<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
Commission file number: 0-26518
FITZGERALDS GAMING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 88-0329170
(State or other jurisdiction of incorporation or (IRS Employer Identification Number)
organization)
</TABLE>
301 FREMONT STREET, LAS VEGAS NV 89101
(Address of principal executive offices) (Zip Code)
(702) 388-2224
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Shares outstanding of each of the registrant's classes of
common stock as of August 11, 1998
<TABLE>
Class Outstanding as of August 11, 1998
----- ---------------------------------
<S> <C>
Common stock, $.01 par value 4,012,846
</TABLE>
<PAGE> 2
FITZGERALDS GAMING CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 28, 1998 AND DECEMBER
31, 1997 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER AND TWO
QUARTERS ENDED JUNE 28, 1998 AND JUNE 29, 1997 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWO QUARTERS
ENDED JUNE 28, 1998 AND JUNE 29, 1997 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 12
PART II OTHER INFORMATION 27
SIGNATURES 31
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<PAGE> 4
FITZGERALDS GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 28, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JUNE 28, 1998 DEC. 31, 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,792,395 $ 14,809,617
Accounts receivable, net of allowance for doubtful
accounts of $333,861 and $411,881 1,715,256 2,060,045
Accounts and notes receivable - related parties 135,087 136,173
Inventories 1,230,018 1,313,611
Prepaid expenses:
Gaming taxes 1,411,228 1,163,342
Other 2,424,878 1,734,186
------------ ------------
Total current assets 25,708,862 21,216,974
------------ ------------
PROPERTY AND EQUIPMENT, net 162,403,015 163,704,715
------------ ------------
OTHER ASSETS:
Estimated realizable value of Nevada Club assets
held for sale 3,747,977 3,979,228
Restricted cash - construction -- 393,987
Restricted investment 1,000,000 1,000,000
Investments 1,049,578 1,347,813
Debt offering costs 8,655,275 8,724,936
Goodwill, net 13,871,913 14,046,231
Other assets 910,853 1,206,356
------------ ------------
Total other assets 29,235,596 30,698,551
------------ ------------
MINORITY INTEREST -- 75,199
------------ ------------
TOTAL $217,347,473 $215,695,439
============ ============
</TABLE>
(CONTINUED)
See Notes to Condensed Consolidated Financial Statements Page 4 of 31
<PAGE> 5
FITZGERALDS GAMING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 28, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY JUNE 28, 1998 DEC. 31, 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,450,534 $ 7,285,897
Current portion of notes payable - related parties 304,637 304,637
Accounts payable 7,148,169 7,236,856
Accrued and other:
Payroll and related 4,041,934 4,061,565
Progressive jackpots 1,206,540 979,449
Outstanding chips and tokens 975,137 768,633
Interest 1,132,045 175,432
Offering costs 281,929 660,775
Other 6,500,170 6,262,740
------------- -------------
Total current liabilities 27,041,095 27,735,984
LONG-TERM DEBT, net of current portion 206,920,948 206,191,485
------------- -------------
Total liabilities 233,962,043 233,927,469
------------- -------------
MINORITY INTEREST 877,474 --
------------- -------------
CUMULATIVE REDEEMABLE PREFERRED STOCK,
$.01 par value; $25 stated value; 800,000 shares authorized, issued and
outstanding; liquidation preference $20,000,000 stated value plus accrued
dividends of $7,995,550 and $6,983,663 recorded at liquidation
preference, net of unamortized offering costs and discount of $7,229,620
and $7,352,266, respectively 21,933,351 19,631,397
------------- -------------
STOCKHOLDERS' DEFICIENCY:
Common stock, $.01 par value; 29,200,000 shares
authorized; 4,012,846 shares issued and outstanding 40,128 40,128
Additional paid-in capital 23,649,582 23,649,582
Accumulated deficit (63,115,105) (61,553,137)
------------- -------------
Total stockholders' deficiency (39,425,395) (37,863,427)
------------- -------------
TOTAL $ 217,347,473 $ 215,695,439
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 5 of 31
<PAGE> 6
FITZGERALDS GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS AND TWO QUARTERS ENDED JUNE 28, 1998 AND JUNE 29, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTERS ENDED TWO QUARTERS ENDED
-----------------------------------------------------------------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Casino $ 40,369,800 $ 34,099,764 $ 79,179,268 $ 64,716,996
Food and beverage 6,243,561 5,510,557 12,175,212 10,796,394
Rooms 5,483,792 5,463,033 10,270,294 10,333,772
Other 10,101,224 2,674,730 12,273,682 4,784,233
------------- ------------- ------------- -------------
Total 62,198,377 47,748,084 113,898,456 90,631,395
Less promotional allowances 4,471,105 3,728,602 8,752,828 7,194,527
------------- ------------- ------------- -------------
Net 57,727,272 44,019,482 105,145,628 83,436,868
------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES:
Casino 19,212,289 15,852,568 37,374,390 30,882,213
Food and beverage 4,356,182 4,282,907 8,496,362 8,261,244
Rooms 3,182,762 3,240,366 5,996,270 6,120,810
Other operating expense 560,890 383,775 1,043,240 736,204
Selling, general and administrative 15,148,993 11,565,036 29,258,943 23,117,521
Depreciation and amortization 3,512,066 3,003,209 6,762,746 5,837,691
Write-down of assets and lease settlement 332,144 -- 332,144 --
------------- ------------- ------------- -------------
Total 46,305,326 38,327,861 89,264,095 74,955,683
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 11,421,946 5,691,621 15,881,533 8,481,185
OTHER INCOME (EXPENSE):
Interest income 140,046 80,190 218,257 162,452
Interest income - stockholders -- 19,481 -- 38,960
Interest expense (6,790,830) (5,788,711) (13,606,362) (11,540,925)
Interest expense - stockholders (4,739) (37,269) (9,322) (73,721)
Other income (expense) (1,446,279) 415,677 (1,744,120) (108,607)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 3,320,144 $ 380,989 $ 739,986 $ (3,040,656)
PREFERRED STOCK DIVIDENDS (1,167,421) (1,015,905) (2,301,954) (1,995,089)
------------- ------------- ------------- -------------
NET EARNINGS (LOSS) AVAILABLE TO
COMMON STOCKHOLDERS $ 2,152,723 $ (634,916) $ (1,561,968) $ (5,035,745)
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ 0.54 $ (0.16) $ (0.39) $ (1.25)
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ 0.36 $ (0.16) $ (0.39) $ (1.25)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC 4,012,846 4,012,846 4,012,846 4,012,846
============= ============= ============= =============
DILUTED 5,964,963 4,012,846 4,012,846 4,012,846
------------- ------------- ------------- -------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 6 of 31
<PAGE> 7
FITZGERALDS GAMING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO QUARTERS ENDED JUNE 28, 1998 AND JUNE 29, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 28, 1998 JUNE 29, 1997
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES: $ 11,157,549 $ 8,157,144
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 497,652 40,567
Acquisition of property and equipment (3,105,626) (1,772,465)
Decrease in restricted cash - construction 393,987 1,085,710
Other (403,744) 520,024
------------ ------------
Net cash provided by (used in) investing activities (2,617,731) (126,164)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 380,882
Payment of debt offering costs (718,338) (106,089)
Repayment of long-term debt (3,502,073) (3,778,640)
Dividends to minority stockholders (336,629) (206,523)
------------ ------------
Net cash used in financing activities (4,557,040) (3,710,370)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,982,778 4,320,610
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,809,617 13,349,497
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,792,395 $ 17,670,107
============ ============
CASH PAID FOR INTEREST $ 12,069,997 $ 1,492,992
============ ============
SUMMARY OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Property and equipment acquired through issuance of debt $ 2,180,717 $ 23,689
Accretion of discount on preferred stock 240,234 215,674
Accrual of preferred stock dividends 2,061,719 1,779,415
Stock redemption adjustment -- 136,021
Accrual of offering costs 339,492 --
</TABLE>
See Notes to Condensed Consolidated Financial Statements Page 7 of 31
<PAGE> 8
FITZGERALDS GAMING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements of
Fitzgeralds Gaming Corporation (the "Company") as of June 28, 1998 and for the
quarter and two quarters ended June 28, 1998 and June 29, 1997 have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the interim
condensed consolidated financial statements have been included. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The results of
operations for the quarter ended June 28, 1998 are not necessarily indicative of
the results to be expected for the year ending December 31, 1998.
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the 1998 method of presentation.
2. Recently Adopted Accounting Standards
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), Earnings per Share. This statement simplifies
the standards for computing earnings per share ("EPS") and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures. During the two quarters ended June 28, 1998 and June 29,
1997, there were no outstanding convertible securities that would result in
dilutive potential common shares and, as such, diluted earnings per share are
not applicable. Options to purchase 656,993 shares of common stock at prices
ranging from $1.00 to $1.10 per share and 701,642 shares of common stock at
prices ranging from $1.00 to $4.50 per share and warrants to purchase 1,971,835
and 2,675,237 shares of common stock at $.01 per share were outstanding at June
28, 1998 and June 29, 1997, respectively. Such options and warrants are not
included in the computation of diluted earnings per share for the two quarters
ended June 28, 1998 and June 29, 1997 and for the quarter ended June 29, 1997
because to do so would have been antidilutive.
Page 8 of 31
<PAGE> 9
The following is a reconciliation of basic weighted average shares
outstanding to diluted weighted average shares outstanding for the quarter ended
June 28, 1998:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED JUNE 28, 1998
---------------------------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
------------------ ------------------ ---------------
<S> <C> <C> <C>
Net Income before extraordinary item and
accounting change $ 3,320,144
Less: Preferred stock dividends (1,167,421)
-----------------
BASIC EPS
Income available to common stockholders 2,152,723 4,012,846 $ 0.54
EFFECT OF DILUTED SECURITIES
Warrants 1,952,117
-----------------
DILUTED EPS
Income available to common stockholders
plus assumed conversion $ 2,152,723 5,964,963 $ 0.36
================== ================== =============
</TABLE>
(a) For the purpose of calculating the effect of the diluted securities as
it pertains to the Company's outstanding warrants, the Company assigned a value
of $1.00 per share to the Company's Common Stock for computational purposes
only. The Company's Common Stock is not presently listed for trading on any
securities exchange and the Company has no plans to list the Common Stock on
any securities exchange. The Company has not performed, and does not intend to
perform, an appraisal or valuation of its Common Stock, and the Company has not
obtained, and does not intend to obtain, any appraisal or valuation of its
Common Stock. Additionally, the Company makes no representations, and explicitly
disclaims any representations, concerning the presentation of the information
concerning the Company's Common Stock. Accordingly, the information presented
concerning the Company's Common Stock should not be considered in making any
investment decision with respect to the Company and should not be considered or
relied upon as indicative or representative of the Company's performance.
3. Recently Issued Accounting Standards
On June 30, 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS 130, Reporting Comprehensive Income. This statement requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position, and is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
Management does not believe this new statement will have a material impact on
the financial statements of the Company.
Also in June 1997, the FASB issued SFAS 131, Disclosures about Segments
of an Enterprise and Related Information, which became effective for the Company
beginning January 1, 1998. SFAS 131 redefines how operating segments are
determined and requires qualitative disclosure of certain financial descriptive
information about a company's operating segments. The Company anticipates with
the adoption of SFAS 131, it will expand its segment disclosures relative to
Nevada, Colorado and Mississippi operations. The Company believes the segment
information required to be disclosed under SFAS 131 will be more comprehensive
than previously reported, including expanded disclosure of income statement and
balance sheet items for each of its reportable operating segments.
4. Long - Term Debt
In December 1997, the Company issued $205.0 million 12 1/4% Senior
Secured Notes due 2004. Of the $202.6 million net proceeds, the Company used
$123.0 million to retire its 13%
Page 9 of 31
<PAGE> 10
Senior Secured Notes due 2002 with Contingent Interest; $5.4 million to retire
its 13% Priority Secured Notes due 1998; $39.7 million to retire the 13% First
Mortgage Notes due 2000 of 101 Main Street Limited Liability Company ("101
Main"); and approximately $20.1 million to retire other secured indebtedness. Of
the remaining proceeds, $8.7 million was used for expenses of the offering and
$5.7 million was applied to accrued interest totaling approximately $10.6
million at December 31, 1997.
5. Contingencies
On May 31, 1995, Fitzgeralds Reno, Inc. ("FRI") sold the closed Harolds
Club in Reno to an unrelated publicly-traded company which subsequently conveyed
Harolds Club to a company whose assets are now under control of the United
States Bankruptcy Court for the Northern District of New York. Under the terms
of certain indemnification agreements executed by FRI in connection with the
sale of Harolds Club, FRI is contingently obligated for certain land lease
payments to five lessors in the amount of approximately $0.58 million annually
plus certain property-related costs, such as taxes and insurance, if said lease
payments and costs are not paid by the current owner of Harolds Club. As of June
28, 1998, the current owner of Harolds Club was approximately $1.4 million in
arrears in land lease payments and approximately $0.28 million in arrears in
property taxes and assessments.
As of June 25, 1998, the current owner of Harolds Club and four of the
five land lessor had executed and delivered into escrow asset purchase
agreements (collectively, the "Harolds Club Asset Purchase Agreements") to
convey their fee simple interests in Harolds and the improvements thereon to an
undisclosed purchaser, which undisclosed purchaser has also entered into an
agreement with FRI to purchase the Nevada Club. The Harolds Club Asset Purchase
Agreements are contingent upon (i) the execution and delivery of settlement and
lease termination agreements (collectively, the "Settlement Agreement") by and
between FRI, four of the five land lessors, and the current and prior Harolds
Club land lessees; (ii) a waiver of the right of first refusal by and between
certain of the land lessors; and (iii) the conveyance, as described below, of
the fifth land lessor's Harolds Club parcel (the "Campbell Parcel").
Pursuant to the Settlement Agreements, FRI has agreed to pay the
four land lessors approximately $1.7 million in exchange for dismissal with
prejudice of all claims and cross-claims against FRI arising out of FRI's
purchase and subsequent sale of Harolds Club. FRI anticipates paying $0.65
million of the approximately $1.7 million settlement in cash, less the
cumulative amount of interim monthly rental payments ($28,977 per month),
concurrently with the closing of the Harolds Club Asset Purchase Agreements and
executing four separate promissory notes totaling approximately $1.0 million for
the balance. The notes will be amortized over five years with interest fixed at
the prime rate in effect at the largest financial institution in Nevada on the
date the notes are executed and will be secured by the personal guarantee of the
Chairman and Chief Executive Officer of the Company.
To accommodate the requirement of the fifth Harolds Club land lessor
that the transfer of the Campbell Parcel be structured as a tax-free exchange,
FRI anticipates entering into an
Page 10 of 31
<PAGE> 11
agreement to purchase the Campbell Parcel for a purchase price of approximately
$1.0 million (the "Campbell Asset Purchase"). FRI anticipates paying
approximately $0.55 million of the purchase price and a prior owner of Harolds
Club will pay the balance of approximately $0.45 million and all closing costs.
The closing of the Campbell Asset Purchase is contingent upon the dismissal with
prejudice of all claims and cross-claims against FRI relating to the Campbell
Parcel. Upon completing the Campbell Asset Purchase, FRI will terminate the
lease encumbering the Campbell Parcel and convey it to the undisclosed purchaser
of Harolds Club for approximately $0.34 million.
Because the assets of the current owner of Harolds Club are under the
control of the United States Bankruptcy Court for the Northern District of New
York, said Bankruptcy Court must approve the current owner's Asset Purchase
Agreement with the undisclosed purchaser. Additionally, the closing of the
Harolds Club transaction is subject to the closing of the Nevada Club
transaction. Although it is currently anticipated that the Harolds Club
transaction will close during 1998, no assurance can be given that the
transaction will be completed.
During the quarter ended June 28, 1998, the Company incurred
approximately $0.1 million in expense for the anticipated net settlement
obligation or related legal fees. See Part II, Item 1. Legal Proceedings.
6. Nevada Club
On June 8, 1998, the Company and an undisclosed purchaser
executed an Asset Purchase Agreement (the "Asset Purchase Agreement") for the
sale of the Nevada Club property in the amount of approximately $3.8 million. In
anticipation of the pending sale, the Company closed the Nevada Club Casino in
December 1997. The closing of the Nevada Club is contingent upon the closing of
the Harolds Club transaction described above in Footnote 5. Although it is
currently anticipated that the sale will close during 1998, no assurance can be
given that the sale will be completed. See Part II, Item 1. Legal Proceedings.
Page 11 of 31
<PAGE> 12
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Condensed Consolidated Financial Statements
and the Notes thereto included in this report. The following discussion contains
certain forward-looking statements. The forward-looking statements are
necessarily based upon a number of estimates and assumptions that, while
considered reasonable, are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond the
control of the Company, and upon assumptions with respect to future business
decisions which are subject to change. Risks to which the Company is subject
include, but are not necessarily limited to, competition, high level of
indebtedness, the need for additional financing, development and construction
risks, market fluctuations, gaming, liquor and other regulatory matters,
taxation, the availability and retention of key management and environmental
matters. Accordingly, actual results could differ materially from those
contemplated by such forward-looking statements.
GENERAL
Fitzgeralds Gaming Corporation (the "Company") is a diversified
multi-jurisdictional gaming holding company that owns and operates four
Fitzgeralds-brand casino-hotels, located in downtown Las Vegas, Nevada
("Fitzgeralds Las Vegas"), Reno, Nevada ("Fitzgeralds Reno") Tunica, Mississippi
("Fitzgeralds Tunica") and Black Hawk, Colorado ("Fitzgeralds Black Hawk"). In
addition, Fitzgeralds Arizona Management, Inc. ("FAMI"), a subsidiary 85% owned
by the Company, had an exclusive agreement (the "Management Agreement") to
manage the Cliff Castle Casino ("Cliff Castle"), a gaming facility in Camp
Verde, Arizona, owned and operated by the Yavapai-Apache Indian Nation (the
"Nation"). In June 1998, FAMI entered into a termination agreement with the
Nation wherein the parties mutually agreed to terminate the Management
Agreement, in consideration for which FAMI received $8.2 million. In
consideration of the work performed by the Company prior and subsequent to the
opening of the Turning Stone Casino in Verona, New York, the Company entered
into a settlement agreement with the Oneida Indian Nation pursuant to which it
receives monthly payments through August 1998. The Company has received an offer
to purchase the Nevada Club, located in Reno, Nevada, from an unaffiliated party
and closed the property in December 1997 in anticipation of the pending sale.
See Note 6 of Notes to Condensed Consolidated Financial Statements.
Changes in operations affecting the period-to-period comparisons below
include (a) the purchase of the remaining 78% membership interest in 101 Main,
which owns and operates Fitzgeralds Black Hawk, on August 15, 1997 and (b) the
closing of Nevada Club in December 1997 in anticipation of its pending sale.
Page 12 of 31
<PAGE> 13
In the narrative discussion below, the "Cumulative 1998 Period" is
defined as the two quarters ended June 28, 1998 and the "Cumulative 1997 Period"
is defined as the two quarters ended June 29, 1997. The "1998 Q2 Period" is
defined as the quarter ended June 28, 1998, and the "1997 Q2 Period" is defined
as the quarter ended June 29, 1997. Financial performance is focused on the
principal ongoing operating properties of the Company, which include Fitzgeralds
Las Vegas, Fitzgeralds Tunica, Fitzgeralds Reno and, commencing August 15, 1997,
Fitzgeralds Black Hawk, and management fees received by Fitzgeralds Incorporated
("FI"), collectively referred to as (the "Properties"). Unless the context
otherwise indicates, the discussion below excludes Nevada Club, which was closed
in December 1997 in anticipation of its pending sale and, in management's
opinion, is not material to the ongoing operations of the Company. Results for
the Properties include corporate expenses allocated to the respective
properties. Such amounts for each property were approximately $0.25 million for
each of the periods represented.
TWO QUARTERS ENDED JUNE 28, 1998 COMPARISON TO TWO QUARTERS ENDED JUNE
29, 1997
The table below sets forth Net Operating Revenues, Income (Loss) from
Operations, EBITDA, Adjusted EBITDA and other financial data for the Cumulative
1998 Period and the Cumulative 1997 Period. EBITDA for the Properties increased
from $14.2 million for the Cumulative 1997 Period to $23.3 million for the
Cumulative 1998 Period as a result of the nonrecurring payment of $8.2 million
in connection with the termination of the Management Agreement with the Nation.
Adjusted EBITDA, which the Company uses as a reasonable measure of its ability
to generate cash from operating activities and as a means to compare the
Company's performance with that of its competitors increased $0.3 million from
$15.1 million for the Cumulative 1997 Period to $15.4 million for the Cumulative
1998 Period (which $15.4 million does not include $8.0 million of the $8.2
million received as consideration of the termination of the Management Agreement
with the Nation). For a definition of EBITDA and adjusted EBITDA, see footnotes
3 and 5 of the table.
Page 13 of 31
<PAGE> 14
\
<TABLE>
<CAPTION>
FOR THE TWO QUARTERS ENDED
-----------------------------------------
STATEMENT OF OPERATIONS DATA JUNE 28, 1998 JUNE 29, 1997
--------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net Operating Revenues:
Fitzgeralds Las Vegas $ 25,280 $ 23,617
Fitzgeralds Tunica 32,358 34,256
Fitzgeralds Reno 18,950 19,396
Fitzgeralds Black Hawk (1) 17,914 --
Other (2) 10,644 2,912
------------ ------------
Total Properties 105,146 80,181
Nevada Club -- 3,256
------------ ------------
Total $ 105,146 $ 83,437
============ ============
Income (Loss) from Operations:
Fitzgeralds Las Vegas $ 614 $ 312
Fitzgeralds Tunica 496 3,452
Fitzgeralds Reno 755 2,674
Fitzgeralds Black Hawk (1) 4,907 --
Other (2) 9,775 1,978
------------ ------------
Total Properties 16,547 8,416
Nevada Club (665) 65
------------ ------------
Total (2) $ 15,882 $ 8,481
============ ============
OTHER DATA
EBITDA (3):
Fitzgeralds Las Vegas $ 2,184 $ 1,862
Fitzgeralds Tunica 3,441 6,497
Fitzgeralds Reno 1,943 3,812
Fitzgeralds Black Hawk (1) 5,765 --
Other (4) 9,973 1,983
------------ ------------
Total Properties 23,306 14,154
Nevada Club (662) 161
------------ ------------
Total EBITDA 22,644 14,315
Adjustments to EBITDA (5) (7,242) 785
------------ ------------
Adjusted EBITDA $ 15,402 $ 15,100
============ ============
Net Cash Provided by (Used in):
Operating Activities $ 11,157,549 $ 8,157,144
Investing Activities (2,617,731) (126,164)
Financing Activities (4,557,040) (3,710,370)
Depreciation and Amortization 6,762,746 5,837,691
Capital Expenditures (3,105,626) (1,772,465)
Earnings to Fixed Charges (6) 1.10 --
</TABLE>
- --------------
(1) Includes operating results of Fitzgeralds Black Hawk for the Cumulative 1998
Period.
Page 14 of 31
<PAGE> 15
(2) Includes management fees from Fitzgeralds Black Hawk for the Cumulative 1997
Period, Cliff Castle and Turning Stone. Also includes nonrecurring revenue of
$8.0 million for the termination of the Management Agreement with the Nation
for the Cumulative 1998 Period.
(3) EBITDA, or "earnings before interest, taxes on income, depreciation and
amortization", is a supplemental financial measurement used by the Company in
the evaluation of its gaming business and by many gaming industry analysts.
EBITDA is calculated by adding depreciation and amortization expense to income
from operations. At any property, EBITDA is calculated after the allocation of
corporate costs. However, EBITDA should only be read in conjunction with all of
the Company's financial data summarized above and its financial statements
prepared in accordance with GAAP appearing elsewhere herein, and should not be
construed as an alternative either to income from operations (as determined in
accordance with GAAP) as an indication of the Company's operating performance or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. This presentation of EBITDA may not be comparable to
similarly titled measures reported by other companies.
(4) Includes fees from management agreements from Fitzgeralds Black Hawk for the
Cumulative 1997 Period, Cliff Castle and Turning Stone and $8.0 million of the
$8.2 million received in connection with the termination of the Management
Agreement with the Nation for the Cumulative 1998 Period, net of corporate
expenses and expenses of FI.
(5) Adjustments to EBITDA include (i) exclusion of EBITDA for Nevada Club for
both periods presented, (ii) inclusion of $0.9 million in cash received by the
Company in the Cumulative 1997 Period as a result of its 22% membership in 101
Main, (iii) exclusion of Harold's Club lease settlement of $0.1 million for
Cumulative 1998 Period and (iv) exclusion of $8.0 million of the $8.2 million
received in connection with the termination of the Management Agreement with the
Nation for the Cumulative 1998 Period.
(6) For the Ratio of Earnings to Fixed Charges, earnings are defined as
earnings before income taxes, interest on indebtedness, imputed interest on
capital lease obligations, and the portion of rent expense deemed to represent
interest. Fixed charges consist of interest on indebtedness, imputed interest on
capital lease obligations, and the portion of rent expense deemed to represent
interest. Earnings covered fixed charges by a ratio of 1.10 for the Cumulative
1998 Period, including amounts attributed to the termination of the Management
Agreement with the Nation; however, earnings were insufficient to cover fixed
charges by $2.1 million for the 1997 Period.
OPERATING REVENUES
Total revenues for the Properties were $113.9 million and net operating
revenues were $105.1 million for the cumulative 1998 Period, representing 30.8%
and 31.1% increases, respectively, over total revenues of $87.1 million and net
operating revenues of $80.2 million for the Cumulative 1997 Period. Such
increases were due to the consolidation of operating results of Fitzgeralds
Black Hawk for the Cumulative 1998 Period which were not included in the
Cumulative 1997 Period and the $8.2 million payment received in connection with
the termination of the Management Agreement with the Nation.
The Company's business can be separated into four operating
departments: casino, food and beverage, rooms and other. Casino revenues for the
Properties (of which approximately 81.7% and 77.5% were derived from slot
machine revenues for the Cumulative 1998 and Cumulative 1997 Periods,
respectively) increased 27.8% to $79.2 million for the Cumulative 1998 Period
from the $61.9 million recorded for the Cumulative 1997 Period, due primarily to
the consolidation of operating results of Fitzgeralds Black Hawk. Casino
revenues increased 9.9% at the Las Vegas property, due primarily to improved
marketing strategies and an effective guest development program. Casino revenues
decreased 2.8% and 4.4% at the Reno and Tunica properties, respectively. The
decrease in Reno was due primarily to severe weather conditions which affected
travel over the mountains to Reno, particularly on weekends from the beginning
of the year through May 1998. The decrease in Tunica is attributable to
increased competition in the Tunica Market, as well as construction disruption
due to remodeling of both the first and second floor casino which commenced
in mid-April and continued through June 1998. Casino
Page 15 of 31
<PAGE> 16
revenue for the Properties represented 69.5% and 71.1% of total revenues
for the Properties for the 1998 and Cumulative 1997 Periods, respectively.
Room revenues for the Properties (at 9.0% and 11.9% of total revenues
for the Properties for the Cumulative 1998 and Cumulative 1997 Periods,
respectively) decreased 0.6% from the Cumulative 1997 Period. At Fitzgeralds
Reno, room revenues were essentially unchanged. This was due to the combination
of a lower average occupancy rate, which decreased to 88.8% from 90.1% for the
Cumulative 1997 Period, offset by an increase in the average daily rate of 3.5%
for the Cumulative 1998 Period. Room revenues decreased 2.2% at Fitzgeralds Las
Vegas while the occupancy rate decreased to 92.5% from 93.6% for the Cumulative
1997 Period and the average daily rate decreased 1.1%. At Fitzgeralds Tunica,
room revenues increased slightly. The occupancy rate increased to 95.3% from
89.4% for the Cumulative 1997 Period, but was offset by a 4.8% decrease in the
average daily rate for the Cumulative 1998 Period.
Food and beverage revenues for the Properties (at 10.7% and 11.5% of
total revenues for the Properties for the Cumulative 1998 and Cumulative 1997
Periods, respectively) increased approximately $2.1 million or 21.2% from the
Cumulative 1997 Period to the Cumulative 1998 Period. This increase was the
result of gains at the Tunica, Las Vegas and Reno properties of 10.7%, 7.5% and
9.6%, respectively, and inclusion of Fitzgeralds Black Hawk revenues of
approximately $1.2 million for the Cumulative 1998 Period.
Other Revenues for the Properties increased $7.5 million or 157.1%,
primarily as a result of the termination of the Management Agreement with the
Nation.
Promotional allowances for the Properties increased $1.8 million, or
26.5%, for the Cumulative 1998 Period year as a result of increasing levels of
competition in all locations and inclusion of Fitzgeralds Black Hawk promotional
allowances of $0.7 million for the Cumulative 1998 Period.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses for the Properties increased 23.4%,
to $88.6 million for the Cumulative 1998 Period from $71.8 million for the
Cumulative 1997 Period due to increases in marketing and payroll costs and
inclusion of Fitzgeralds Black Hawk operating expenses of approximately $13.0
million.
Casino expenses for the Properties were $37.2 million for the
Cumulative 1998 Period, a 28.4% increase from the $29.0 million for the
Cumulative 1997 Period, primarily due to inclusion of Fitzgeralds Black Hawk
casino expenses, which accounted for 84.0% of the total increase for the
Cumulative 1998 Period. Food and beverage expenses for the Properties increased
10.1%, to $8.5 million for the Cumulative 1998 Period from $7.7 million for the
Cumulative 1997 Period. Room expenses for the Properties decreased 2.0%, to $6.0
million for the Cumulative 1998 Period from $6.1 million for the Cumulative 1997
Period, primarily as the result of improved efficiencies in operations. At the
Las Vegas, Reno and Tunica properties, room expenses decreased by 2.0%, 3.4% and
1.5%, respectively. Selling, general and
Page 16 of 31
<PAGE> 17
administrative expense for the Properties increased 29.0%, to $29.0 million for
the Cumulative 1998 Period from $22.5 million for the Cumulative 1997 Period due
partly to increases in marketing expenses and inclusion of Fitzgeralds Black
Hawk expenses for the Cumulative 1998 Period.
Personnel expenses for the Properties increased 18.8%, to approximately
$37.4 million for the Cumulative 1998 Period from approximately $31.5 million
for the Cumulative 1997 Period. This increase was due primarily to inclusion of
Fitzgeralds Black Hawk personnel expenses, which accounted for 70.4% of the
total increase for the Cumulative 1998 Period, and a 12.2% increase at the
Tunica property due to under-staffing for a portion of the Cumulative 1997
Period.
Marketing expenses for the Properties, which include advertising,
promotional material, special events and the operations of the Fitzgeralds
player tracking card, increased 32.5% for the Cumulative 1998 Period. The
increase is due to more intensive marketing efforts at all the properties
undertaken in response to increasing competitive activity and inclusion of
Fitzgeralds Black Hawk marketing expenses, which accounted for 74.8% of the
total increase for the Cumulative 1998 Period.
Depreciation and amortization expense of the Properties increased
17.7%, to $6.8 million for the Cumulative 1998 Period from $5.7 million for the
Cumulative 1997 Period. The increase resulted primarily from inclusion of
Fitzgeralds Black Hawk depreciation and amortization expense of $0.9 million for
the Cumulative 1998 Period.
INCOME FROM OPERATIONS
Income from operations for the Properties increased 96.7%, to $16.5
million (which includes $8.0 million of the $8.2 million received in connection
with the termination of the Management Agreement with the Nation) for the
Cumulative 1998 Period from $8.4 million for the Cumulative 1997 Period.
NET INTEREST EXPENSE
Interest expense for the Properties (net of interest income), increased
17.0%, to $13.2 million for the Cumulative 1998 Period from $11.3 million for
the Cumulative 1997 Period, primarily due to increased debt as a result of the
purchase of the 78% interest in 101 Main.
NET INCOME
Net income for the Properties increased to $1.4 million for the
Cumulative 1998 Period (which includes the $8.0 million received in connection
with the termination of the Management Agreement with the Nation) as compared to
a net loss of $2.8 million for the Cumulative 1997 Period.
Page 17 of 31
<PAGE> 18
QUARTER ENDED JUNE 29, 1998 COMPARISON TO QUARTER ENDED JUNE 28, 1997
The table below sets forth Net Operating Revenues, Income (Loss) from
Operations, EBITDA, Adjusted EBITDA and other financial data for the 1998 Q2
Period and the 1997 Q2 Period. EBITDA for the Properties increased from $8.5
million for the Cumulative 1997 Period to $15.2 million for the Cumulative 1998
Period as a result of the nonrecurring payment of $8.2 million in connection
with the termination of the Management Agreement with the Nation. Adjusted
EBITDA, which the Company uses as a reasonable measure of its ability to
generate cash from operating activities and as a means to compare the Company's
performance with that of its competitors decreased from $8.9 million for the
1997 Q2 Period to $7.3 million for the 1998 Q2 Period, (which $7.3 million does
not include $8.0 million of the $8.2 million received in consideration of the
termination of the Management Agreement with the Nation). For a definition of
EBITDA and adjusted EBITDA, see footnotes 3 and 5 of the table.
Page 18 of 31
<PAGE> 19
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------
STATEMENT OF OPERATIONS DATA JUNE 28, 1998 JUNE 29, 1997
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Net Operating Revenues:
Fitzgeralds Las Vegas $ 12,413 $ 11,578
Fitzgeralds Tunica 15,900 18,058
Fitzgeralds Reno 10,941 10,988
Fitzgeralds Black Hawk(1) 9,183 --
Other(2) 9,291 1,628
-------- --------
Total Properties 57,728 42,252
Nevada Club -- 1,767
-------- --------
Total $ 57,728 $ 44,019
======== ========
Income (Loss) from Operations:
Fitzgeralds Las Vegas $ (258) $ (42)
Fitzgeralds Tunica (320) 1,816
Fitzgeralds Reno 1,139 2,620
Fitzgeralds Black Hawk(1) 2,477 --
Other 8,644 1,182
-------- --------
Total Properties 11,682 5,576
Nevada Club (260) 117
-------- --------
Total $ 11,422 $ 5,693
======== ========
OTHER DATA
EBITDA(3):
Fitzgeralds Las Vegas $ 561 $ 743
Fitzgeralds Tunica 1,157 3,416
Fitzgeralds Reno 1,743 3,184
Fitzgeralds Black Hawk(1) 2,916 --
Other(4) 8,817 1,187
-------- --------
Total Properties 15,194 8,530
Nevada Club (260) 165
-------- --------
Total EBITDA 14,934 8,695
Adjustments to EBITDA(5) (7,644) 253
-------- --------
Adjusted EBITDA $ 7,290 $ 8,948
-------- --------
</TABLE>
- --------------
(1) Includes operating results of Fitzgeralds Black Hawk for the 1998 Q2 Period.
(2) Includes management fees from Fitzgeralds Black Hawk for the 1997 Q2 Period,
Cliff Castle and Turning Stone. Also includes nonrecurring revenue of $8.0
million for the termination of the Management Agreement with the Nation for the
1998 Q2 Period.
(3) EBITDA, or "earnings before interest, taxes on income, depreciation and
amortization", is a supplemental financial measurement used by the Company in
the evaluation of its gaming business and by many gaming industry analysts.
EBITDA is calculated by adding depreciation and amortization expense to income
from operations. At any property, EBITDA is calculated after the allocation of
corporate costs. However, EBITDA should only be read in conjunction with all of
the Company's financial data summarized above and its financial statements
prepared in accordance with GAAP appearing elsewhere herein, and should not be
construed as an alternative either to income from operations (as determined in
accordance with GAAP) as an indication of the Company's operating performance or
to cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. This presentation of EBITDA may not be comparable to
similarly titled measures reported by other companies.
Page 19 of 31
<PAGE> 20
(4) Includes fees from management agreements from Fitzgeralds Black Hawk for the
1997 Q2 Period, Cliff Castle and Turning Stone and $8.0 million of the $8.2
million received in connection with the termination of the Management Agreement
with the Nation for the 1998 Q2 Period, net of corporate expenses and expenses
of FI.
(5) Adjustments to EBITDA include (i) exclusion of EBITDA for Nevada Club for
both periods presented, (ii) inclusion of $0.5 million in cash received by the
Company in the 1997 Q2 Period as a result of its 22% membership in 101 Main,
(iii) exclusion of Harold's Club lease settlement of $0.1 million in the 1998 Q2
Period and (iv) exclusion of $8.0 million of the $8.2 million received in
connection with the termination of the Management Agreement with the Nation for
the 1998 Q2 Period.
OPERATING REVENUES
Total revenues for the Properties were $62.2 million and net operating
revenues were $57.7 million for the 1998 Q2 Period, representing 35.7% and 36.6%
increases, respectively, over total revenues of $45.8 million and net operating
revenues of $42.3 million for the 1997 Q2 Period. Such increases were due
primarily to the consolidation of operating results of Fitzgeralds Black Hawk
for the 1998 Q2 Period which were not included in the 1997 Q2 Period, and the
$8.2 million payment received in connection with the termination of the
Management Agreement with the Nation.
Casino revenues for the Properties (of which approximately 81.9% and
79.3% were derived from slot machine revenues for the 1998 and 1997 Q2 Periods,
respectively) increased 23.9% to $40.4 million for the 1998 Q2 Period from the
$32.6 million recorded for the 1997 Q2 Period, due primarily to the
consolidation of operating results of Fitzgeralds Black Hawk. Casino revenues
increased 9.3% at the Las Vegas property, due primarily to improved marketing
strategies. Casino revenues decreased 1.3% at the Reno property, due primarily
to severe weather conditions particularly on weekends, throughout April and May
of 1998. Casino revenue decreased 11.2% at the Tunica property, due to an
increase in competition in the Tunica market as well as construction disruption
resulting from remodeling of both the first and second floor casinos which
commenced in mid-April and continued through June 1998. Casino revenue for the
Properties represented 64.9% and 71.1% of total revenues for the Properties for
the 1998 and 1997 Q2 Periods, respectively.
Room revenues for the Properties (at 8.8% and 11.9% of total revenues
for the Properties for the 1998 and 1997 Q2 Periods, respectively) increased
0.4% from the 1997 Q2 Period. At Fitzgeralds Tunica, room revenues increased
1.7%. This was due to the combination of a higher average occupancy rate, which
increased to 92.9% from 91.0% for the 1997 Q2 Period, offset by a decrease in
the average daily rate of 0.2% for the 1998 Q2 Period due to an increase in room
capacity in the market. Room revenues decreased 1.0% at Fitzgeralds Las Vegas
while the occupancy rate remained consistent at 93.4% from 1997 Q2 Period and
the average daily rate decreased 1.8%. At Fitzgeralds Reno, room revenues also
increased slightly as the occupancy rate increased to 96.2% from 93.7% for the
1997 Q2 Period, with a 0.1% increase in the average daily rate for the 1998 Q2
Period.
Page 20 of 31
<PAGE> 21
Food and beverage revenues for the Properties (at 10.0% and 11.2% of
total revenues for the Properties for the 1998 and 1997 Q2 Periods,
respectively) increased approximately $1.1 million or 22.1% from the 1997 Q2
Period to the 1998 Q2 Period. This increase was the result of gains at the
Tunica, Las Vegas and Reno properties of 10.1%, 9.1% and 13.1%, respectively,
and inclusion of Fitzgeralds Black Hawk revenues of approximately $0.6 million
for the 1998 Q2 Period.
Other Revenues for the Properties increased $7.4 million or 278.4%,
primarily as a result of the termination of the Management Agreement with the
Nation.
Promotional allowances for the Properties increased $.9 million or
24.8% for the 1998 Q2 Period as a result of increasing levels of competition in
all locations and inclusion of Fitzgeralds Black Hawk promotional allowances of
$0.4 million for the 1998 Q2 Period.
OPERATING COSTS AND EXPENSES
Total operating costs and expenses for the Properties increased 25.5%,
to $46.0 million for the 1998 Q2 Period from $36.7 million for the 1997 Q2
Period, due to increases in revenues and payroll costs and inclusion of
Fitzgeralds Black Hawk operating expenses of approximately $6.7 million.
Casino expenses for the Properties were $19.2 million for the 1998 Q2
Period, a 29.2% increase from the $14.9 million for the 1997 Q2 Period,
primarily due to inclusion of Fitzgeralds Black Hawk casino expenses, which
accounted for 81.9% of the total increase for the 1998 Q2 Period. The Las Vegas
and Reno Properties had increases of 17.3% and 2.9%, respectively, while
Tunica's expense decreased .8%. Food and beverage expenses for the Properties
increased 9.0%, to $4.4 million for the 1998 Q2 Period from $4.0 million for the
1997 Q2 Period. Room expenses for the Properties decreased 1.8%, primarily as
the result of improved efficiencies in operations. At the Las Vegas and Reno
properties, room expenses increased by 4.0% and 0.9%, respectively, while the
room expense at Tunica decreased 9.5%. Selling, general and administrative
expense for the Properties increased 34.7%, to $15.1 million for the 1998 Q2
Period from $11.2 million for the 1997 Q2 Period partly due to increases in
marketing expenses and inclusion of Fitzgeralds Black Hawk expenses of $2.2
million for the 1998 Q2 Period.
Personnel expenses for the Properties increased 20.6%, to approximately
$19.5 million for the 1998 Q2 Period from approximately $16.1 million for the
1997 Q2 Period. This increase was due primarily to inclusion of Fitzgeralds
Black Hawk personnel expenses, which accounted for 65.7% of the total increase
for the 1998 Q2 Period, and increases at Tunica, Las Vegas, and Reno of 10.3%,
7.7% and 1.8 %, respectively.
Marketing expenses for the Properties, which include advertising,
promotional material, special events and the operations of the Fitzgeralds
player tracking card, increased 34.8% for the 1998 Q2 Period. The increase is
due to more intensive marketing efforts at all the properties undertaken in
response to increasing competitive activity and inclusion of Fitzgeralds Black
Page 21 of 31
<PAGE> 22
Hawk marketing expenses, which accounted for 70.6% of the total increase for the
1998 Q2 Period.
Depreciation and amortization expense of the Properties increased
18.8%, to $3.5 million for the 1998 Q2 Period from $3.0 million for the 1997 Q2
Period. The increase resulted primarily from inclusion of Fitzgeralds Black Hawk
depreciation and amortization expense of $0.4 million for the 1998 Q2 Period.
INCOME FROM OPERATIONS
Income from operations for the Properties increased 109.5%, to $11.7
million which includes the $8.0 million of the $8.2 million received in
connection with the termination of the Management Agreement with the Nation, for
the 1998 Q2 Period, from $5.6 million for the 1997 Q2 Period.
NET INTEREST EXPENSE
Interest expense for the Properties (net of interest income), increased
15.5%, to $6.5 million for the 1998 Q2 Period from $5.6 million for the 1997 Q2
Period, primarily due to increased debt as a result of the purchase of the 78%
interest in 101 Main.
NET INCOME
For the reasons described above, net income for the Properties
increased to $3.7 million for the 1998 Q2 Period (which includes $8.0
million of the $8.2 million received in connection with the termination of the
Management Agreement with the Nation), as compared to $0.4 million for the 1997
Q2 Period.
LIQUIDITY AND CAPITAL RESOURCES
In December 1997, the Company issued $205.0 million 12 1/4% Senior
Secured Notes due 2004. Of the $202.6 million net proceeds, the Company used
$123.0 million to retire its 13% Senior Secured Notes due 2002 With Contingent
Interest, $5.4 million to retire its 13% Priority Secured Notes due 1998, $39.7
million to retire the 101 Main 13% First Mortgage Notes due 2000; and
approximately $20.1 million to retire other secured indebtedness. Of the
remaining proceeds, $8.7 million was used for expenses of the offering and $5.7
million was applied to accrued interest totaling approximately $10.6 million at
December 31, 1997.
At June 28, 1998, the Company had unrestricted cash of $18.8 million,
compared to $14.8 million at December 31, 1997. The Company's primary sources of
liquidity and cash flows during the Cumulative 1998 Period were operations of
$11.2 million (which includes $8.0 million of the $8.2 million received for the
termination of the Management Agreement with the Nation), and proceeds from the
sale of assets of $0.5 million. Uses of liquidity during the Cumulative 1998
Period included acquisition of property and equipment of $3.1 million, repayment
of long term debt of $3.5 million and payment of debt offering costs of $0.7
million.
Page 22 of 31
<PAGE> 23
Net cash used in investing activities was $2.6 million for the
Cumulative 1998 Period as compared to net cash used of $0.1 million for the
Cumulative 1997 Period. Net cash used in financing activities was $4.6 million
for the Cumulative 1998 Period as compared with net cash used of $3.7 million
during the Cumulative 1997 Period.
With regard to certain matters relating to Harolds Club and Nevada Club
see Notes 5 and 6 of Notes to Condensed Consolidated Financial Statements
included in Part I, Item 1.
During 1997, the Company recorded an expense of $1.9 million for the
anticipated net settlement obligation, including related legal fees. In
anticipation of the Nevada Club transaction, the Company reclassified $6.2
million from Property and Equipment to Estimated Realizable Value of Nevada Club
Assets Held for Sale in the consolidated balance sheet as of December 31, 1997,
and recorded an allowance of $2.2 million against the book value of the assets
held for sale to write such assets down to the estimated net realizable value in
the consolidated statement of operations for year ended December 31, 1997. In
the second quarter of 1998, the assets held for sale were written down an
additional $0.2 million to the net realizable value of the Asset Purchase
Agreement executed on June 8, 1998. See Part II, Item 1. Legal Proceedings.
In December 1997, the Company closed the Nevada Club. A note payable by
Nevada Club, Inc. ("NCI") to a bank, which is secured by Nevada Club assets and
guaranteed by the Chairman and Chief Executive Officer of the Company, will be
retired concurrently with the sale of the Nevada Club. Such note payable had a
principal balance of $2.6 million as of June 28, 1998, and has covenants placing
certain restrictions on NCI and requiring that certain financial ratios be
maintained. As of June 28, 1998, NCI was not in compliance with the following
covenants: Tangible Net Worth of $0.8 million, Funded Debt to EBITDA Ratio of
3.5 to 1.0, Debt Service Coverage Ratio of 1.2 to 1.0 and a Fixed Charge
Coverage Ratio of 1.0 to 1.0. The lender had previously stated that it would
forbear exercising any of its remedies provided that Nevada Club was sold by
June 30, 1998, resulting in the payment of the note in its entirety. Nevada Club
was not sold by June 30, 1998, and NCI continues to make scheduled principal and
interest payments on the note. Although the lender has not taken any action to
date with respect to the Company's failure to comply with such covenants the
lender has notified the Company that it has not waived the non-compliance with
such covenants and there can be no assurance that the lender will continue to
forbear exercising its remedies. A note payable by FRI to a trust which is also
secured by Nevada Club assets will also be retired upon the sale. As of June 28,
1998, such note payable had a principal balance of approximately $1.0 million.
There can be no assurance, however, that Nevada Club will be sold and the
Harolds Club settlement will be consummated. See Note 6 of Notes to Condensed
Consolidated Financial Statements and Part II, Item 1. Legal Proceedings.
The Company's principal sources of capital will consist of cash from
operations and vendor and lease financing of gaming and other equipment. The
indenture under which the Senior Secured Notes were issued allows the Company,
under certain circumstances, to establish a secured $15.0 million line of
credit, of which up to $5.0 million could be used for capital
Page 23 of 31
<PAGE> 24
projects at Fitzgeralds Black Hawk. The Company is currently negotiating a line
of credit and, although no assurance can be given, anticipates having the line
of credit in place by August 31, 1998. Based upon anticipated levels of
operations, the Company currently expects its cash flows will be sufficient to
enable the Company to satisfy its anticipated operating cash requirements
including debt service requirements, working capital and other fixed charges
through 1998, as well as anticipated maintenance capital expenditures of
approximately $6.0 million during 1998. There can be no assurance as to the
actual level of operating cash requirements or of the amount of cash flows from
operations or their sufficiency to meet such requirements.
EBITDA AND ADJUSTED EBITDA
The Company's earnings before interest, income taxes, depreciation and
amortization ("EBITDA") was $23.3 million for the Cumulative 1998 Period and
$14.2 million for the Cumulative 1997 Period. EBITDA is calculated by adding
depreciation and amortization expenses to income from operations. The Company's
Adjusted EBITDA was $15.4 million for the Cumulative 1998 Period (which $15.4
million does not include $8.0 million of the $8.2 million received in connection
with the termination of the Management Agreement with the Nation) and $15.1
million for the Cumulative 1997 Period. Adjusted EBITDA is determined based on
the adjustments described in Note 5 to "Statement of Operations Data." However,
EBITDA should only be read in conjunction with all of the Company's financial
data summarized above and its financial statements prepared in accordance with
GAAP appearing elsewhere herein, and should not be construed as an alternative
either to income from operations (as determined in accordance with GAAP) as an
indication of the Company's operating performance or to cash flows from
operating activities (as determined in accordance with GAAP) as a measure of
liquidity. This presentation of EBITDA may not be comparable to similarly titled
measures reported by other companies.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges measures the extent by which
earnings, as defined, exceed certain fixed charges. Earnings are defined as
earnings before income taxes, interest on indebtedness, imputed interest on
capital lease obligations and the portion of rent expense deemed to represent
interest. Fixed charges consist of interest on indebtedness, imputed interest on
capital lease obligations, and the portion of rent expense deemed to represent
interest. The Fixed Charge Coverage Ratio was 1.10 for the Cumulative 1998
Period; including amounts attributed to the termination of the Management
Agreement with the Nation; however, earnings were insufficient to cover fixed
charges by $2.1 million for the Cumulative 1997 Period.
BUSINESS SEASONALITY AND SEVERE WEATHER
The gaming operations of the Company in certain locations may be
seasonal and, depending on the location and other circumstances, the effects of
such seasonality could be significant. At Fitzgeralds Las Vegas, business levels
are generally weaker from Thanksgiving through the middle of January (except
during the week between Christmas and New Year's) and
Page 24 of 31
<PAGE> 25
throughout the summer, and generally stronger from mid-January through Easter
and from mid-September through Thanksgiving. At each of the three other
Fitzgeralds-brand properties, business levels are typically weaker from
Thanksgiving through the end of the spring and typically stronger from mid-June
to mid-November.
The Company's results are also affected by inclement weather in
relevant markets. The Fitzgeralds Black Hawk site, located in the mountains of
Colorado, and the Fitzgeralds Reno site, located in the foothills of the Sierra
Nevada mountains in Nevada, are subject to snow and icy road conditions during
the winter months. Any such severe weather conditions may discourage potential
customers from visiting the Company's facilities.
COMPUTERIZED OPERATIONS AND THE YEAR 2000
During recent years, there has been significant global awareness raised
regarding the potential disruption to business operations worldwide resulting
from the inability of current technology to process properly the change from the
year 1999 to 2000. The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
In 1997, the Company initiated an investigation to identify and ensure
that all significant applications will be Year 2000 compliant. The Company is
conducting its investigation and is in the process of obtaining assurances from
its vendors that timely updates will be made available to ensure that all
purchased applications are Year 2000 compliant. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
The Company will utilize both internal and external resources to test,
program and/or replace applications to ensure that they are Year 2000 compliant.
Completion of this project is anticipated not later than October 31, 1999. The
costs associated with the Year 2000 project are expected to be approximately
$1.2 million for, collectively, Fitzgeralds Las Vegas, Fitzgeralds Reno,
Fitzgeralds Tunica and Fitzgeralds Black Hawk; however, the Company has not
finalized its investigation. Approximately $0.9 million of the cost is expected
to be capitalized with the remaining amount expensed as incurred. Such costs are
expected to be funded through operating cash flows. Costs of hardware and
software required to be purchased as a result of the Year 2000 Issue will be
capitalized in accordance with normal policy. Personnel and all other costs
related to the project will be expensed as incurred. The conversion of most
purchased applications will be completed under the terms of maintenance
agreements which provide for the conversion of such applications at no
additional cost. All equipment and other operating systems are currently
Page 25 of 31
<PAGE> 26
being evaluated to determine if Year 2000 issues have an effect on their ability
to perform their respective functions.
Although, based on its investigation to date the Company does not
believe that it will experience any significant adverse effects or material
unbudgeted costs associated with the Year 2000 project, the Company cannot
provide any assurance in this regard, and any such cause or effect could
materially and adversely affect the Company.
Page 26 of 31
<PAGE> 27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
HAROLDS CLUB
On May 31, 1995, Fitzgeralds Reno, Inc. ("FRI") sold the closed Harolds
Club in Reno to an unrelated publicly-traded company which subsequently conveyed
Harolds Club to a company whose assets are now under control of the United
States Bankruptcy Court for the Northern District of New York. Under the terms
of certain indemnification agreements executed by FRI in connection with the
sale of Harolds Club, FRI is contingently obligated for certain land lease
payments to five lessors in the amount of approximately $0.58 million annually
plus certain property-related costs, such as taxes and insurance, if said lease
payments and costs are not paid by the current owner of Harolds Club. As of June
28, 1998, the current owner of Harolds Club was approximately $1.4 million in
arrears in land lease payments and approximately $0.28 million in arrears in
property taxes and assessments.
As of June 25, 1998, the current owner of Harolds Club and four of the
five land lessor had executed and delivered into escrow asset purchase
agreements (collectively, the "Harolds Club Asset Purchase Agreements") to
convey their fee simple interests in Harolds and the improvements thereon to an
undisclosed purchaser, which undisclosed purchaser has also entered into an
agreement with FRI to purchase the Nevada Club. The Harolds Club Asset Purchase
Agreements are contingent upon (i) the execution and delivery of settlement and
lease termination agreements (collectively, the "Settlement Agreement") by and
between FRI, four of the five land lessors, and the current and prior Harolds
Club land lessees; (ii) a waiver of the right of first refusal by and between
certain of the land lessors; and (iii) the conveyance, as described below, of
the fifth land lessor's Harolds Club parcel (the "Campbell Parcel").
Pursuant to the Settlement Agreements, FRI has agreed to pay the four
land lessors approximately $1.7 million in exchange for dismissal with prejudice
of all claims and cross-claims against FRI arising out of FRI's purchase and
subsequent sale of Harolds Club. FRI anticipates paying $0.65 million of the
approximately $1.7 million settlement in cash, less the cumulative amount of
interim monthly rental payments ($28,977 per month), concurrently with the
closing of the Harolds Club Asset Purchase Agreements and executing four
separate promissory notes totaling approximately $1.0 million for the balance.
The notes will be amortized over five years with interest fixed at the prime
rate in effect at the largest financial institution in Nevada on the date the
notes are executed and will be secured by the personal guarantee of the Chairman
and Chief Executive Officer of the Company.
To accommodate the requirement of the fifth Harolds Club land lessor
that the transfer of the Campbell Parcel be structured as a tax-free exchange,
FRI anticipates entering into an agreement to purchase the Campbell Parcel for a
purchase price of approximately $1.0 million
Page 27 of 31
<PAGE> 28
(the "Campbell Asset Purchase"). FRI anticipates paying approximately $0.55
million of the purchase price and a prior owner of Harolds Club will pay the
balance of approximately $0.45 million and all closing costs. The closing of the
Campbell Asset Purchase is contingent upon the dismissal with prejudice of all
claims and cross-claims against FRI relating to the Campbell Parcel. Upon
completing the Campbell Asset Purchase, FRI will terminate the lease encumbering
the Campbell Parcel and convey it to the undisclosed purchaser of Harolds Club
for approximately $0.34 million.
Because the assets of the current owner of Harolds Club are under the
control of the United States Bankruptcy Court for the Northern District of New
York, said Bankruptcy Court must approve the current owner's Asset Purchase
Agreement with the undisclosed purchaser. Additionally, the closing of the
Harolds Club transaction is subject to the closing of the Nevada Club
transaction. Although it is currently anticipated that the Harolds Club
transaction will close during 1998, no assurance can be given that the
transaction will be completed.
TREASURE BAY
In October 1993, Fitzgeralds Mississippi, Inc. "(FMI"), a wholly owned
subsidiary of the Company and manager of Fitzgeralds Tunica, executed a road
contract (the "Contract") with Treasure Bay Gaming and Resorts, Inc. ("Treasure
Bay") to share equally the cost of developing a road leading to the two
properties (the "Roadway") and of the acquisition of a 3.67-acre tract of land
(the "Tract"). The Company believes that it has paid its portion of such costs,
although documents filed by Treasure Bay in the Treasure Bay bankruptcy
proceeding referred to below reflect its claim that approximately $0.3 million
remains outstanding. Pursuant to the Contract, the Roadway and Tract were
acquired by Treasure Bay and the Roadway was constructed providing access from
Commerce Road to the Fitzgeralds Tunica and Treasure Bay casinos. Pursuant to
Treasure Bay's acquisition contract and deed, Treasure Bay was also obligated to
convey the Roadway to Tunica County within a reasonable time after its
development, and adjacent land owners and utility companies were to be entitled
to full rights of access.
Treasure Bay is currently subject to a bankruptcy proceeding pursuant
to Title 11 of the United States Code (the "Bankruptcy Code"). Preliminary title
reports on the Roadway and Tract indicate that a deed of trust securing $115.0
million in Treasure Bay bonds and approximately $8.0 million in mechanics' and
material men's liens are recorded against such properties. In addition, the lien
of the deed of trust is prior to the Company's easement rights over two
additional tracts that are necessary for access to the Fitzgeralds Tunica
property. The holder of the deed of trust was aware of the rights of Fitzgeralds
Mississippi, Inc. ("FMI") at the time the deed of trust was recorded. To quiet
title in the Roadway and the Tract, FMI filed an adversary proceeding against
Treasure Bay and others claiming an interest in the Roadway and the Tract. FMI's
complaint seeks, among other relief, a declaratory judgment that FMI owns an
unencumbered, undivided one-half interest in the Roadway and Tract and the
avoidance of all liens on the Roadway and Tract. In an effort to compromise and
settle its tax liability on the Roadway, Tract, and other real property it owns,
in September 1996, Treasure Bay executed a Quitclaim Deed in favor of Tunica
County to convey a one-half interest in the Tract. Prior to this conveyance, all
lien-holders released their liens against the Tract.
Page 28 of 31
<PAGE> 29
A Chapter 11 Plan of Reorganization (the "Plan") has been confirmed in
the Treasure Bay bankruptcy proceeding. All assets of Treasure Bay re-vested in
Treasure Bay upon confirmation of the Plan. To the best of the Company's
knowledge, with the exception of certain excluded assets (as defined in the new
indenture which is attached to the Plan), the Plan grants Treasure Bay's new
indenture trustee (as defined in the Plan) a replacement lien on substantially
all assets which it previously held as collateral. The Tract was specifically
released from the new indenture trustee's collateral as part of the compromise
of Tunica County's priority tax claim whereby Treasure Bay's one-half interest
in the Tract was conveyed to Tunica County free and clear of all liens and
security interests. To the extent Treasure Bay owns the Roadway, it appears to
be part of the collateral which re-vested in favor of its bondholders. The Plan
also grants a permanent easement free and clear of all liens and encumbrances on
the Roadway to a land lessor under the real property lease for the Treasure Bay
Tunica casino. With respect to the above-mentioned mechanics' and material men's
liens, the Plan provides that such liens, if they are deemed to be valid,
attached to the proceeds from the sale of the Treasure Bay barge and
consequently no longer constitute encumbrances on the Roadway or the Tract.
The quiet title proceeding filed by FMI against Treasure Bay and
Treasure Bay's adversarial proceeding against FMI to recover approximately $0.3
million for the cost of developing the Roadway and the Tract are still pending,
and it not possible at the present time to predict the outcome. Furthermore,
there can be no assurance that Tunica County would be prepared to accept the
conveyance of the Roadway at this time in which case FMI would continue to
undertake maintenance of the Roadway. FMI is in physical possession of and
utilizing the Roadway and Tract. The loss of access to the Roadway would require
the Company to construct a new road to its property. However, both the
Bankruptcy Code and the Mississippi law offer protection to FMI, as a purchaser
in possession, in spite of there being no recorded deeds in favor of FMI. In
addition, both the Bankruptcy Code and Mississippi law offer protection to FMI
with regard to deeds of trust recorded at a time when the holder thereof had
knowledge of FMI's claim. Accordingly, the Company believes that FMI will
continue to have full access and use of the Roadway and the Tract.
The Company is a party to various lawsuits relating to routine matters
incidental to its business. The Company does not believe that the outcome of
such litigation, individually or in the aggregate, will have any material
adverse effect on its financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Page 29 of 31
<PAGE> 30
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10(a): Form of Fitzgeralds Gaming Corporation Stock Option Incentive
Plan as Amended and Restated Effective as of May 1, 1998
27(c): Financial Data Schedule
(b) Reports on Form 8-K
Report on Form 8-K, Item 5, filed on May 21, 1998
Report on Form 8-K, Item 5, filed on June 24, 1998
Page 30 of 31
<PAGE> 31
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.
Dated: August 11, 1998
FITZGERALDS GAMING CORPORATION
/s/ Michael E. McPherson
Michael E. McPherson
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer, Principal
Financial Officer and Principal
Accounting Officer)
Page 31 of 31
<PAGE> 1
EXHIBIT 10(a)
FITZGERALDS GAMING CORPORATION
STOCK OPTION INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE AS OF MAY 1, 1998)
1. PURPOSE
The purpose of the Fitzgeralds Gaming Corporation Stock Option Incentive
Plan is to further the interests of Fitzgeralds Gaming Corporation, a Nevada
corporation (the "Company"), and its Subsidiaries by encouraging and enabling
selected officers, directors, employees, consultants, advisers, independent
contractors and agents, upon whose judgment, initiative and effort the Company
is largely dependent for the successful conduct of its business, to acquire and
retain a proprietary interest in the Company by ownership of its stock through
the exercise of stock options to be granted hereunder. Options granted hereunder
are either options intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code or non-qualified stock options.
2. DEFINITIONS
Whenever used herein the following terms shall have the following
meanings, respectively:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended, and
the regulations promulgated thereunder.
(c) "Committee" shall mean the Stock Option or Compensation Committee
appointed by the Board to administer the Plan, or if no committee has been
appointed or the Board elects to retain the power to administer the Plan,
reference to "Committee" shall be deemed to refer to the Board.
(d) "Common Stock" shall mean the Company's Common Stock, $0.01 par
value.
(e) "Company" shall mean Fitzgeralds Gaming Corporation, a Nevada
corporation.
(f) "Employee" shall mean, in connection with Incentive Options, only
employees of the Company or any Subsidiary or Parent Corporation of the Company.
(g) "Fair Market Value Per Share" of the Common Stock on any date shall
mean, if the Common Stock is publicly traded, the mean between the highest and
lowest quoted selling prices of the Common Stock on such date or, if not
available, the mean between the bona fide bid and asked prices of the Common
Stock on such date. In any situation not covered above, or if there were no
sales on the date in question, the Fair Market Value Per Share shall be
determined by the Committee in accordance with Section 20.2031-2 of the Federal
Estate Tax Regulations.
(h) "Incentive Option" shall mean an Option granted under the Plan which
is designated as and qualified as an incentive stock option within the meaning
of Section 422 of the Code.
<PAGE> 2
(i) "Non-Employee Director" shall have the meaning set forth in Rule
16b-3 promulgated by the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, or any successor rule.
(j) "Non-Qualified Option" shall mean an Option granted under the Plan
which does not qualify as, or is not designated as, an incentive stock option
within the meaning of Section 422 of the Code.
(k) "Option" shall mean an Incentive Option or a Non-Qualified Option.
(l) "Optionee" shall mean any person who has been granted an Option
under the Plan.
(m) "Outside Director" shall have the meaning set forth in Section
162(m) of the Code.
(n) "Parent Corporation" shall have the meaning set forth in Section
424(e) of the Code.
(o) "Permanent Disability" shall mean termination of a Relationship with
the Company or any Subsidiary of the Company with the consent of the Company or
such Subsidiary by reason of permanent and total disability within the meaning
of Section 22(e)(3) of the Code.
(p) "Plan" shall mean the Fitzgeralds Gaming Corporation Stock Option
Incentive Plan, as amended from time to time.
(q) "Relationship" shall mean that the Optionee is or has agreed to
become an officer, director, employee, consultant, adviser, independent
contractor or agent of the Company or any Subsidiary of the Company.
(r) "Subsidiary" shall have the meaning set forth in Section 424(f) of
the Code.
(s) "Termination for Cause" means the termination of an employee's
employment with the Company, whether voluntary or involuntary, that is
determined by the Committee to have resulted from the discovery by the Company
of the employee's dishonesty, commission of a felony (regardless of whether or
not prosecuted) or fraud.
3. ADMINISTRATION
(a) The Plan shall be administered either (i) by the Board, or (ii) in
the discretion of the Board, by a committee of at least two directors of the
Company appointed by the Board, all of which members are both Non-Employee
Directors and Outside Directors. The Committee may delegate some or all of its
powers under the Plan to an executive officer of the Company, except with
respect to Option grants to executive officers or directors.
(b) Any action of the Committee with respect to the administration of
the Plan shall be taken by majority vote or by unanimous written consent of its
members.
(c) Subject to the provisions of the Plan, the Committee shall have the
authority to construe and interpret the Plan, to define the terms used therein,
to determine the time or times an Option may be exercised and the number of
shares for which an Option may be exercised at any one time, to prescribe,
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<PAGE> 3
amend and rescind rules and regulations relating to the Plan, to determine the
time and nature of a participant's termination of their employment for purposes
of the Plan, and to make all other determinations necessary or advisable for the
administration of the Plan. All determinations and interpretations made by the
Committee shall be conclusive and binding on all Optionees and on their
guardians, legal representatives and beneficiaries.
(d) The Company shall indemnify and hold harmless the members of the
Board and the Committee from and against any and all liabilities, costs and
expenses incurred by such persons as a result of any act, or omission to act, in
connection with the performance of such persons' duties, responsibilities and
obligations under the Plan, other than such liabilities, costs and expenses as
may result from the negligence, bad faith, willful misconduct or criminal acts
of such persons.
(e) The Company will provide financial information to the Optionees on
the same basis as the Company provides such information to its stockholders.
4. NUMBER OF SHARES SUBJECT TO PLAN
The aggregate number of shares of Common Stock subject to Options which
may be granted under the Plan shall not exceed 1,000,000. The shares of Common
Stock to be issued upon the exercise of Options may be authorized but unissued
shares, shares issued and reacquired by the Company or shares purchased by the
Company on the open market. If any Option granted hereunder shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for purposes of the Plan.
5. ELIGIBILITY AND PARTICIPATION
(a) Non-Qualified Options may be granted to any person who has a
Relationship with the Company or any of its Subsidiaries. Incentive Options may
be granted to any Employee. In addition, the Committee may make a one-time grant
of Options to former employees in substitution for options previously granted to
them, for the same number of shares and having substantially the same terms and
conditions as the options they are replacing. The Committee shall determine the
persons to whom Options shall be granted, the time or times at which such
Options shall be granted and the number of shares to be subject to each Option.
An Optionee may, if he is otherwise eligible, be granted an additional Option or
Options if the Committee shall so determine. An Employee may be granted
Incentive Options or Non-Qualified Options or both under the Plan; provided,
however, that the grant of Incentive Options and Non-Qualified Options to an
Employee shall be the grant of separate Options and each Incentive Option and
each Non-Qualified Option shall be specifically designated as such.
(b) In no event shall the aggregate fair market value (determined as of
the time the Option is granted) of the shares with respect to which Incentive
Options (granted under the Plan or any other plans of the Company or any
Subsidiary or Parent Corporation of the Company) are exercisable for the first
time by an Optionee in any calendar year exceed $100,000.
-3-
<PAGE> 4
6. PURCHASE PRICE
The purchase price of each share covered by each Option shall be
determined by the Committee; provided, however, that in the case of an Incentive
Option such price shall not be less than 100% of the Fair Market Value Per Share
of the Common Stock on the date the Incentive Option is granted; and provided
further that if at the time an Incentive Option is granted the Optionee owns or
would be considered to own by reason of Section 424(d) of the Code more than 10%
of the total combined voting power of all classes of stock of the Company or any
Subsidiary or Parent Corporation of the Company, the purchase price of the
shares covered by such Incentive Option shall not be less than 110% of the Fair
Market Value Per Share of the Common Stock on the date the Incentive Option is
granted.
7. DURATION OF OPTIONS
The expiration date of an Option and all rights thereunder shall be
determined by the Committee; provided, however, that the expiration date of an
Incentive Option must be within 10 years from the date on which the Incentive
Option is granted, unless at the time the Incentive Option is granted the
Optionee owns or would be considered to own by reason of Section 424(d) of the
Code more than 10% of the total combined voting power of all classes of stock of
the Company or any Subsidiary or Parent Corporation of the Company, in which
case the expiration date of such Incentive Option must be within five years from
the date of grant. In the event the Committee does not specify the expiration
date of an Option, the expiration date shall be 10 years from the date on which
the Option was granted; provided, however, that if at the time an Incentive
Option is granted the Optionee owns or would be considered to own by reason of
Section 424(d) of the Code more than 10% of the total combined voting power of
all classes of stock of the Company or any Subsidiary or Parent Corporation of
the Company, such Incentive Option shall expire five years from the date of
grant. Options shall be subject to earlier termination as provided herein.
8. EXERCISE OF OPTIONS
An Option shall vest and become exercisable from time to time in
installments or otherwise in accordance with such schedule and upon such other
terms and conditions as the Committee shall in its discretion determine at the
time the Option is granted. An Optionee may purchase less than the total number
of shares for which the Option is exercisable, provided that a partial exercise
of an Option may not be for less than 100 shares, unless the exercise is during
the final year of the Option, and shall not include any fractional shares. As a
condition to the exercise, in whole or in part, of any Option, the Committee may
in its sole discretion require the Optionee to pay, in addition to the purchase
price of the shares covered by the Option, an amount equal to any federal, state
or local taxes that the Committee has determined are required to be paid in
connection with the exercise of such Option in order to enable the Company to
claim a deduction or otherwise. Furthermore, if any Optionee disposes of any
shares of stock acquired by exercise of an Incentive Option prior to the
expiration of either of the holding periods specified in Section 422(a)(1) of
the Code, the Optionee shall pay to the Company, or the Company shall have the
right to withhold from any payments to be made to the Optionee, an amount equal
to any federal, state or local taxes that the Committee has determined are
required to be paid in connection with the exercise of such Option in order to
enable the Company to claim a deduction or otherwise.
-4-
<PAGE> 5
9. METHOD OF EXERCISE
(a) To the extent that an Option has become exercisable, the Option may
be exercised from time to time by giving written notice to the Company stating
the number of shares with respect to which the Option is being exercised,
accompanied by payment in full, by cash or by certified or cashier's check
payable to the order of the Company or the equivalent thereof acceptable to the
Company, of the purchase price for the number of shares being purchased and, if
applicable, any federal, state or local taxes required to be paid in accordance
with the provisions of Section 8 hereof.
(b) In the Committee's discretion, payment of the purchase price for the
shares with respect to which the Option is being exercised may be made in whole
or in part with shares of Common Stock which have been held by the Optionee (or
other person entitled to exercise the Option) for at least six months. If
payment is made with shares of Common Stock, the Optionee, or other person
entitled to exercise the Option, shall deliver to the Company certificates
representing the number of shares of Common Stock in payment for the shares
being purchased, duly endorsed for transfer to the Company. If requested by the
Committee, prior to the acceptance of such certificates in payment for such
shares, the Optionee, or any other person entitled to exercise the Option, shall
supply the Committee with a representation and warranty in writing that he has
good and marketable title to the shares represented by the certificate(s), free
and clear of all liens and encumbrances. The value of the shares of Common Stock
tendered in payment for the shares being purchased shall be their Fair Market
Value Per Share on the date of the exercise.
(c) Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of the shares for such period as may be required
for it to comply, with reasonable diligence, with any applicable listing
requirements of any national securities exchange or automated quotation system
or any federal, state or local law. If an Optionee, or other person entitled to
exercise an Option, fails to accept delivery of or fails to pay for all or any
portion of the shares requested in the notice of exercise, upon tender of
delivery thereof, the Committee shall have the right to terminate his Option
with respect to such shares.
10. NON-TRANSFERABILITY OF OPTIONS
No Option granted under the Plan shall be assignable or transferable by
the Optionee, either voluntarily or by operation of law, otherwise than by will
or the laws of descent and distribution, and each Option shall be exercisable
during the Optionee's lifetime only by the Optionee.
11. CONTINUANCE OF RELATIONSHIP
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any Optionee any rights with respect to the continuation of
his employment by or other Relationship with the Company or any Subsidiary or
Parent Corporation of the Company or interfere in any way with the right of the
Company or any Subsidiary or Parent Corporation of the Company at any time to
terminate such employment or other Relationship or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the grant
of an Option.
-5-
<PAGE> 6
12. TERMINATION OF RELATIONSHIP OTHER THAN BY DEATH OR PERMANENT DISABILITY
Except as the Committee may determine otherwise at any time with respect
to any particular Option granted hereunder:
(a) If an Optionee ceases to have a Relationship for any reason other
than his death or Permanent Disability or termination for cause, any Options
granted to him shall terminate 90 days from the date on which such Relationship
terminates unless such Optionee has resumed or initiated a Relationship and has
a Relationship on such date. During such 90-day period, the Optionee may
exercise any Option granted to him but only to the extent such Option was
exercisable on the date of termination of his Relationship and provided that
such Option has not expired or otherwise terminated as provided herein. A leave
of absence approved in writing by the Company shall not be deemed a termination
of Relationship for purposes of this Section 12, but no Option may be exercised
during any such leave of absence, except during the first 90 days thereof.
(b) For purposes hereof, termination of an Optionee's Relationship for
reasons other than death or Permanent Disability shall be deemed to take place
upon the earliest to occur of the following: (i) the date of the Optionee's
retirement from employment under the normal retirement policies of the Company
or any Subsidiary of the Company; (ii) the date of the Optionee's retirement
from employment with the approval of the Committee because of disability other
than Permanent Disability; (iii) the date the Optionee receives notice or advice
that his employment or other Relationship is terminated; or (iv) the date the
Optionee ceases to render the services which he was employed, engaged or
retained to render to the Company or any Subsidiary (absences for temporary
illness, emergencies and vacations or leaves of absence approved in writing by
the Company excepted). The fact that the Optionee may receive payment from the
Company or any Subsidiary of the Company after termination for vacation pay, for
services rendered prior to termination, for salary in lieu of notice or for
other benefits shall not affect the termination date.
(c) No Option may be exercised or claimed following an Optionee's
termination of Relationship as a result of Termination for Cause, and no Option
may be exercised or claimed while the Optionee is being investigated for a
Termination for Cause.
13. DEATH OR PERMANENT DISABILITY OF OPTIONEE
Except as the Committee may expressly determine otherwise at any time
with respect to any particular Option granted hereunder, if an Optionee shall
die at a time when he is in a Relationship or if the Optionee shall cease to
have a Relationship by reason of Permanent Disability, any Options granted to
him shall terminate one year after the date of his death or termination of
Relationship due to Permanent Disability unless by its terms it shall expire
before such date or otherwise terminate as provided herein, and shall only be
exercisable to the extent that it would have been exercisable on the date of his
death or his termination of Relationship due to Permanent Disability. In the
case of death, the Option may be exercised by the executor or administrator of
the Optionee's estate or the person or persons to whom the Optionee's rights
under the Option shall pass by will or by the laws of descent and distribution.
-6-
<PAGE> 7
14. STOCK PURCHASE NOT FOR DISTRIBUTION
Each Optionee shall, by accepting the grant of an Option under the Plan,
represent and agree, for himself and his transferees in the event of his death,
that all shares of stock purchased upon exercise of the Option will be received
and held without a view to distribution except as may be permitted by the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder. After each notice of exercise of any portion of an Option, if
requested by the Committee, the person entitled to exercise the Option shall
agree in writing that the shares of stock are being acquired in good faith
without a view to distribution.
15. PRIVILEGES OF STOCK OWNERSHIP
No person entitled to exercise any Option granted under the Plan shall
have any of the rights or privileges of a stockholder of the Company with
respect to any shares of Common Stock issuable upon exercise of such Option
until such person has become the holder of record of such shares. No adjustment
shall be made for dividends or distributions of rights in respect of such shares
if the record date is prior to the date on which such person becomes the holder
of record, except as provided in Section 16 hereof.
16. ADJUSTMENTS
(a) If the number of outstanding shares of Common Stock is increased or
decreased, or if such shares are exchanged for a different number or kind of
shares or securities of the Company, through reorganization, merger,
recapitalization, reclassification, stock dividend, stock split, combination of
shares or other transaction or change in corporate structure affecting the
Common Stock such that an adjustment is determined by the Board to be
appropriate under the Plan, the aggregate number of shares of Common Stock
subject to the Plan as provided in Section 4 hereof, the shares of Common Stock
subject to issued and outstanding Options under the Plan and the aggregate
number of shares of Common Stock with respect to which Options may be granted to
a single Optionee as provided in Section 5(c) hereof shall be appropriately and
proportionately adjusted by the Board. Any such adjustment in the outstanding
Options shall be made without change in the aggregate purchase price applicable
to the unexercised portion of the Option but with an appropriate adjustment in
the price for each share or other unit of any security covered by the Option,
provided, however, that such adjustment shall not result in the Company being
required to issue or sell any fractional shares. The Board's determination as to
which adjustments shall be made and the extent thereof shall be final, binding
and conclusive.
(b) Notwithstanding the provisions of Section 16(a), upon the
dissolution or liquidation of the Company or upon any reorganization, merger or
consolidation with one or more corporations as a result of which the Company is
not the surviving corporation (or is a subsidiary of another corporation), or
upon a sale of all or substantially all of the assets of the Company to another
corporation or entity, the Board may take such action, if any, as it in its
discretion may deem appropriate to accelerate the time within which and the
extent to which Options may be exercised, to provide for the assumption of
Options by surviving, consolidated, successor or transferee corporations, or to
make such other equitable adjustment to outstanding Options as the Board in its
discretion may deem appropriate to preserve the benefits intended at the time of
grant.
-7-
<PAGE> 8
(c) Adjustments under this Section 16 shall be made by the Board, whose
determination as to which adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
17. AMENDMENT AND TERMINATION OF PLAN
(a) The Board may from time to time suspend or terminate the Plan with
respect to any shares at the time not subject to Options, or amend or revise the
terms of the Plan. Amendments may be made without stockholder approval, except
as required to satisfy applicable laws or regulations or the requirements of any
stock exchange or automated quotation system on which the Common Stock is
listed.
(b) No amendment, suspension or termination of the Plan shall, without
the consent of the Optionee, alter or impair in a manner adverse to the Optionee
any rights or obligations under any Option theretofore granted to such Optionee.
(c) The terms and conditions of any Option granted to an Optionee may be
modified or amended only by a written agreement executed by the Optionee and the
Company; provided, however, that if any amendment or modification of an
Incentive Option would constitute a "modification, extension or renewal" within
the meaning of Section 424(h) of the Code, such amendment shall be null and void
unless the amendment contains an acknowledgment by the parties substantially in
the following form: "The parties hereto recognize and agree that this amendment
constitutes a modification, renewal or extension within the meaning of Section
424(h) of the Code, of the option granted on ."
18. EFFECTIVE DATE OF PLAN
The Plan shall become effective upon adoption by the Board and approval
by the Company's stockholders; provided, however, that prior to approval of the
Plan by the Company's stockholders, but after adoption by the Board, Options may
be granted under the Plan subject to obtaining the stockholders' approval of the
adoption of the Plan. Notwithstanding the foregoing, stockholders' approval must
occur no later than 12 months after the date of adoption of the Plan by the
Board.
19. TERM OF PLAN
No Option shall be granted pursuant to the Plan after 10 years from the
earlier of the date of adoption of the Plan by the Board or the date of approval
of the Plan by the Company's stockholders.
The Plan was adopted by the Board on June 26, 1997 and approved by the
stockholders at the annual meeting held on August 1, 1997. This amendment and
restatement is effective as of May 1, 1998.
IN WITNESS WHEREOF, the undersigned have executed this amended and
restated Stock Option Incentive Plan effective as of May 1, 1998.
/s/Philip D. Griffith /s/Michael E. McPherson
- ---------------------------------------- ---------------------------------
Philip D. Griffith Michael E. McPherson
Chairman and Chief Executive Officer Senior Vice President, CFO,
Treasurer and Secretary
-8-
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21,933,351
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