To the Members
Mark Twain Casino, L.L.C.
LaGrange, Missouri
We have audited the accompanying balance sheets of Mark Twain Casino, L.L.C. as of December 31, 2004 and 2003, and the related statements of operations, changes in members’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mark Twain Casino, L.L.C. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
St. Joseph, Missouri
January 19, 2005
1
MARK TWAIN CASINO, L.L.C.
December 31, 2004 and 2003
ASSETS
| | 2004 | | 2003 | |
CURRENT ASSETS | | | | | |
Cash and cash equivalents | | $ | 2,887,621 | | $ | 4,221,196 | |
Restricted cash and cash equivalents | | 1,132,896 | | 1,216,202 | |
Inventories | | 63,164 | | 53,552 | |
Accounts receivable | | 14,382 | | 13,266 | |
Prepaid expenses | | 393,822 | | 252,700 | |
| | | | | |
Total current assets | | 4,491,885 | | 5,756,916 | |
| | | | | |
PROPERTY AND EQUIPMENT | | | | | |
Land and land improvements | | 1,835,144 | | 1,842,644 | |
Building and equipment | | 14,646,544 | | 14,047,959 | |
| | | | | |
Total | | 16,481,688 | | 15,890,603 | |
Less accumulated depreciation | | 4,475,944 | | 3,304,035 | |
| | | | | |
Total property and equipment | | 12,005,744 | | 12,586,568 | |
| | | | | |
INTANGIBLE ASSETS | | | | | |
Loan costs | | 552,500 | | 552,500 | |
Less accumulated amortization | | 552,500 | | 190,744 | |
| | | | | |
Total intangible assets | | — | | 361,756 | |
| | | | | |
OTHER ASSETS | | — | | 150,000 | |
| | | | | |
TOTAL ASSETS | | $ | 16,497,629 | | $ | 18,855,240 | |
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
2
LIABILITIES AND MEMBERS’ EQUITY
| | 2004 | | 2003 | |
CURRENT LIABILITIES | | | | | |
Accounts payable | | $ | 575,907 | | $ | 251,124 | |
Current portion of notes payable | | — | | 2,009,012 | |
Accrued liabilities | | 1,049,524 | | 1,039,698 | |
| | | | | |
Total current liabilities | | 1,625,431 | | 3,299,834 | |
| | | | | |
LONG-TERM LIABILITIES | | | | | |
Notes payable, less current maturities included above | | — | | 8,286,608 | |
| | | | | |
Total liabilities | | 1,625,431 | | 11,586,442 | |
| | | | | |
MEMBERS’ EQUITY | | 14,872,198 | | 7,268,798 | |
| | | | | |
TOTAL LIABILITIES AND MEMBERS’ EQUITY | | $ | 16,497,629 | | $ | 18,855,240 | |
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
3
MARK TWAIN CASINO, L.L.C.
Years Ended December 31, 2004, 2003 and 2002
| | 2004 | | 2003 | | 2002 | |
REVENUES | | | | | | | |
Gaming | | $ | 26,863,907 | | $ | 25,203,680 | | $ | 24,829,291 | |
Non-gaming | | 1,661,587 | | 1,677,792 | | 1,701,053 | |
| | | | | | | |
Total revenues | | 28,525,494 | | 26,881,472 | | 26,530,344 | |
Less promotional allowances | | (634,238 | ) | (600,471 | ) | (559,541 | ) |
| | | | | | | |
Net revenues | | 27,891,256 | | 26,281,001 | | 25,970,803 | |
| | | | | | | |
COST OF GOODS SOLD | | 1,202,755 | | 1,202,730 | | 1,251,506 | |
| | | | | | | |
Gross profit | | 26,688,501 | | 25,078,271 | | 24,719,297 | |
| | | | | | | |
OPERATING EXPENSES | | | | | | | |
Departmental expenses | | 15,526,429 | | 15,152,707 | | 15,363,983 | |
General and administrative expenses | | 2,494,823 | | 2,304,449 | | 2,427,863 | |
Loss on sale of assets | | 14,935 | | 43,536 | | — | |
Depreciation and amortization | | 1,788,126 | | 1,499,070 | | 1,490,408 | |
| | | | | | | |
Total operating expenses | | 19,824,313 | | 18,999,762 | | 19,282,254 | |
| | | | | | | |
OPERATING INCOME | | 6,864,188 | | 6,078,509 | | 5,437,043 | |
| | | | | | | |
OTHER INCOME (EXPENSE) | | | | | | | |
Interest income | | 21,713 | | 7,696 | | 19,463 | |
Interest expense | | (454,854 | ) | (674,696 | ) | (1,291,443 | ) |
Miscellaneous income | | 57,653 | | 93,887 | | 40,233 | |
| | | | | | | |
Total other income (expense) | | (375,488 | ) | (573,113 | ) | (1,231,747 | ) |
| | | | | | | |
NET INCOME | | $ | 6,488,700 | | $ | 5,505,396 | | $ | 4,205,296 | |
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
4
MARK TWAIN CASINO, L.L.C.
Years Ended December 31, 2004, 2003 and 2002
| | Cardinal
Gaming
Company | | Sauvage
Gas
Company | | Total Members’
Equity
(Deficit) | |
| | | | | | | |
BALANCE, DECEMBER 31, 2001 | | $ | (221,377 | ) | $ | (221,377 | ) | $ | (442,754 | ) |
| | | | | | | |
Net income | | 2,102,648 | | 2,102,648 | | 4,205,296 | |
| | | | | | | |
BALANCE, DECEMBER 31, 2002 | | 1,881,271 | | 1,881,271 | | 3,762,542 | |
| | | | | | | |
Member distributions | | (999,570 | ) | (999,570 | ) | (1,999,140 | ) |
Net income | | 2,752,698 | | 2,752,698 | | 5,505,396 | |
| | | | | | | |
BALANCE, DECEMBER 31, 2003 | | 3,634,399 | | 3,634,399 | | 7,268,798 | |
| | | | | | | |
Member contributions | | 2,000,000 | | 2,000,000 | | 4,000,000 | |
Member distributions | | (1,442,650 | ) | (1,442,650 | ) | (2,885,300 | ) |
Net income | | 3,244,350 | | 3,244,350 | | 6,488,700 | |
| | | | | | | |
BALANCE, DECEMBER 31, 2004 | | $ | 7,436,099 | | $ | 7,436,099 | | $ | 14,872,198 | |
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
5
MARK TWAIN CASINO, L.L.C.
Years Ended December 31, 2004, 2003 and 2002
| | 2004 | | 2003 | | 2002 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net income | | $ | 6,488,700 | | $ | 5,505,396 | | $ | 4,205,296 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation | | 1,426,370 | | 1,420,141 | | 1,411,480 | |
Amortization | | 361,756 | | 78,929 | | 78,928 | |
Loss on sale of assets | | 14,935 | | 43,536 | | — | |
Changes in operating assets and liabilities: | | | | | | | |
Inventories | | (9,612 | ) | (4,382 | ) | (5,488 | ) |
Accounts receivable – net | | (1,116 | ) | (867 | ) | 28,438 | |
Prepaid expenses | | (141,122 | ) | 134,365 | | 80,417 | |
Other assets | | 150,000 | | — | | — | |
Accounts payable | | 12,003 | | 3,468 | | (135,261 | ) |
Accrued liabilities | | 27,620 | | (157,655 | ) | 163,799 | |
Chip and token liability | | (17,794 | ) | 2,714 | | (2,392 | ) |
Net cash provided by operating activities | | 8,311,740 | | 7,025,645 | | 5,825,217 | |
| | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | |
Purchases of property and equipment | | (557,701 | ) | (458,032 | ) | (151,164 | ) |
Proceeds from sale of assets | | 10,000 | | 138,994 | | 44,009 | |
Sales of investments | | — | | — | | 7,652 | |
Net cash used in investing activities | | (547,701 | ) | (319,038 | ) | (99,503 | ) |
| | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | |
Payments on long-term debt | | (10,295,620 | ) | (3,987,970 | ) | (3,146,800 | ) |
Member contributions | | 4,000,000 | | — | | — | |
Member distributions | | (2,885,300 | ) | (1,999,140 | ) | — | |
Net cash used in financing activities | | (9,180,920 | ) | (5,987,110 | ) | (3,146,800 | ) |
| | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | (1,416,881 | ) | 719,497 | | 2,578,914 | |
| | | | | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | | 5,437,398 | | 4,717,901 | | 2,138,987 | |
| | | | | | | |
CASH AND CASH EQUIVALENTS, END OF YEAR | | $ | 4,020,517 | | $ | 5,437,398 | | $ | 4,717,901 | |
| | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | |
| | | | | | | |
Cash paid for interest | | $ | 478,593 | | $ | 758,871 | | $ | 1,254,678 | |
These financial statements should be read only in connection with
the accompanying summary of significant accounting policies
and notes to financial statements.
6
MARK TWAIN CASINO, L.L.C.
December 31, 2004, 2003 and 2002
Mark Twain Casino, L.L.C. (the Company) was formed on January 30, 1995 for the purpose of conducting gaming operations in the United States. Construction of a dockside barge casino was started in 2000 and the Company was issued a gaming license by the Missouri Gaming Commission and commenced operations on July 25, 2001. The Company is subject to continuing regulation and enforcement by the Missouri Gaming Commission.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months or less when purchased to be cash equivalents.
CASINO REVENUES
The Company’s revenue consists primarily of income from gaming operations. In accordance with gaming industry practice, the Company recognizes as gaming revenue the net wins from gaming activities, which is the difference between gaming wins and losses. Other sources of revenue include food and beverage, and gift shop sales.
INVENTORIES
The Company’s inventories of food, beverages, and gift shop merchandise, are stated at the lower of replacement cost, which approximates first-in, first-out cost, or market value.
ADVERTISING
The Company expenses advertising costs as incurred.
7
PROPERTY AND EQUIPMENT
Property and equipment, with the exception of land, is depreciated over the estimated useful life of each asset. Annual depreciation is computed on either straight-line or accelerated methods for financial reporting. The estimated economic useful lives for each property classification are as follows:
Building and improvements | | 39.5 | years |
Barge, land, and site improvements | | 10 to 30 | years |
Equipment, furniture, and fixtures | | 3 to 10 | years |
Renewal, improvements and betterments are capitalized. Ordinary maintenance and repairs are charged to expenses as incurred.
LOAN FEES
Loan fees represent direct costs related to obtaining long-term financing and are amortized over the lives of the related loans.
INCOME TAXES
The Company and its members have elected to be treated as a partnership for income tax purposes. Accordingly, any tax liability or benefit generated by the Company is passed through to its members, with no tax effect to the Company.
This information is an integral part of the accompanying financial statements.
8
MARK TWAIN CASINO, L.L.C.
December 31, 2004, 2003 and 2002
NOTE 1 - RESTRICTED CASH AND CASH EQUIVALENTS
The Company is required, under Missouri Gaming Commission (M.G.C.) regulations, to maintain a balance of cash or short-term investments in amounts at least equal to the Company’s previous month’s average daily payout to patrons, multiplied by seven. Additionally, certain depository accounts are required for gaming and admission tax remittal. As of December 31, 2004 and 2003, the minimum cash balance requirements were $1,132,896 and $1,132,880, respectively, and are included in restricted cash and cash equivalents in the accompanying balance sheets.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment balances are as follows:
| | 2004 | | 2003 | |
Land | | $ | 839,227 | | $ | 849,227 | |
Land improvements | | 995,917 | | 993,417 | |
Building and improvements | | 6,018,922 | | 6,018,922 | |
Barge and site improvements | | 1,495,224 | | 1,495,224 | |
Equipment, furniture and fixtures | | 7,132,398 | | 6,533,813 | |
| | 16,481,688 | | 15,890,603 | |
Less accumulated depreciation | | 4,475,944 | | 3,304,035 | |
Property and equipment, net | | $ | 12,005,744 | | $ | 12,586,568 | |
| | | | | | | | |
NOTE 3 - PROMOTIONAL ALLOWANCES
Revenues from casino operations include the retail value of food and beverage, goods and services provided to customers on a complimentary basis. Such amounts are then deducted as promotional allowances. The estimated cost of providing these promotional allowances is as follows:
| | 2004 | | 2003 | | 2002 | |
Food and beverage | | $ | 257,659 | | $ | 247,090 | | $ | 225,821 | |
Other | | 44,013 | | 32,341 | | 37,383 | |
Total | | $ | 301,672 | | $ | 279,431 | | $ | 263,204 | |
| | | | | | | | | | | |
9
NOTE 4 - RELATED PARTIES
The Company entered into an agreement with Grace Entertainment, Inc. to provide assistance in obtaining financing, and to provide management and business expertise to the Company for a period of five years after the commencement date of operations. Grace Entertainment, Inc. receives as a management fee 2 ½% of the adjusted gross receipts resulting from operations of the enterprise. Management fees for the years ended December 31, 2004, 2003 and 2002 totaled $698,475, $659,638 and $651,167, respectively. In addition to the management fee, Grace Entertainment, Inc. also receives reimbursement for ordinary and necessary business expenses. Grace Entertainment is affiliated with the Company through common ownership.
Included in accounts payable are amounts owed to related parties as of December 31, 2004 and 2003 of $117,170, and $109,246, respectively.
During 2003 and 2002, used slot machines were sold for $59,855 and $44,009, respectively, to St. Jo Frontier Casino, which is affiliated with the Company through common ownership.
During 2003, used slot machines were sold for $68,986 to Southern Iowa Gaming Company, which is affiliated with the Company through common ownership.
Interest expense totaled $-0-, $37,577 and $357,406 as of December 31, 2004, 2003 and 2002, respectively, for the related party debt detailed in Note 5.
During 2003, the Company reimbursed St. Jo Frontier Casino, which is affiliated with the Company through common ownership, $18,268 for costs associated with the Company’s opening.
The Company entered into individual $1,000,000 unsecured related party debt agreements with Sauvage Gas Company and Cardinal Gaming Co. These agreements were amended in July 2000 to increase the debt up to $1,750,000 per party and amended in 2001 up to $1,781,245 per party. Both notes required interest at 12% payable on December 31 of each year. The entire outstanding principal was paid in 2003.
10
NOTE 5 - DEBT
In July 2000, the Company entered into a $14,000,000 construction loan agreement with The Marshall Group, Inc. Loan fees totaling $552,500 were recorded in connection with the loan as an advance on the note payable. Service fees are expensed as incurred and totaled $21,304, $28,322 and $32,791 for the years ended December 31, 2004, 2003 and 2002, respectively. The note required monthly interest payments at a variable interest rate set at Wall Street Journal Prime plus 1%. The rate was recalculated and adjusted each August 1st. According to the loan agreement, payment terms were interest only from September 1, 2000 through November 1, 2001. Beginning on December 1, 2001, equal monthly payments, including interest, were required and recalculated annually based on the interest rate adjustment. The note was collateralized by the building, non-gaming equipment, a lien on all receipts and revenues of the enterprise, and the personal guarantees of the members of the Company. The note was retired during 2004.
Long-term debt at December 31, 2004 and 2003 consists of :
| | 2004 | | 2003 | |
Secured note payable to The Marshall Group | | $ | — | | $ | 10,295,620 | |
Total | | — | | 10,295,620 | |
Less current portion | | — | | 2,009,012 | |
Long-term portion | | $ | — | | $ | 8,286,608 | |
NOTE 6 - LEASE COMMITMENTS
The Company entered into a franchise and lease agreement for a river dock with the City of LaGrange, Missouri in May 1995. This agreement was amended in December 1999 to reflect the current ownership of Mark Twain Casino, L.L.C. The five year lease agreement requires $200,000 annual payments beginning at the commencement of gaming operations. The Company has the option to renew this lease for up to four additional five year terms. The Company made advance payments of $300,000 on the lease in 2001, of which $-0- was recorded in prepaid expense at December 31, 2004 and 2003. An additional $100,000 advance payment was made in 2001 that is to apply to the final year of the agreement. Subsequent to year end, the casino was sold to a third party who assumed ownership of this lease. Therefore, this prepayment is presented as a current asset within prepaid expenses on the balance sheets in 2004 and as a long-term asset within the other assets caption in 2003. Total lease expense under this lease was $200,000 for the years ended December 31, 2004, 2003 and 2002.
11
As part of the lease agreement, the Company also agreed to pay the City of LaGrange, Missouri $50,000 for the LaGrange Revitalization Organization’s NAP program. This payment was a one time event which did not bind the City to approve future contributions to the NAP program. The Company recorded this contribution as prepaid rent, and it is to be applied in the fifth year of gaming operations to the required lease payments described above. Subsequent to year end, the casino was sold to a third party who assumed ownership of this contribution. Due to the buyer assuming ownership of this payment, this contribution is classified as current in 2004 for financial presentation purposes.
The Company has agreed that, beginning with the first year of operation, if it falls short or exactly meets its projections of admission fees and state taxes that go to the City, the Company will pay a $50,000 annual beautification fee to the City for five years, payable on the first of July. If the Company exceeds its projections, each dollar in excess of projections will be credited toward the $50,000 beautification fee. At June 30, 2004, the Company exceeded the projection and the fee was not required to be paid. The Company anticipates that no fee will be necessary at June 30, 2005 and has therefore not provided any accrual for such a fee in these financial statements.
The Company leases office equipment under noncancelable operating leases expiring in various years through 2007. Lease expense related to these leases totaled $6,700 in 2004. Subsequent to year-end the Casino was sold to a third party. These leases will be assumed by the third party. The following schedule is included for informational purposes only.
Future minimum lease payments under these leases are as follows:
2005 | | $ | 9,606 | |
2006 | | 9,606 | |
2007 | | 2,388 | |
| | | |
Total | | $ | 21,600 | |
Minimum lease payments exclude rentals under renewal options which, as of December 31, 2004 and 2003 are not reasonably assured of being exercised.
The Company also leases slot machines under the terms of various month-to-month operating lease agreements. These are cancelable at the option of either party to the leases.
Total rental expense for the years ended December 31, 2004, 2003 and 2002 was $494,403, $482,375 and $704,770 respectively.
12
NOTE 7 - ADVERTISING
Advertising expense charged to operations for the years ended December 31, 2004, 2003 and 2002 totaled $1,397,612, $1,365,358 and $1,310,369, respectively.
NOTE 8 - OTHER TAXES
The Company remits daily to the M.G.C. a gaming tax representing 20% of adjusted gross receipts from gaming and an admission tax of $2 per patron per gaming session. Gaming taxes totaled $5,377,411, $5,040,742 and $4,969,536 and admission taxes totaled $2,054,628, $2,104,406 and $2,222,982, for the years ended December 31, 2004, 2003 and 2002, respectively.
NOTE 9 - PENSION PLAN
Effective January 1, 2002, the Company established a defined contribution pension plan (the Plan) that is qualified under Internal Revenue Code, Section 401(k). The Plan provides for Company contributions annually, equal to 25 percent of each eligible participant’s individual contribution of up to 6 percent of compensation. Employees may make additional contributions to the Plan up to a specified limit. The funds of the Plan are deposited with a trustee and invested at the employee’s option in one or more investment funds. The total pension expense was $12,341, $12,384 and $5,172 for 2004, 2003 and 2002, respectively.
NOTE 10 - CONTINGENCIES
The Company is a defendant in a complaint filed in the United States District Court, Eastern District of Missouri. The suit has no specified damages and is presently in the discovery process. Legal counsel is vigorously defending this action. It is the opinion of management, after reviewing such actions with counsel, that they should not result in material adverse consequences to the Company.
NOTE 11 - ACCRUED EXPENSES
Accrued expenses consist of the following:
| | 2004 | | 2003 | |
Accrued payroll and related costs | | $ | 293,902 | | $ | 258,024 | |
State gaming taxes | | 89,685 | | 185,405 | |
Player’s club liability | | 413,725 | | 328,545 | |
Other accrued liabilities | | 252,212 | | 267,724 | |
Total | | $ | 1,049,524 | | $ | 1,039,698 | |
13
NOTE 12 - RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made to conform to the presentation adopted for 2004. These reclassifications had no effect on previously reported losses or changes in members’ equity.
NOTE 13 - SUBSEQUENT EVENTS
On July 20, 2004, the Company entered into a definitive agreement with Herbst Gaming, Inc. to sell the assets of the Company for a cash sales price of approximately $56,479,000. These assets include the Mark Twain Casino, located in La Grange, Missouri, which contains 506 slot machines and 17 table games. This transaction was closed on February 1, 2005.
This information is an integral part of the accompanying financial statements.
14
