpose events center for concerts and meetings and a new 650 seat buffet. The renovation project includes the remodeling of the casino and restaurants and a reconfigured and remodeled porte cochere and valet parking area to improve access to the property. As of June 30, 2000, the Company had incurred $58 million in cumulative costs associated with the Sam's Town Las Vegas expansion and renovation project. The renovation portion of the project is expected to continue through the summer of 2000 and the expansion is expected to be completed by mid November 2000. There can be no assurances that the Sam's Town Las Vegas renovation and expansion project will be completed on time or within budget. In addition, in January 2000, the Company reached an agreement in principle with Nevso, L.L.C. to purchase approximately 18 acres of land in western Las Vegas to develop a locals hotel and casino. The purchase of the land and development of the project is subject to a number of contingencies, including but not limited to, the parties reaching a definitive agreement and securing various regulatory and development approvals. The zoning to allow the construction of the project and its use as a locals resort casino was reversed upon administrative appeal and is the subject of litigation. The Company can make no assurances that this project will go forward or that if the project goes forward that it will be successful.
The Company's primary expansion project is the development of an Atlantic City casino resort. On May 29, 1996, the Company, through a wholly-owned subsidiary, entered into a joint venture agreement with MAC, Corp., which has become a wholly-owned subsidiary of MGM MIRAGE, to jointly develop and own a casino hotel entertainment facility in Atlantic City, New Jersey. Certain aspects of the joint venture agreement were subsequently modified into an amended and restated joint venture agreement (the "Agreement") on July 14, 1998. While the Company is in discussions to amend the Agreement, the Agreement currently provides for a hotel of at least 1,200 rooms and a casino and related amenities (collectively named "The Borgata") and contemplates a total cost of $750 million. Any project costs exceeding the $750 million budget shall be funded by the Company without any proportionate increase in the ownership of the joint venture by the Company. The Agreement provides for each party to make an equity contribution of $150 million with the Company contributing $90 million when MGM MIRAGE contributes land to the venture. The Agreement further provides for the venture to arrange $450 million in non-recourse financing for the project. The Company's ongoing discussions with MGM MIRAGE include increasing the size of The Borgata to at least 2,000 rooms and increasing the budget to $1.035 billion. Pursuant to these discussions, any project costs exceeding the $1.035 billion increased budget shall be funded by the Company without any proportionate increase in the ownership of the joint venture by the Company. Under these discussions, cash equity contributions by the Company would increase to $207 million, while MGM MIRAGE's cash equity contributions would increase to $117 million. MGM MIRAGE would also contribute land to the venture, valued at $90 million. In addition, it is contemplated that the joint venture would obtain $621 million in non-recourse financing. Funding of the Company's capital contributions to The Borgata is expected to be derived from cash flow from operations, availability under the Company's Bank Credit Facility, incremental bank financing, or additional debt offerings. The Borgata is subject to the many risks inherent in the development and operation of a new business enterprise, including potential unanticipated design, construction, regulatory, environmental and operating problems, increased project costs, timing delays, lack of adequate financing and the significant risks commonly associated with implementing a
marketing strategy in a new market. Once construction begins, if The Borgata does not become operational within the time frame and budget currently contemplated or does not compete successfully in its new market, it could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is in the planning stages of this development and as of June 30, 2000 has contributed or advanced total funds of $10.2 million to The Borgata. The Company expects to contribute its $90 million capital contribution contemporaneously with MGM MIRAGE's contribution of the land, which is expected to occur when a significant portion of the building plans are complete, permits are obtained and financing is arranged. Such date is expected to be early in the fourth quarter of this year. Also, if The Borgata is increased in size pursuant to the discussions, it will result in a longer construction period and would move the expected completion date from late 2002 to the middle of 2003.
The Company recently began a $21 million renovation project at Sam's Town Tunica to reconfigure and remodel the casino, redesign and enhance its restaurant product, remodel the atrium and build an RV park adjacent to the property. The renovation project is expected to be completed by December 31, 2000, although there can be no assurances that the project will be completed on time or within budget. As of June 30, 2000, the Company had incurred $3.6 million in total costs associated with the Sam's Town Tunica renovation project.
The Company has undertaken a Customer Information System ("CIS") project that will standardize the Company's customer tracking systems. The purpose of the CIS project is to link all points of customer contact at a particular property to enable the Company to better monitor customer activity in order to enhance and direct marketing efforts. As of June 30, 2000, the Company had incurred $16.7 million in cumulative costs associated with the CIS project, $4.9 million of which was incurred during the six month period ended June 30, 2000. Substantially all of these costs have been capitalized. The Company expects to spend approximately $10 million during the last half of 2000 on the CIS project. The Company has never undertaken a technology project of this magnitude and may experience difficulties in the integration and implementation of this project. In addition, given the inherent difficulties of a project of this magnitude and the resources required, the timing and costs involved could differ materially from those anticipated by the Company. There can be no assurance that the CIS project will be completed successfully, on schedule, or within budget.
Substantial funds are required for The Borgata, the other projects discussed above, and for other future expansion projects. There are no assurances that any of the above mentioned projects will go forward on a timely basis, if at all, or ultimately become operational. The source of funds required to meet the Company's working capital needs (including maintenance capital expenditures) is expected to be cash flow from operations and availability under the Company's Bank Credit Facility. The source of funds for the Company's expansion projects may come from cash flow from operations and availability under the Company's Bank Credit Facility, incremental bank financing, additional debt or equity offerings, joint venture partners or other sources. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company or its stockholders.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements
or other written statements made or to be made by the Company) contains statements that are forward looking, such as statements relating to plans for future expansion and other business development activities as well as capital spending, financing sources, and the effects of regulation (including gaming and tax regulation) and competition. Such forward looking statements involve important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, actual results may differ materially from those expressed in any forward looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those related to construction, expansion and development activities, economic conditions, changes in tax laws, changes in laws or regulations affecting gaming licenses, changes in competition, and factors affecting leverage and debt service including sensitivity to fluctuation in interest rates and other factors described from time to time in the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Any forward looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. The Company's primary exposure to market risk is interest rate risk associated with its long-term debt. The Company attempts to limit its exposure to interest rate risk by managing the mix of its long-term fixed-rate borrowings and short-term borrowings under the Bank Credit Facility. Borrowings under the Bank Credit Facility bear interest, at the Company's option, at the agent bank's quoted base rate or at a specified premium over the Eurodollar rate. However, the amount of outstanding borrowings is expected to fluctuate and may be reduced from time to time. The Company currently does not utilize hedging instrument |
