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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 25, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File Number: 0-20538
ISLE OF CAPRI CASINOS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1659606
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
711 WASHINGTON LOOP, SECOND FLOOR, BILOXI, 39530
MISSISSIPPI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(228) 436-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (a) 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 that the
registrant was required to file such reports), and (b) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Shares of Common Stock outstanding at December 7, 1998: 23,568,562
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ISLE OF CAPRI CASINOS, INC.
FORM 10-Q
INDEX
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, October 25, 1998 (unaudited)
and April 26, 1998....................................... 1-2
Consolidated Statements of Operations for the Three Months
and Six Months Ended October 25, 1998 and October 26,
1997 (unaudited)......................................... 3
Consolidated Statement of Stockholders' Equity
(unaudited).............................................. 4
Consolidated Statements of Cash Flows for the Six Months
Ended October 25, 1998 and October 26, 1997 (unaudited).. 5
Notes to Unaudited Consolidated Financial Statements...... 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 11-18
Part II--OTHER INFORMATION
Item 1. Legal Proceedings......................................... 19
Item 2. Changes in Securities..................................... 20
Item 3. Defaults Upon Senior Securities........................... 20
Item 4. Submission of Matters to a Vote of Security Holders....... 20
Item 5. Other Information......................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................... 20
SIGNATURES......................................................... 21
EXHIBIT LIST....................................................... 22
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 25, APRIL
1998 26, 1998
----------- --------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents............................... $ 56,524 $ 52,460
Accounts receivable..................................... 4,454 5,715
Income taxes receivable................................. -- 3,563
Deferred income taxes................................... 3,279 3,279
Prepaid expenses and other assets....................... 4,115 4,240
-------- --------
Total current assets.................................. 68,372 69,257
Property and equipment, net............................... 375,646 333,811
Other assets:
Other investments....................................... 2,177 1,709
Property held for development or sale................... 7,943 7,943
Licenses, and other intangible assets net of accumulated
amortization of $7,508 and $6,058, respectively........ 64,861 66,311
Goodwill, net of accumulated amortization of $7,343 and
$6,023, respectively................................... 59,230 60,550
Berthing, concession and leasehold rights, net of
accumulated amortization of $1,993 and $1,836,
respectively........................................... 4,275 4,432
Deferred financing costs, net of accumulated
amortization of $4,234 and $3,073, respectively........ 14,227 15,313
Restricted cash......................................... 23,889 50,341
Prepaid expenses, deposits and other.................... 5,711 6,068
-------- --------
182,313 212,667
-------- --------
Total Assets.......................................... $626,331 $615,735
======== ========
See notes to unaudited consolidated financial statements.
1
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
OCTOBER 25, APRIL
1998 26, 1998
----------- --------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt......................... $ 13,041 $ 12,453
Accounts payable--trade...................................... 16,391 14,365
Accrued liabilities:
Interest................................................... 11,443 11,771
Payroll and related........................................ 18,323 17,854
Property and other taxes................................... 12,913 10,095
Progressive jackpots and slot club awards.................. 3,506 3,505
Other...................................................... 10,839 7,912
-------- --------
Total current liabilities................................ 86,456 77,955
-------- --------
Long-term debt, net of current maturities and net of discount
of $95........................................................ 427,144 429,642
Deferred income taxes.......................................... 16,155 16,155
Minority interest.............................................. 5,825 5,852
Stockholders' equity
Preferred stock, $0.01 par value; 2,050,000 shares
authorized; none issued..................................... -- --
Common stock, $0.01 par value; 45,000,000 shares authorized;
shares issued and outstanding: 23,568,562 and 23,345,287,
respectively................................................ 236 236
Class B common stock, $0.01 par value; 3,000,000 shares
authorized; none issued..................................... -- --
Additional paid-in capital................................... 63,146 63,146
Retained earnings............................................ 27,369 22,749
-------- --------
Total stockholders' equity............................... 90,751 86,131
-------- --------
Total Liabilities and Stockholders' Equity............... $626,331 $615,735
======== ========
See notes to unaudited consolidated financial statements.
2
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
OCTOBER 25, OCTOBER 26, OCTOBER 25, OCTOBER 26,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenue
Casino....................... $95,162 $95,821 $195,851 $194,968
Rooms........................ 2,732 1,695 5,821 4,773
Pari-mutuel commissions and
fees........................ 3,612 3,839 7,972 8,326
Food, beverage and other..... 5,420 4,918 11,361 9,943
------- ------- -------- --------
Total revenue.............. 106,926 106,273 221,005 218,010
Operating expenses:
Casino....................... 17,945 19,040 36,192 37,861
Rooms........................ 986 552 1,995 1,681
Gaming taxes................. 19,653 19,196 40,376 38,894
Pari-mutuel.................. 2,787 2,651 6,110 6,415
Food, beverage and other..... 3,309 3,981 7,167 7,455
Marine and facilities........ 6,505 6,081 13,350 11,922
Marketing and
administrative.............. 32,582 32,697 67,074 67,401
Depreciation and
amortization................ 8,475 8,143 17,132 16,422
------- ------- -------- --------
Total operating expenses... 92,242 92,341 189,396 188,051
------- ------- -------- --------
Operating income .............. 14,684 13,932 31,609 29,959
Interest expense, net of
capitalized interest of
$2,500, $578, $3,841 and $672,
respectively.................. (11,409) (13,070) (24,025) (24,634)
Interest income................ 631 1,067 1,639 1,518
Minority interest.............. 205 321 527 321
Equity in loss of
unconsolidated joint venture.. (362) -- (661) --
------- ------- -------- --------
Income before taxes............ 3,749 2,250 9,089 7,164
Income tax expense............. 1,821 1,173 4,469 3,139
------- ------- -------- --------
Net income..................... $ 1,928 $ 1,077 $ 4,620 $ 4,025
======= ======= ======== ========
Net income per share--
basic/diluted................. $ 0.08 $ 0.05 $ 0.20 $ 0.17
======= ======= ======== ========
Weighted average common
shares--diluted............... 23,577 23,397 23,622 23,378
See notes to unaudited consolidated financial statements.
3
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
ADDITIONAL TOTAL
SHARES OF PAID-IN RETAINED STOCKHOLDERS'
COMMON STOCK COMMON STOCK CAPITAL EARNINGS EQUITY
------------ ------------ ---------- -------- -------------
Balance, April 26,
1998................... 23,569 $236 $63,146 $22,749 $86,131
Net Income.............. -- -- -- 4,620 4,620
------ ---- ------- ------- -------
Balance, October 25,
1998................... 23,569 $236 $63,146 $27,369 $90,751
====== ==== ======= ======= =======
See notes to unaudited consolidated financial statements.
4
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
OCTOBER 25, 1998 OCTOBER 26, 1997
---------------- ----------------
Cash flows from operating activities
Net income.................................. $ 4,620 $ 4,025
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 17,132 16,422
Amortization of bond discount and deferred
financing costs........................... 1,162 856
Equity in loss of unconsolidated joint ven-
ture...................................... 661 --
Loss on disposal of assets................. 31 --
Changes in current assets and liabilities:
Accounts receivable....................... (414) (131)
Income tax receivable..................... 5,238 6,315
Prepaid expenses and other................ (71) (1,640)
Accounts payable and accrued liabilities.. 7,508 5,098
------- --------
Net cash provided by operating activi-
ties.................................... 35,867 30,945
Cash flows from investing activities
Purchases of property and equipment......... (53,827) (31,969)
Net cash paid for acquisitions.............. 500 (679)
Proceeds from disposals of property and
equipment.................................. 6 83
Minority interest........................... (527) (321)
Decrease/(Increase) in restricted cash...... 27,249 (67,337)
Other....................................... (2,628) (354)
------- --------
Net cash used in investing activities.... (29,227) (100,577)
Cash flows from financing activities
Proceeds from debt.......................... 3,921 72,000
Principal payments on debt and cash paid for
refinancing................................ (6,442) (8,063)
Deferred financing costs.................... (55) (1,797)
Proceeds from sale of stock & options....... -- 8
------- --------
Net cash provided from (used in) financ-
ing activities.......................... (2,576) 62,148
Net increase (decrease) in cash and cash
equivalents................................ 4,064 (7,484)
Cash and cash equivalents at beginning of
period..................................... 52,460 51,846
------- --------
Cash and cash equivalents at end of period.. 56,524 44,362
======= ========
Supplemental disclosures of cash flow infor-
mation
Cash payments for:
Interest................................... 24,353 23,103
Income taxes, net of refunds received...... 2,233 (2,395)
Supplemental schedule of noncash investing
and financing activities:
Notes Payable and debt issued for:
Land....................................... -- 396
Property and equipment..................... -- 30
Insurance premiums......................... -- 420
Capital Contributions:
Land, net of mortgage of $396,000.......... -- 7,604
Financing fees............................. -- 137
Property and equipment..................... -- 180
Other:
Construction payable funded through
accounts payable.......................... 1,110 --
See notes to unaudited consolidated financial statements.
5
ISLE OF CAPRI CASINOS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Isle of Capri Casinos, Inc. (the "Company") was incorporated as a Delaware
corporation on February 14, 1990. The Company, through its subsidiaries, is
engaged in the business of developing, owning and operating riverboat,
dockside and land based casinos and related facilities. The Company has
licenses to conduct gaming operations in Biloxi and Vicksburg, Mississippi, in
Bossier City and Lake Charles, Louisiana, and Blackhawk, Colorado through its
subsidiaries.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the six-
month period ended October 25, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending April 25, 1999. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended April 26, 1998.
Other Assets
Licenses and other intangible assets--principally represent the license
value attributed to the Louisiana gaming licenses acquired through the
Company's acquisition of St. Charles Gaming Company, Inc. ("SCGC"), Grand
Palais Riverboat, Inc. ("GPRI") and Louisiana Riverboat Gaming Partnership
("LRGP"). These assets are being amortized over a twenty-five year period
using the straight-line method.
Goodwill--reflects the excess purchase price the Company paid in acquiring
the net identifiable tangible assets of SCGC, GPRI and LRGP. Goodwill is being
amortized over a twenty-five year period using the straight line method.
Restricted cash--represents cash proceeds from the 13% First Mortgage Notes
due 2004 with Contingent Interest issued by Isle of Capri Black Hawk L.L.C.
(the "First Mortgage Notes") held in trust by IBJ Schroder Bank and Trust in
New York, as trustee for Isle of Capri Black Hawk L.L.C. ("ICBH"), a majority
owned subsidiary of the Company. These funds are held in three separate
accounts (Construction Disbursement, Completion Reserve, Interest Reserve)
with usage restricted by an indenture between ICBH and the trustee, dated
August 20, 1997 in connection with issuance of the First Mortgage Notes (the
"Indenture"). Amounts in the Construction Disbursement Account as of October
25, 1998, approximately $13.6 million, will be used for the development,
construction and opening of a casino entertainment complex by ICBH in
Blackhawk, Colorado. Amounts in the Completion Reserve Account, approximately
$3.6 million, will be used in the event there are insufficient funds in the
Construction Disbursement Account to complete the casino entertainment
complex. The amounts in the Interest Reserve Account, approximately $4.5
million, will be used to pay the next interest payment on the First Mortgage
Notes which were issued pursuant to the Indenture. In addition, the Company
has other restricted cash totaling $2.2 million.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings
6
ISLE OF CAPRI CASINOS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. Earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
SIX MONTHS ENDED
-----------------
10/25/98 10/25/97
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Numerator:
Income (loss) before extraordinary item..................... $4,620 $4,025
Extraordinary loss.......................................... -- --
Net income (loss)........................................... 4,620 4,025
Numerator for basic earnings per share--income available to
common stockholders........................................ 4,620 4,025
Effect of dilutive securities............................... -- --
------ ------
Numerator for diluted earnings per share--income available
to common stockholders after assumed conversions.......... $4,620 $4,025
====== ======
Denominator:
Denominator for basic earnings per share--weighted--average
shares..................................................... 23,569 23,369
Effect of dilutive securities
Employee stock options..................................... 53 9
Warrants...................................................
Dilutive potential common shares............................ 53 9
Denominator for diluted earnings per share--adjusted
weighted--average shares and assumed conversions 23,622 23,378
Basic earnings per share
Income (loss) before extraordinary item..................... $ 0.20 $ 0.17
Extraordinary loss..........................................
Net income (loss)........................................... $ 0.20 $ 0.17
Diluted earnings per share
Income (loss) before extraordinary item..................... $ 0.20 $ 0.17
Extraordinary loss..........................................
Net income (loss)........................................... $ 0.20 $ 0.17
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current presentation.
NOTE 2. ISLE OF CAPRI BLACK HAWK L.L.C.
On April 25, 1997, a subsidiary of the Company, Casino America of Colorado,
Inc. formed ICBH, a limited liability company, with Blackhawk Gold, Ltd., a
wholly-owned subsidiary of Nevada Gold and Casino, Inc. The primary purpose of
ICBH is to develop a casino entertainment complex in Blackhawk, Colorado (the
"Isle-Black Hawk"), which is anticipated to open in late 1998 or early 1999.
The Company's interest in the net loss of ICBH for fiscal 1998 was
approximately $1.2 million, net of minority interest of $0.8 million. The net
loss is comprised solely of interest expense on the $75,000,000, 13% First
Mortgage Notes, net of interest income on the restricted cash. ICBH plans to
construct a hotel containing a minimum of 100 rooms at the site of the Isle-
Black Hawk, and the Company is assisting ICBH in its efforts to secure
financing for the development of a hotel; however, as of the date of this
filing, no definitive arrangements have been made with respect to financing
the hotel and ICBH will commence operations without a hotel.
7
ISLE OF CAPRI CASINOS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. CAPRI CRUISES L.L.C.
On April 20, 1998, the Company signed an agreement with Commodore Holdings
Limited, parent company of Commodore Cruise Line to create a joint venture
named Capri Cruises to operate cruise ships in strategic markets. As of
October 25, 1998, the Company had invested $2.8 million into this joint
venture, which is operating one cruise ship from the Port of New Orleans.
NOTE 4. LONG-TERM DEBT
On August 6, 1996, the Company issued $315,000,000 of 12 1/2% Senior Secured
Notes due 2003 (the "Senior Secured Notes"). Interest on the Senior Secured
Notes is payable semi-annually on each February 1 and August 1 through
maturity. The Senior Secured Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after August 1, 2000 at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest to the redemption date, if redeemed
during the 12-month period beginning on August 1, of the years indicated
below:
YEAR PERCENTAGE
---- ----------
2000........................................................... 106.250%
2001........................................................... 103.125%
2002 and thereafter............................................ 100.000%
The Senior Secured Notes restrict, among other things: (i) the incurrence of
additional debt, except under certain circumstances including meeting certain
pro forma coverage tests; (ii) the payment of dividends on and redemptions of
capital stock; (iii) the businesses in which the Company may engage; (iv) the
use of proceeds from the sale of assets; (v) transactions with affiliates;
(vi) the creation of liens; and (vii) sale and leaseback transactions. At
October 25, 1998, no dividends were permitted to be paid under these
restrictions.
The Company has $5,500,000 available in bank lines of credit. As of October
25, 1998, the Company had no outstanding balances under these lines of credit.
Substantially all of the Company's assets are pledged as collateral for
long-term debt. At October 25, 1998, the Company was in compliance with all
debt covenants.
On August 20, 1997, ICBH issued $75 million of 13% First Mortgage Notes due
2004 with Contingent Interest (the "ICBH First Mortgage Notes"), which is non-
recourse debt to the joint venture partners. Interest on the ICBH First
Mortgage Notes is payable semiannually on February 28 and August 31 of each
year, commencing February 28, 1998. Additionally, contingent interest is
payable on the ICBH First Mortgage Notes on each interest payment date, in an
aggregate principal amount of 5% of the Consolidated Cash Flow (as defined in
the Indenture), provided that no Contingent Interest is payable prior to
commencement of the facility's operations. The ICBH First Mortgage Notes are
redeemable at the option of ICBH, in whole or in part, at any time on or after
August 1, 2001 at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest to the redemption
date, if redeemed during the 12-month period beginning on August 31 of the
years indicated below:
YEAR PERCENTAGE
---- ----------
2001........................................................... 106.5%
2002........................................................... 103.2%
2003 and thereafter............................................ 100.0%
Beginning with the first operating year after the Isle-Black Hawk begins
gaming operations, ICBH will be required to offer to purchase, at the price of
101% of the aggregate principal amount thereof, the maximum
8
ISLE OF CAPRI CASINOS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal amount of the ICBH First Mortgage Notes that may be purchased with
50% of the Isle-Black Hawk's excess cash flow.
Substantially all of ICBH's assets are pledged as collateral for long-term
debt.
ICBH posted a letter of credit as a requirement to obtain a building permit
from the City of Black Hawk (the "City"). The letter of credit, totaling $2.1
million, can be drawn upon by the City if for any reason ICBH fails to fulfill
its obligations under its subdivision agreement with the City, which includes
making certain public improvements and constructing a hotel containing a
minimum of 100 rooms within specified time periods. The letter of credit is
secured by a deposit held in trust of $1.1 million, which was funded by the
Company, and the balance is secured by the Company's open line of credit with
the bank.
As of April 26, 1998, the Company had secured financing to fund the
development of an all-suite hotel at the Isle-Bossier City, not to exceed $19
million, of which $2.8 million had been drawn as of October 25, 1998. The
Company plans to fund the balance of the Bossier City hotel project from
existing cash flows.
On July 31, 1998, the IOC-BH secured financing from a third party in the
amount of $1.6 million to partially fund the furniture, fixtures and equipment
for the entertainment complex in Blackhawk, Colorado. The IOC-BH plans to fund
the balance of the furniture, fixtures and equipment approximately $13.0
million from the same third party.
NOTE 5. CONTINGENCIES
A subsidiary of the Company has been named, along with numerous
manufacturers, distributors and gaming operators, including many of the
country's largest gaming operators (the "Gaming Industry Defendants"), in a
consolidated class action lawsuit pending in Las Vegas, Nevada. The suit
alleges that the Gaming Industry Defendants violated the Racketeer Influenced
and Corrupt Organizations Act by engaging in a course of fraudulent and
misleading conduct intended to induce people to play their gaming machines
based upon a false belief concerning how those gaming machines actually
operate, as well as the extent to which there is actually an opportunity to
win on any given play. The suit seeks unspecified compensatory and punitive
damages. The actions are in the discovery and preliminary motion stages. The
Company is unable at this time to determine what effect, if any, the suit
would have on its financial position or results of operations. However, the
Defendants are committed to vigorously defend all claims asserted in the
consolidated action.
LRGP has challenged a statute that purportedly permits the Bossier Parish
Police Jury to levy an additional $.50 boarding fee per passenger against LRGP
beginning January 1, 1996. The Company's challenge was denied at the state
trial court level, and the Company appealed the decision. On June 26, 1998, a
Louisiana State Court of Appeals reversed the trial court's decision. On
November 6, 1998, the Louisiana Supreme Court declined to hear the Bossier
Parish Police Jury's appeal of the decision by the Court of Appeals, Second
Circuit of State of Louisiana. Bossier Parish Police Jury has until February
4, 1999 to appeal to the United States Supreme Court or the matter will be
resolved in favor of the Company. As of October 25, 1998, the Company had
recorded an accrued liability of approximately $4.2 million related to this
matter.
On June 11, 1998, a lawsuit was filed which seeks to nullify a contract to
which LRGP is a party. Pursuant to the contract, LRGP pays a fixed amount plus
a percent of revenue to various local governmental entities, including the
City of Bossier and the Bossier Parish School Board, in lieu of payment of a
boarding fee per passenger. The Company intends to vigorously defend the
action.
In February 1998, the Isle-Vicksburg was named as a defendant in an action
brought by an individual who owns property adjacent to the Big Black River in
the eastern part of Warren County and several other parties.
9
ISLE OF CAPRI CASINOS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Also named as defendants in the action are two other operators in the
Vicksburg market and one of the largest banks in the State of Mississippi. As
amended, the Complaint alleges that the defendants entered into an agreement,
the effect of which was to improperly restrain trade and hinder competition in
the gaming business by conducting a campaign in opposition to a gaming
application for a site adjacent to property owned by the Plaintiffs (the
"Proposed Project"). The Plaintiffs further allege that the Defendants
conspired for the purpose of injuring the property rights of the Plaintiffs.
The Plaintiffs seek compensatory and punitive damages in the amount of $238
million from the Defendants. The Company denies the allegations contained in
the Amended Complaint and intends to vigorously defend all claims and
allegations in the action.
On May 29, 1998, the Company was named as a defendant in an action brought
by several persons who owned property in Cripple Creek, Colorado which they
sold to a subsidiary of the Company in 1995. The Plaintiffs allege that the
Company breached its purported agreement to construct a casino facility on the
property by the end of 1995. The Company denies the allegations contained in
the Complaint, and it intends to vigorously defend all claims and allegations
in the action.
The Company is engaged in various other matters of litigation and has a
number of unresolved claims pending. While the ultimate liability with respect
to such litigation and claims cannot be determined at this time, it is the
opinion of management that such liability is not expected to be material to
the Company's consolidated financial position or results of operations.
10
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 unaudited consolidated financial statements,
including the notes thereto, included elsewhere in this report.
The following discussion includes "forward-looking statements" within the
meaning of section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. In particular,
statements concerning the effects of increased competition in the Company's
markets, the effects of regulatory and legislative matters, the Company's
plans to make capital investments at its facilities, including, without
limitation, considerations to develop a casino and hotel at the Isle-Black
Hawk in Black Hawk, Colorado and to develop hotels at the Isle-Lake Charles,
The Isle-Vicksburg, the Isle-Bossier City and the Isle-Biloxi and the
expansion of non-gaming amenities at all facilities, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations are reasonable or that they will be correct. Actual results
may vary materially from those expected. Important factors that could cause
actual results to differ with respect to the Company's planned capital
expenditures principally include a lack of available capital resources,
construction and development risks such as shortages of materials and labor
and unforeseen delays resulting from a failure to obtain necessary approvals,
the Company's limited experience in developing hotel operations, and the
failure or the inability to adequately address or anticipate the cost of
correcting problems arising from what is commonly described as the "Year 2000
problem". Other important factors that could cause the actual results to
differ materially from expectations are discussed under "Risk Factors" in the
prospectus dated August 1, 1996 relating to the issuance of the Company's
Senior Secured Notes and the prospectus dated December 22, 1997 relating to an
exchange offer with respect to the ICBH First Mortgage Notes.
GENERAL
The Company's results of operations for the three fiscal months and six
fiscal months ended October 25, 1998 and October 26, 1997 reflect the
consolidated operations of all of the Company's subsidiaries, including Isle
of Capri Casino in Biloxi, Mississippi (the "Isle-Biloxi"), Isle of Capri
Casino in Vicksburg, Mississippi (the "Isle-Vicksburg"), Isle of Capri Casino
in Bossier City, Louisiana (the "Isle-Bossier City"), Isle of Capri Casino in
Lake Charles, Louisiana (the "Isle-Lake Charles"), Pompano Park, Inc. ("PPI")
and the Isle-Black Hawk. The following discussion relates to the period for
the three fiscal months and the six fiscal months ended October 25, 1998 and
will be compared with the three month and the six month periods ending October
26, 1997.
The Company believes that its historical results may not be indicative of
future results of operations because of the substantial present and expected
future increase in gaming competition for gaming customers in each of the
Company's markets as new casinos open and as existing casinos add to or
enhance their facilities. As the markets in which the Company operates have
matured, it has become apparent to management that the Company's operating
results are affected by seasonality. Seasonality causes the operating results
for the Company's first and fourth fiscal quarters ending July and April,
respectively, to be notably better than the second and third fiscal quarters
ending October and January, respectively.
RESULTS OF OPERATIONS
Three Fiscal Months Ended October 25, 1998 Compared to the Three Fiscal
Months Ended October 26, 1997--Consolidated Company
Total revenue for the quarter ended October 25, 1998 was $106.9 million
which included $95.2 million of casino revenue, $2.7 million of rooms revenue,
$3.6 million of pari-mutuel commissions, and $5.4 million of food, beverage
and other revenue. Comparably, total revenue for the quarter ended October 26,
1997 was $106.3 million which included $95.8 million of casino revenue, $1.7
million of rooms revenue, $3.8 million of pari-mutuel commissions, and $4.9
million of food, beverage and other revenue. Casino revenue slightly decreased
11
primarily as a result of the closing of the Isle-Biloxi for one week due to
severe adverse weather conditions related to Hurricane Georges. Management
believes the negative impact on casino revenues due to this closing was
approximately $1.5 million. Room revenue and food, beverage and other revenue
have increased as a result of the increased number of hotel rooms and the
development of the Company's themed restaurant, branded Farraddays', which
opened at each of the Company's casino properties during fiscal 1998. Pari-
mutuel commissions have decreased slightly due to heavy rains associated with
Hurricane Georges, which closed the track for five live race days and three
simulcasting days. Revenue does not reflect the retail value of any
complimentaries.
Casino operating expenses for the quarter ended October 25, 1998 totaled
$17.9 million, or 19% of casino revenue versus $19.0 million, or 20% of casino
revenue for the three months ended October 26, 1997. These expenses were
primarily comprised of salaries, wages and benefits, and other operating
expenses of the casinos. Casino operating expenses have decreased primarily as
a result of continued refinement of the Company's payroll and operating cost
control programs.
Operating expenses for the quarter ended October 25, 1998 also included room
expenses of $1.0 million from the hotels at the Isle-Biloxi (the "Isle-Biloxi
Hotel"), the Isle-Bossier City (the "Isle-Bossier City Hotel") and the Isle-
Lake Charles (the "Inn at the Isle"). Comparably, operating expenses for the
three months ended October 26, 1997 included $0.6 million of room expenses
from the hotels at the Isle-Biloxi, the Isle-Bossier City and the Isle-Lake
Charles. These expenses were those directly relating to the cost of providing
hotel rooms. Other costs of the hotels are shared with the casinos and are
presented in their respective expense categories. Room expenses increased in
line with the increase in rooms revenue as a result of the addition of hotel
rooms at the Isle-Lake Charles in September, 1997.
State and local gaming taxes paid in Mississippi and Louisiana totaled $19.7
million for the quarter ended October 25, 1998 versus $19.2 million for the
three months ended October 26, 1997. The increase is consistent with the
increase in casino revenues, relative to each state's applicable gaming tax
rate.
Food, beverage and other expenses totaled $3.3 million, or 61% of food,
beverage and other revenues, for the quarter ended October 25, 1998 versus
$4.0 million, or 82% of food, beverage and other revenues, for the quarter
ended October 26, 1997. These expenses are comprised primarily of the cost of
goods sold, salaries, wages and benefits, and the operating expenses of these
departments. Food, beverage and other expenses have increased as a result of
increased revenues, while these expenses as a percentage of revenues have
decreased as a result of payroll and inventory cost control measures put into
effect by management.
Marine and facilities expenses totaled $6.5 million for the three fiscal
months ended October 25, 1998 versus $6.1 million for the quarter ended
October 26, 1997. These expenses included salaries, wages and benefits,
operating expenses of the marine crews, insurance, housekeeping and general
maintenance of the riverboats and floating pavilions. Marine and facilities
expenses have increased due to the maturity of the Company's vessels and
facilities.
Marketing and administrative expenses totaled $32.6 million, or 30% of total
revenues, for the quarter ended October 25, 1998 versus $32.7 million, or 31%
of total revenues, for the quarter ended October 26, 1997. Marketing expenses
included salaries, wages and benefits of the marketing and sales departments
as well as promotions, advertising, special events and entertainment.
Administrative expenses included administration and human resource department
expenses, rent, new development activities, professional fees and property
taxes. Marketing and administrative expenses have continued to decrease as a
result of the Company's refinement of its direct response marketing and other
expense reduction efforts.
Depreciation and amortization expense was $8.5 million for the quarter ended
October 25, 1998, and $8.1 million for the quarter ended October 26, 1997.
These expenses relate to property and equipment, berthing and concession
rights, and intangible assets. The increase in depreciation and amortization
expense is consistent with the increase in fixed assets placed into service.
12
Interest expense was $10.8 million for the quarter ended October 25, 1998,
net of capitalized interest of $2.5 million and interest income of $0.6
million, versus $12.0 million for the quarter ended October 26, 1997, net of
capitalized interest of $0.6 million and interest income of $1.1 million.
Interest expense primarily relates to indebtedness incurred in connection with
the acquisition of property, equipment, leasehold improvements and berthing
and concession rights, as well as indebtedness relating to the purchase of the
remaining interest in LRGP. Additionally, interest expense, capitalized
interest and interest income of $2.6 million, $2.1 million and $0.1 million
respectively, related to the Isle of Capri Black Hawk L.L.C. are included in
the quarter ended October 25, 1998. This compares to $1.9 million, $0.4
million and $0.7 million ended October 26, 1997 in the comparable prior year
quarter.
The Company's effective tax rate for the quarter was approximately 48.6%,
which includes the effects of non-deductible goodwill amortization.
The Company had net income of $1.9 million for the quarter ended October 25,
1998, which includes a $0.1 million charge, net of taxes, related to the
Company's share of net interest expense at the Isle of Capri Black Hawk L.L.C.
and a $0.2 million charge, net of taxes, related to the operating losses on
the Capri Cruises joint venture. The prior year comparable quarter had net
income of $1.1 million, which includes a $0.3 million charge, net of taxes,
related to the Company's share of net interest expense at the Isle of Capri
Black Hawk L.L.C.
Three Fiscal Months Ended October 25, 1998, Compared to Three Months Ended
October 26, 1997--By Casino Location
Isle-Biloxi
For the quarter ended October 25, 1998, the Isle-Biloxi had total revenue of
$22.1 million of which $18.7 million was casino revenue, compared to total
revenue of $24.0 million of which $20.5 million was casino revenue for the
quarter ended October 26, 1997. The decrease in total revenue relates to the
closing of this location for one week due to Hurricane Georges. Operating
income for the three fiscal months ended October 25, 1998 totaled $4.8 million
or 22% of total revenues compared to $4.8 million or 20% of total revenues for
the three months ended October 26, 1997. Operating income remained flat while
the operating income percentage increased, due to the Company's continued
refinement of its marketing efforts and the monitoring of operating expenses.
Isle-Vicksburg
For the quarter ended October 25, 1998, the Isle-Vicksburg had total revenue
of $12.2 million of which $11.5 million was casino revenue, compared to total
revenue of $12.0 million of which $11.5 million was casino revenue for the
quarter ended October 26, 1997. Operating income for the three fiscal months
ended October 25, 1998 totaled $2.1 million or 17% of total revenue compared
to $2.0 million or 17% of total revenues for the three months ended October
26, 1997. The slight increase in revenues and operating income is due
primarily to the Company's continuing refinement of its marketing efforts and
the monitoring of operating expenses. The flat operating results are due
primarily to increased competition from the opening of a competitor's new
hotel in the market.
Isle-Bossier City
For the quarter ended October 25, 1998, the Isle-Bossier City had total
revenue of $29.9 million of which $28.5 million was casino revenue, compared
to total revenue of $30.6 million of which $29.6 million was casino revenue
for the quarter ended October 26, 1997. The decrease in revenue relates
primarily to increased competition from the opening of a competitor's new
hotel and expanded gaming facility in the market. Operating income for the
three fiscal months ended October 25, 1998 totaled $5.8 million or 19% of
total revenue compared to $6.0 million or 20% of total revenue for the three
months ended October 26, 1997. Decreased operating
13
income margin is due primarily to increased depreciation expense related to
renovations to this location's pavilion and hotel.
Isle-Lake Charles
For the quarter ended October 25, 1998, the Isle-Lake Charles had total
revenue of $38.3 million of which $36.4 million was casino revenue, compared
to total revenue of $35.0 million of which $34.1 million was casino revenue
for the quarter ended October 26, 1997. Operating income for the three months
ended October 25, 1998 totaled $6.5 million or 17% of total revenue compared
to operating income of $5.1 million or 15% of total revenue for the three
months ended October 26, 1997. The increase in revenue and operating income
has resulted from the addition of the 241-room Inn at the Isle during
September 1997, an increased use of the casino's player database, and the
increased utilization of the Isle-Lake Charles' entertainment center.
Six Months Ended October 25, 1998 Compared to the Six Months Ended October
26, 1997--Consolidated Company
Total revenue for the six months ended October 25, 1998 was $221.0 million
which included $195.9 million of casino revenue, $5.8 million of rooms
revenue, $8.0 million of pari-mutuel commissions, and $11.4 million of food,
beverage and other revenue. Comparably, total revenue for the six months ended
October 26, 1997 was $218.0 million which included $195.0 million of casino
revenue, $4.8 million of rooms revenue, $8.3 million of pari-mutuel
commissions, and $9.9 million of food, beverage and other revenue. Casino
revenue increased primarily as a result of the addition of the 241-room Inn at
the Isle in Lake Charles, which opened in September 1997. Room revenue and
food, beverage and other revenue have increased as a result of the increased
number of hotel rooms and the development of the Company's themed restaurant,
branded Farraddays', which opened at each of the Company's casino properties
during fiscal 1998. Revenue does not reflect the retail value of any
complimentaries.
Casino operating expenses for the six months ended October 25, 1998 totaled
$36.2 million, or 18% of casino revenue versus $37.9 million, or 19% of casino
revenue for the six months ended October 26, 1997. These expenses were
primarily comprised of salaries, wages and benefits, and other operating
expenses of the casinos. Casino operating expenses have decreased primarily as
a result of continued refinement of the Company's payroll and operating cost
control programs.
Operating expenses for the six months ended October 25, 1998 also included
room expenses of $2.0 million from the hotels at the Isle-Biloxi (the "Isle-
Biloxi Hotel"), the Isle-Bossier City (the "Isle-Bossier City Hotel") and the
Isle-Lake Charles (the "Inn at the Isle"). Comparably, operating expenses for
the six months ended October 26, 1997 included $1.7 million of room expenses
from the hotels at the Isle-Biloxi, the Isle-Bossier City and the Isle-Lake
Charles. These expenses were those directly relating to the cost of providing
hotel rooms. Other costs of the hotels are shared with the casinos and are
presented in their respective expense categories. Room expenses increased in
line with the increase in rooms revenue as a result of the increased number of
rooms at the Isle Lake-Charles in September, 1997.
State and local gaming taxes paid in Mississippi and Louisiana totaled $40.4
million for the six months ended October 25, 1998 versus $38.9 million for the
six months ended October 26, 1997. The increase is consistent with the
increase in casino revenues, relative to each state's applicable gaming tax
rate.
Food, beverage and other expenses totaled $7.2 million, or 63% of food,
beverage and other revenues, for the six months ended October 25, 1998 versus
$7.5 million, or 76% of food, beverage and other revenues, for the six months
ended October 26, 1997. These expenses are comprised primarily of the cost of
goods sold, salaries, wages and benefits, and the operating expenses of these
departments. Food, beverage and other expenses have decreased as a result of
the Company's expense reduction efforts.
14
Marine and facilities expenses totaled $13.4 million for the six months
ended October 25, 1998 versus $11.9 million for the six months ended October
26, 1997. These expenses included salaries, wages and benefits, operating
expenses of the marine crews, insurance, housekeeping and general maintenance
of the riverboats and floating pavilions. Marine and facilities expenses have
increased due to the maturity of the Company's vessels and facilities.
Marketing and administrative expenses totaled $67.1 million, or 30% of total
revenues, for the six months ended October 25, 1998 versus $67.4 million, or
31% of total revenues, for the six months ended October 26, 1997. Marketing
expenses included salaries, wages and benefits of the marketing and sales
departments as well as promotions, advertising, special events and
entertainment. Administrative expenses included administration and human
resource department expenses, rent, new development activities, professional
fees and property taxes. Marketing and administrative expenses have decreased
as a result of the Company's refinement of its direct response marketing and
other expense reduction efforts.
Depreciation and amortization expense was $17.1 million for the six months
ended October 25, 1998, and $16.4 million for the six months ended October 26,
1997. These expenses relate to property and equipment, berthing and concession
rights, and intangible assets. The increase in depreciation and amortization
expense is consistent with the increase in fixed assets placed into service.
Interest expense was $22.4 million for the six months ended October 25,
1998, net of capitalized interest of $3.8 million and interest income of $1.6
million, versus $23.1 million for the six months ended October 26, 1997, net
of capitalized interest of $0.7 million and interest income of $1.5 million.
Interest expense primarily relates to indebtedness incurred in connection with
the acquisition of property, equipment, leasehold improvements and berthing
and concession rights, as well as indebtedness relating to the purchase of the
remaining interest in LRGP. Additionally, interest expense, capitalized
interest and interest income of $5.0 million, $3.2 million and $0.5 million
respectively, related to the Isle of Capri Black Hawk L.L.C. are included in
the six months ended October 25, 1998. This compares to $1.9 million, $0.4
million and $0.7 million respectively, in the comparable prior year six-month
period.
The Company's effective tax rate for the six-month period was approximately
49.2%, which includes the effects of non-deductible goodwill amortization.
The Company had net income of $4.6 million for the six months ended October
25, 1998, which includes a $0.3 million charge, net of taxes, related to the
Company's share of net interest expense at the Isle of Capri Black Hawk L.L.C.
and a $0.3 million charge, net of taxes, related to startup and operating
losses on the Capri Cruises joint venture. The prior year comparable six
months had net income of $4.0 million, which includes a $0.3 million charge,
net of taxes, related to the Company's share of net interest expense at the
Isle of Capri Black Hawk L.L.C.
Six Months Ended October 25, 1998, Compared to Six Months Ended October 26,
1997--By Casino Location
Isle-Biloxi
For the six months ended October 25, 1998, the Isle-Biloxi had total revenue
of $46.6 million of which $38.9 million was casino revenue, compared to total
revenue of $47.5 million of which $40.3 million was casino revenue for the six
months ended October 26, 1997. The decrease in total revenue relates to the
closing of the property during the second quarter due to Hurricane Georges.
Operating income for the six months ended October 25, 1998 totaled $9.6
million or 21% of total revenues compared to $8.9 million or 19% of total
revenues for the six months ended October 26, 1997. Increased operating income
margin is due primarily to decreased depreciation expense, as a result of
certain assets becoming fully depreciated.
15
Isle-Vicksburg
For the six months ended October 25, 1998, the Isle-Vicksburg had total
revenue of $25.3 million of which $24.0 million was casino revenue, compared
to total revenue of $25.4 million of which $24.3 million was casino revenue
for the six months ended October 26, 1997. Operating income for the six months
ended October 25, 1998 totaled $4.9 million or 19% of total revenue compared
to $4.9 million or 19% of total revenues for the six months ended October 26,
1997. The flat operating results are due primarily to increased competition
from the opening of a competitor's new hotel in the market.
Isle-Bossier City
For the six months ended October 25, 1998, the Isle-Bossier City had total
revenue of $61.7 million of which $58.8 million was casino revenue, compared
to total revenue of $65.0 million of which $61.6 million was casino revenue
for the six months ended October 26, 1997. The decrease in revenue relates
primarily to increased competition from the opening of a competitor's new
hotel and expanded gaming facility in the market. Operating income for the six
months ended October 25, 1998 totaled $12.6 million or 20% of total revenue
compared to $12.6 million or 19% of total revenue for the six months ended
October 26, 1997. The constant operating income is due primarily to the
Company's ability to manage operating expenses to revenues.
Isle-Lake Charles
For the six months ended October 25, 1998, the Isle-Lake Charles had total
revenue of $77.8 million of which $73.9 million was casino revenue, compared
to total revenue of $70.4 million of which $68.6 million was casino revenue
for the six months ended October 26, 1997. Operating income for the six months
ended October 25, 1998 totaled $13.3 million or 17% of total revenue compared
to operating income of $11.2 million or 16% of total revenue for the six
months ended October 26, 1997. The increase in revenue and operating income
has resulted from the addition of the 241-room Inn at the Isle, increased use
of the casino's player database, and the increased utilization of the Isle-
Lake Charles' entertainment center.
Liquidity and Capital Resources
At October 25, 1998, the Company had cash and cash equivalents of $56.5
million compared to $44.4 million at October 26, 1997. The increase in cash is
primarily a result of increased cash flows from operating activities. During
the six-month period ended October 25, 1998, the Company's operating
activities provided $37.0 million of cash compared to $30.9 million of cash
used in operating activities in the first six months of fiscal 1997.
The Company invested $53.8 million in property and equipment in the first
six months of fiscal 1999, primarily for the development of the Isle-Black
Hawk, which is currently under construction and scheduled to open in late 1998
or early 1999. Additionally, the Company has also incurred capital
expenditures related to the construction of a 305-room all suite hotel at the
Isle-Bossier City and a 124-room hotel at the Isle-Vicksburg, which are
expected to open in the spring of 1999.
On August 20, 1997, Isle of Capri Black Hawk L.L.C., a joint venture of
which the Company owns 57%, issued $75 million of 13% First Mortgage Notes due
2004 with Contingent Interest, which is non-recourse debt to the Company.
Interest is payable semiannually on each February 28 and August 31, commencing
February 28, 1998. Additionally, contingent interest is payable on the First
Mortgage Notes on each interest payment date, in an aggregate principal amount
equal to 5% of the Company's Consolidated Cash Flow (as defined in the
Indenture), provided that no Contingent Interest is payable prior to
commencement of operations and may be deferred under certain circumstances.
The net proceeds of the issuance are being used to fund the development of the
Isle of Capri casino complex in Black Hawk, Colorado. Interest payments due on
February 28, 1998 and August 31, 1998 have been made and an interest payment
due February 28, 1999 has been placed in escrow at the discounted amount.
Additionally, the Company has provided a completion capital commitment of up
to $5.0
16
million, which is required to be paid if the facility has not commenced
operations by April 1, 1999. It is not expected that this commitment will be
drawn upon.
On April 20, 1998, the Company signed an agreement with Commodore Holdings
Limited, parent company of Commodore Cruise Line to create a joint venture to
be named Capri Cruises that will operate cruise ships in strategic markets. As
of October 25, 1998, the Company had invested $2.8 million into this joint
venture which is operating one cruise ship from the Port of New Orleans.
The Company anticipates that its principal near-term capital requirements
will relate to the completion of a 305-room hotel at the Isle-Bossier City, a
124-room hotel at the Isle-Vicksburg, and the completion of the Isle-Black
Hawk. The Company also anticipates that capital improvements approximating
$9.2 million will be made during fiscal 1999 to maintain its existing
facilities and remain competitive in its markets. Additionally, ICBH plans to
construct a hotel containing a minimum of 100 rooms in conjunction with the
Isle-Black Hawk, and the Company is assisting ICBH in its efforts to secure
financing for the development of the hotel, however, as of the date of this
filing, no definitive arrangements have been made with respect to financing
construction of the hotel.
An important component of the Company's operating strategy is to develop,
open and operate, either directly, through a hotel joint venture or otherwise,
hotel facilities at its gaming facilities in order to attract additional
gaming patrons and encourage longer visits to and a greater level of play at
the Company's casinos. The Company has secured financing, not to exceed $19
million (of which $2.8 million has been drawn as of October 25, 1998), for and
is currently constructing a 305-room all suite hotel, at an anticipated cost
of $42.3 million, at the Isle-Bossier City. Construction of this hotel
facility began on January 29, 1998. Additionally, the Company began
construction of a 124-room hotel at the Isle-Vicksburg on April 9, 1998. The
hotel at the Isle-Vicksburg is expected to cost approximately $11.1 million,
which is expected to be funded through the Company's operating cash flows. The
Company is currently seeking financing and/or a joint venture partner or
partners, among other alternatives, for the development of additional hotels,
and is exploring other financing alternatives with respect to its existing
hotel properties. Construction on any additional hotel facilities are not
expected to begin until such financing and/or a joint venture partner or
partners are obtained.
Although the Company is not presently committed to making any significant
capital expenditures at certain of its existing properties or investment into
new gaming markets, the Company believes that, in addition to developing
hotels, enhancements to its non-gaming amenities will be important to its
operations. The Company may, in the future, also consider building a parking
garage and expanding its casino square footage and hotel capacity at the Isle-
Biloxi. In addition, the Company is considering making investments in other
gaming opportunities as well as in jurisdictions in which gaming is not
presently permitted, but in which it believes that gaming may be legalized in
the future.
The Company expects that available cash and cash from future operations, as
well as current financing arrangements, will be adequate to fund the hotel
expansion at the Isle-Bossier City and the Isle-Vicksburg, planned capital
expenditures, debt service and working capital requirements. However, no
assurance can be made that the Company will have sufficient capital resources
to make all of the expenditures described above or such capital investments
that may be necessary to remain competitive in the Company's markets. In
addition, the Indenture governing the Senior Secured Notes places certain
limits on the Company's ability to incur additional indebtedness and to make
certain investments. The Company is highly leveraged and, as a result, may be
unable to obtain debt or equity financing on terms acceptable to the Company.
As a result, limitations on the Company's capital resources could delay
certain plans with respect to capital improvements at its existing properties.
Furthermore, the Company will continue to evaluate its planned capital
expenditures at each location in light of the operating performance of the
respective facilities at such locations.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating its information
technology infrastructure for Year 2000 issues (i.e., computer applications
that use only two digits to identify a year and could produce erroneous
17
results after 1000). The evaluation included inquiries to the vendors of
various hardware and software products. Most of the Company's information
technology infrastructure are currently Year 2000 compliant, and the Company
has received assurances that it believes to be reasonable from the vendors of
material products used by the Company that their products are compliant. The
Company is currently in the process of changing to a casino player and table
system, which is Year 2000 compliant. As of this date, the Company's
assessment does not indicate that any material costs will be incurred to
modify its information technology infrastructure in order to be Year 2000
compliant, as all software needed will be provided by the respective
information technology vendor at no charge to the Company, excluding the new
player and table management system, which will be implemented at an
approximate cost of $0.4 million. The Company expects to have all software
modifications in place by mid-1999. The Company and its results of operations
and financial condition could be materially and adversely affected by a
failure of one or more of the third parties with whom it does business to
satisfactorily address and resolve any Year 2000 issues discovered in the
future on a timely basis. In addition, Year 2000 difficulties, if any,
experienced by public utilities, the banking system, the postal system or
other similar infrastructure enterprises could adversely affect the Company.
However, the Company believes that the impact of such problems on the Company
would be the same as on other businesses in the same area or areas. The
Company believes these risks range from slight financial functions, and in a
worst case scenario, extensive and costly inability to communicate with
customers and suppliers. The Company believes it can not be certain there will
not be a material effect on the Company's result of operations, liquidity or
financial condition until the Company has substantially completed the
evaluation process. Management of the Company believes it has an effective
program in place to resolve the Year 2000 issues and although all phases of
the program are not yet complete, the Company feels confident this will occur.
The Company has no contingency plan in place at this time in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in mid-1999 and determine whether such a
plan is necessary.
18
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A subsidiary of the Company has been named, along with numerous
manufacturers, distributors and gaming operators, including many of the
country's largest gaming operators (the "Gaming Industry Defendants"), in a
consolidated class action lawsuit pending in Las Vegas, Nevada. The suit
alleges that the Gaming Industry Defendants violated the Racketeer Influenced
and Corrupt Organizations Act by engaging in a course of fraudulent and
misleading conduct intended to induce people to play their gaming machines
based upon a false belief concerning how those gaming machines actually
operate, as well as the extent to which there is actually an opportunity to
win on any given play. The suit seeks unspecified compensatory and punitive
damages. The actions are in the discovery and preliminary motion stages. The
Company is unable at this time to determine what effect, if any, the suit
would have on its financial position or results of operations. However, the
Defendants are committed to vigorously defend all claims asserted in the
consolidated action.
LRGP has challenged a statute that purportedly permits the Bossier Parish
Police Jury to levy an additional $.50 boarding fee per passenger against LRGP
beginning January 1, 1996. The Company's challenge was denied at the state
trial court level, and the Company appealed the decision. On June 26, 1998, a
Louisiana State Court of Appeals reversed the trial court's decision. On
November 6, 1998, the Louisiana Supreme Court declined to hear the appeal of a
decision in which the Court of Appeals, Second Circuit of State of Louisiana
upheld the Company's challenge to a statute permitting the Bossier Parish
Police Jury to levy an additional $.50 per passenger boarding fee against its
Bossier City facility as of January 1, 1996. Bossier Parish has until February
4, 1999 to appeal to the United States Supreme Court or the matter will be
resolved in favor of the Company. As of October 25, 1998, the Company had
recorded an accrued liability of approximately $4.2 million related to this
matter.
On June 11, 1998, a lawsuit was filed which seeks to nullify a contract to
which LRGP is a party. Pursuant to the contract, LRGP pays a fixed amount plus
a percent of revenue to various local governmental entities, including the
City of Bossier and the Bossier Parish School Board, in lieu of payment of a
boarding fee per passenger. The Company intends to vigorously defend the
action.
In February 1998, the Isle-Vicksburg was named as a defendant in an action
brought by an individual who owns property adjacent to the Big Black River in
the eastern part of Warren County and several other parties. Also named as
defendants in the action are two other operators in the Vicksburg market and
one of the largest banks in the State of Mississippi. As amended, the
Complaint alleges that the defendants entered into an agreement, the effect of
which was to improperly restrain trade and hinder competition in the gaming
business by conducting a campaign in opposition to a gaming application for a
site adjacent to property owned by the Plaintiffs (the "Proposed Project").
The Plaintiffs further allege that the Defendants conspired for the purpose of
injuring the property rights of the Plaintiffs. The Plaintiffs seek
compensatory and punitive damages in the amount of $238 million from the
Defendants. The Company denies the allegations contained in the Amended
Complaint and intends to vigorously defend all claims and allegations in the
action.
On May 29, 1998, the Company was named as a defendant in an action brought
by several persons who owned property in Cripple Creek, Colorado which they
sold to a subsidiary of the Company in 1995. The Plaintiffs allege that the
Company breached its purported agreement to construct a casino facility on the
property by the end of 1995. The Company denies the allegations contained in
the Complaint, and it intends to vigorously defend all claims and allegations
in the action.
The Company is engaged in various other matters of litigation and has a
number of unresolved claims pending. While the ultimate liability with respect
to such litigation and claims cannot be determined at this time, it is the
opinion of management that such liability is not expected to be material to
the Company's consolidated financial position or results of operations.
19
ITEM 2. CHANGES IN SECURITIES--None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--
The Annual Meeting of Stockholders was held September 25, 1998 at which time
the following matters where submitted to a vote of the stockholders:
(1) To elect seven persons to the Company's Board of Directors;
(2) To approve an amendment to the Company's Certificate of Incorporation
changing the name of the Company to "Isle of Capri Casinos, Inc.";
(3) To approve an amendment to the Company's 1993 Stock Option Plan to
increase the number of shares of the Company's common stock available
for issuance thereunder by 1,150,000 shares; and
(4) To approve the selection of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending April 25, 1999.
ITEM 5. OTHER INFORMATION--None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
A list of the exhibits included as part of this Form 10-Q is set forth in the
Exhibit Index that immediately precedes such exhibits, which is incorporated
herein by reference.
B. Reports on Form 8-K
During the second quarter ended October 25, 1998, the Company filed the
following reports on Form 8-K for the following dates:
None
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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.
ISLE OF CAPRI CASINOS, INC.
Dated: December 8, 1998 By: /s/ Rexford A. Yeisley
----------------------------------
Rexford A. Yeisley
Chief Financial Officer & Treasurer
(Duly Authorized Officer and
Principal
Financial Officer and Accounting
Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
22