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 January 24, 1999
[_] 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
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(State of Incorporation) (IRS Employer Identification No.)
711 Washington Loop, Second Floor, Biloxi, Mississippi 39530
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(Address of principal executive offices) (Zip Code)
(228) 436-7000
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(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 March 3, 1999: 23,568,562
ISLE OF CAPRI CASINOS, INC.
FORM 10-Q
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, January 24, 1999
(unaudited) and April 26, 1998 1-2
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
January 24, 1999 and January 25, 1998
(unaudited) 3
Consolidated Statement of Stockholders' Equity
(unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months Ended January 24, 1999 and
January 25, 1998 (unaudited) 5
Notes to Unaudited Consolidated Financial
Statements 6-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 21-22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
EXHIBIT LIST 24
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
JANUARY 24, 1999 April 26, 1998
---------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 68,735 $ 52,460
Accounts receivable 7,177 5,715
Income taxes receivable --- 3,563
Deferred income taxes 3,279 3,279
Prepaid expenses and other assets 4,252 4,240
-------- --------
TOTAL CURRENT ASSETS 83,443 69,257
Property and equipment, net 387,093 333,811
OTHER ASSETS:
Other investments 1,762 1,709
Property held for development or sale 5,542 7,943
Licenses, and other intangible assets net of accumulated
amortization of $8,235 and $6,058, respectively 64,134 66,311
Goodwill, net of accumulated amortization of $7,993 and $6,023,
respectively 58,579 60,550
Berthing, concession and leasehold rights, net of accumulated
amortization of $2,071 and $1,836, respectively 4,198 4,432
Deferred financing costs, net of accumulated amortization of
$4,808 and $3,073, respectively 13,592 15,313
Restricted cash 12,880 50,341
Prepaid expenses, deposits and other 5,834 6,068
-------- --------
TOTAL ASSETS $637,057 $615,735
======== ========
See Notes to Unaudited Consolidated Financial Statements.
1
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
January 24, 1999 April 26, 1998
---------------- --------------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt $ 12,458 $ 12,453
Accounts payable - trade 15,219 14,365
Accrued liabilities:
Interest 23,647 11,771
Payroll and related 19,541 17,854
Property and other taxes 9,525 10,095
Progressive jackpots and slot club awards 4,041 3,505
Other 10,596 7,912
-------- --------
Total current liabilities 95,027 77,955
-------- --------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 429,924 429,642
DEFERRED INCOME TAXES 16,155 16,155
Minority interest 4,155 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;
23,568,562 shares issued and outstanding 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 28,414 22,749
-------- --------
TOTAL STOCKHOLDERS' EQUITY 91,796 86,131
-------- --------
Total Liabilities and Stockholders' Equity $637,057 $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 Nine Months Ended
------------------------------------ ------------------------------------
January 24, 1999 January 25, 1998 January 24, 1999 January 25, 1998
---------------- ---------------- ---------------- ----------------
Revenue
Casino $101,893 $ 93,052 $297,744 $288,020
Rooms 2,167 1,943 7,988 6,716
Pari-mutuel commissions and fees 5,542 6,047 13,514 14,373
Food, beverage and other 5,518 4,777 16,879 14,720
-------- -------- -------- --------
Total revenue 115,120 105,819 336,125 323,829
Operating expenses:
Casino 19,629 20,548 55,821 58,409
Rooms 798 646 2,793 2,327
Gaming taxes 20,912 19,539 61,288 58,433
Pari-mutuel 4,083 4,366 10,193 10,781
Food, beverage and other 3,262 2,285 10,429 9,740
Marine and facilities 7,227 6,558 20,577 19,650
Pre-opening 3,320 --- 3,320 ---
Valuation allowance 5,097 --- 5,097 ---
Accrued litigation settlement (reversal) (4,215) --- (4,215) ---
Marketing and administrative 34,343 31,267 101,417 97,497
Depreciation and amortization 8,762 8,391 25,894 24,813
-------- -------- -------- --------
Total operating expenses 103,218 93,600 292,614 281,650
-------- -------- -------- --------
Operating income 11,902 12,219 43,511 42,179
Interest expense, net of capitalized interest
of $2,422, $688, $6,263 and $1,360,
respectively (11,676) (13,059) (35,701) (37,693)
Interest income 710 954 2,349 2,472
Minority interest 1,670 498 2,197 819
Equity in loss of unconsolidated joint venture (479) --- (1,140) ---
-------- -------- -------- --------
Income before taxes 2,127 612 11,216 7,777
Income tax expense 1,082 352 5,551 3,491
-------- -------- -------- --------
Net income $ 1,045 $ 260 $ 5,665 $ 4,286
======== ======== ======== ========
Net income per share - basic/diluted $0.04 $0.01 $0.24 $0.18
======== ======== ======== ========
Weighted average common shares - diluted 23,684 23,523 23,663 23,427
See notes to unaudited consolidated financial statements.
3
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Total
Shares of Additional Paid-In Stockholders'
Common Stock Common Stock Capital Retained Earnings Equity
------------ ------------ ------------------- ----------------- -------------
Balance, April 26, 1998 23,569 $236 $63,146 $22,749 $86,131
Net income --- --- --- 5,665 5,665
------ ---- ------- ------- -------
Balance, January 24, 1999 23,569 $236 $63,146 $28,414 $91,796
====== ==== ======= ======= =======
See notes to unaudited consolidated financial statements.
4
ISLE OF CAPRI CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In Thousands)
Nine Months Ended
-------------------------------------
January 24, 1999 January 25, 1998
----------------- -----------------
Cash flows from operating activities
Net income $ 5,665 $ 4,286
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 25,894 24,813
Amortization of bond discount and deferred financing costs 1,736 1,332
Valuation allowance 5,097 ---
Equity in loss of unconsolidated joint venture 1,140 ---
Changes in current assets and liabilities:
Accounts receivable (4,164) (1,778)
Income tax receivable 6,265 6,315
Prepaid expenses and other 266 (1,675)
Accounts payable and accrued liabilities 17,495 11,951
-------- ---------
Net cash provided by operating activities 59,394 45,244
Cash flows from investing activities
Purchases of property and equipment (73,243) (40,228)
Net cash paid for acquisitions 500 (795)
Minority interest (2,197) (819)
Decrease (increase) in restricted cash 37,461 (67,337)
Other (2,726) 1,118
-------- ---------
Net cash used in investing activities (40,205) (108,061)
Cash flows from financing activities
Proceeds from debt 6,589 72,017
Principal payments on debt (9,496) (11,477)
Deferred financing costs (7) (2,449)
Proceeds from sale of stock and options --- 508
-------- ---------
Net cash provided by (used in) financing activities (2,914) 58,599
Net increase (decrease) in cash and cash equivalents 16,275 (4,218)
Cash and cash equivalents at beginning of period 52,460 51,846
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,735 $ 47,628
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest 28,353 24,311
Income taxes, net of refunds received 2,663 (1,721)
Supplemental schedule of noncash investing and financing activities:
Notes Payable and Debt Issued For:
Underwriting fees on first mortgage notes --- 3,000
Land --- 1,398
Capital Contributions:
Land, net of mortgage of $396,000 --- 7,504
Financing fees --- 137
Property and equipment --- 180
Other:
Property and equipment funded through accounts payable 43 3,798
Discount on note payable 95 ---
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 named Casino America, Inc. on February 14, 1990
and changed its name to Isle of Capri Casinos, Inc. on October 1,
1998. 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 and currently conducts gaming operations in Biloxi and
Vicksburg, Mississippi, in Bossier City and Lake Charles, Louisiana,
and in Black Hawk, 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 nine-month period ended
January 24, 1999 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 of which
the company owns a 57% equity interest. These funds are held in three
separate accounts (Construction Disbursement, Completion Reserve and
Interest Reserve), with usage restricted by an indenture between ICBH
and the trustee, dated August 20, 1997 in connection with the issuance
of the First Mortgage Notes (the "Indenture"). Amounts in the
Construction Disbursement Account as of January 24, 1999,
approximately $4.1 million, will be used to complete the construction
of a casino entertainment complex by ICBH in Black Hawk, Colorado
which opened on December 30, 1998. Amounts in the Completion Reserve
Account, approximately $0.9 million, will be used in the event there
are insufficient funds in the Construction Disbursement Account to
complete the casino entertainment complex. The amount in the Interest
Reserve Account, approximately $4.5 million, were subsequently used to
pay the
6
February 28, 1999 interest payment on the First Mortgage Notes. The
complex was opened for business on December 30, 1998. In addition, the
Company has other restricted cash totaling $3.4 million related to
various operating deposits.
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 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.
Nine Months Ended
----------------------------------
01/24/99 01/25/98
--------- ---------
(In thousands, except per share data)
Numerator:
Income (loss) before extraordinary item.............................. $ 5,665 $ 4,286
Extraordinary loss................................................... --- ---
--------- ---------
Net income (loss).................................................... 5,665 4,286
Numerator for basic earnings per share - income available to
common stockholders............................................... 5,665 4,286
Effect of dilutive securities --- ---
--------- ---------
Numerator for diluted earnings per share - income available to
common stockholders after assumed conversions...................... $ 5,665 $ 4,286
========= =========
Denominator:
Denominator for basic earnings per share - weighted - average shares 23,568 23,418
Effect of dilutive securities
Employee stock options.............................................. 95 9
Warrants............................................................ --- ---
Dilutive potential common shares..................................... 95 9
Denominator for diluted earnings per share - adjusted weighted -
average shares and assumed conversions............................. 23,663 23,427
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item.............................. $ 0.24 $ 0.18
Extraordinary loss................................................... --- ---
--------- ---------
Net income (loss).................................................... $ 0.24 $ 0.18
DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item.............................. $ 0.24 $ 0.18
Extraordinary loss................................................... --- ---
--------- ---------
Net income (loss).................................................... $ 0.24 $ 0.18
7
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 wholly owned 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 Black Hawk, Colorado (the "Isle-Black Hawk"),
which opened on December 30, 1998. 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 commenced operations without a hotel. The
Company has a majority ownership interest in ICBH, making it a
consolidated subsidiary of the Company. As such, the operating results
of ICBH are reflected in the consolidated operating results of the
Company.
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. Cruise operations began in early June, 1998. As of January
24, 1999, the Company had invested $2.9 million into this 50/50 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 January 24,
1999, no dividends were permitted to be paid under these restrictions.
The Company has $6,500,000 available in bank lines of credit. As of
January 24, 1999, the Company had no outstanding balances under these
lines of credit.
8
Substantially all of the Company's assets are pledged as collateral
for long-term debt. At January 24, 1999, 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 members of ICBH. 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 ICBH's Consolidated Cash Flow (as defined in
the Indenture), beginning with respect to the two fiscal quarters
ending July, 1999. 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 respect to the four fiscal quarters ending in January,
2000, ICBH will be required to offer to purchase, at the price of 101%
of the aggregate principal amount thereof, the maximum principal
amount of the ICBH First Mortgage Notes that may be purchased with 50%
of the Isle-Black Hawk's Excess Cash Flow, as defined in the
indenture.
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 a 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 $5.5 million had been drawn as of January
24, 1999. The Company plans to fund the balance in excess of $19
million of the Isle-Bossier City hotel project from existing cash
flows.
On July 31, 1998, ICBH secured financing from a third party in the
amount of $1.6 million to purchase furniture, fixtures and equipment
for the entertainment complex for the Isle-Black Hawk. The remainder
of the furniture, fixtures and equipment needed for the Isle-Black
Hawk was acquired through operating leases 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
9
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 Gaming
Industry Defendants are committed to vigorously defend all claims
asserted in the consolidated action.
LRGP challenged a statute that purported to permit 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 Louisiana State Court of Appeals.
The Bossier Parish Police Jury did not appeal to the United States
Supreme Court, with the result that the matter was finally resolved in
favor of the Company. As of January 24, 1999, the Company accordingly
reversed a recorded 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 percentage 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. Summary judgment in favor of LRGP was granted on June 4,
1998.
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, Mississippi 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 on
the Big Black River (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. In
December, 1998, the Company's motion to dismiss the complaint was
granted by the United States District Court in Denver, Colorado. The
plaintiff has appealed this decision to the Tenth Circuit Court of
Appeals. The Company intends to vigorously defend all claims and
allegations in the action.
10
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.
Note 6. Preopening Expenses
Preopening expenses represent salaries, benefits, training, marketing
and other non-capitalizable costs, which were incurred prior to and
expensed in connection with the opening of the Isle-Black Hawk.
Note 7. Valuation Allowance
In the third quarter ended January 24, 1999, the Company recorded a
valuation allowance totaling $5.1 million. The Valuation allowance
reflects the write-down of assets held for development or sale of $2.4
million related to its two original riverboat casino vessels and land
the Company was planning to develop in Cripple Creek, Colorado. During
the third quarter ended January 24, 1999, the Company entered an
agreement to sell one of its two original riverboats for less than the
recorded value. This sale had not closed as of the end of the quarter,
however, the Company has adjusted the valuation allowance related to
both riverboats to reflect the fair value, based on the agreed upon
sales price. Also, management has delayed its plans to develop a
casino on land it owns in Cripple Creek, Colorado. Accordingly,
management has established a valuation allowance on the land it owns
in Cripple Creek to reflect the fair value as the carrying value.
Additionally, the valuation allowance includes $2.7 million related to
future obligations under an operating lease related to its Cripple
Creek, Colorado project.
Note 8. Subsequent Events
In February 1999, the Company entered into an agreement with a
subsidiary of Harrah's Entertainment, Inc. to acquire the original
Harrah's casino facility in Tunica, Mississippi. The Company received
approval of the acquisition from the Mississippi Gaming Commission at
its February meeting and on March 2, 1999, completed the acquisition.
The Company plans to renovate the facility and commence gaming
operations as an Isle of Capri Casino (the "Isle-Tunica") during the
summer of 1999. The total purchase price was $9.5 million, a portion
of which is seller financed. The Company's aggregate initial cost of
purchasing, renovating and opening the Isle-Tunica, including the
purchase price, is estimated to be approximately $33.5 million.
On February 19, 1999, the Company opened a 124-room hotel at the Isle-
Vicksburg.
On March 2, 1999 the Company entered into a joint venture agreement
with Wayne Newton to develop theaters at the Isle of Capri Casino
locations. The joint venture plans to develop and operate its first
theater complex at the Isle-Tunica, which will include two theaters
with combined seating for over 2,000 people and a separate residence
for performers.
11
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,
plans to develop a hotel at the Isle-Black Hawk and to develop hotels at the
Isle-Bossier City, the Isle-Lake Charles, the Isle-Biloxi and the Isle-Tunica
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, and
the Company's limited experience in developing hotel operations. 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 nine fiscal
months ended January 24, 1999 and January 25, 1998 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 of
Capri in Black Hawk, Colorado (the "Isle-Black Hawk"). The following discussion
relates to the period for the three fiscal months and the nine fiscal months
ended January 24, 1999 and will be compared with the three fiscal month and the
nine fiscal month periods ending January 25, 1998.
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. Management believes that the Company's operating results are
affected by seasonality. Seasonality has historically caused the operating
results for the Company's first and fourth fiscal quarters ending July and
April, respectively, to be notably better than the operating results second and
third fiscal quarters ending October and January, respectively.
12
RESULTS OF OPERATIONS
Three Fiscal Months Ended January 24, 1999 Compared to the Three Fiscal Months
Ended January 25, 1998 - Consolidated Company
Total revenue for the quarter ended January 24, 1999 was $115.1 million which
included $101.9 million of casino revenue, $2.2 million of rooms revenue, $5.5
of pari-mutuel commissions, and $5.5 million of food, beverage and other
revenue. Comparably, total revenue for the quarter ended January 25, 1998 was
$105.8 million which included $93.1 million of casino revenue, $1.9 million of
rooms revenue, $6.0 million of pari-mutuel commissions and $4.8 million of
food, beverage and other revenue. Casino revenue increased primarily as a
result of the opening of the Isle-Black Hawk on December 30, 1998 and improved
market share at the Isle-Lake Charles. Room revenue and food, beverage and
other revenue have increased as a result of the increased hotel occupancy and
the development of the Company's themed restaurant, Farraddays', which opened at
each of the Company's casino properties during fiscal 1998. Pari-mutuel
commissions have decreased slightly due to increased competition for
simulcasting contracts. Revenue does not reflect the retail value of any
complimentaries.
Casino operating expenses for the quarter ended January 24, 1999 totaled $19.6
million, or 19% of casino revenue versus $20.5 million, or 22% of casino revenue
for the three months ended January 25, 1998. 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 January 24, 1999 also included room
expenses of $0.8 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 January 25, 1998 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 primarily due
to the increase in room occupancy.
State and local gaming taxes paid in Mississippi, Louisiana and Colorado totaled
$20.9 million for the quarter ended January 24, 1999 versus $19.5 million for
the three months ended January 25, 1998. The increase is consistent with the
increase in casino revenues, relative to each jurisdiction's applicable gaming
tax.
Food, beverage and other expenses totaled $3.3 million, or 59% of food, beverage
and other revenues, for the quarter ended January 24, 1999 versus $2.3 million,
or 48% of food, beverage and other revenues, for the quarter ended January 25,
1998. 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 and start up operations at the Isle-Black Hawk.
Marine and facilities expenses totaled $7.2 million for the three fiscal months
ended January 24, 1999 versus $6.6 million for the fiscal quarter ended January
25, 1998. 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 and the
inclusion of the Isle-Black Hawk.
Marketing and administrative expenses totaled $34.3 million, or 30% of total
revenues, for the quarter ended January 24, 1999 versus $31.8 million, or 30% of
total revenues, for the quarter
13
ended January 25, 1998. 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 increased as a result of increased total revenues and the addition
of the Isle-Black Hawk.
Preopening expenses of $3.3 million in the three months ended January 24, 1999
represent salaries, benefits, training, marketing and other non-capitalizable
costs, which were expensed in connection with the opening of the Isle-Black
Hawk.
The Company's third quarter results of operations include the reversal of an
accrued litigation settlement of $4.2 million related to the boarding tax
liability at the Isle-Bossier City, for which the courts have finally determined
the Company is not liable. The Company has also recorded a write-down of the
assets held for development or sale of $2.4 million related to its two original
riverboat casino vessels and land the Company was planning to develop in Cripple
Creek, Colorado. During the third quarter ended January 24, 1999, the Company
entered an agreement to sell one of its two original riverboats for less than
the recorded value. This sale had not closed as of the end of the quarter,
however, the Company has adjusted the value of both riverboats to reflect the
fair value, based on the agreed upon sales price. Also, management has delayed
its plans to develop a casino on land its owns in Cripple Creek, Colorado.
Accordingly, management has established a valuation allowance on the land it
owns in Cripple Creek to reflect the fair value as the carrying value.
Additionally, the Company wrote-off future obligations under an operating
lease of $2.7 million related to its Cripple Creek, Colorado project.
Depreciation and amortization expense was $8.8 million for the quarter ended
January 24, 1999, versus $8.4 million for the quarter ended January 25, 1998.
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, primarily
related to the commencement of operations at the Isle-Black Hawk.
Interest expense was $11.0 million for the quarter ended January 24, 1999, net
of capitalized interest of $2.4 million and interest income of $0.7 million,
versus $12.1 million for the quarter ended January 25, 1998, net of capitalized
interest of $0.7 million and interest income of $1.0 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 $2.9 million, $1.6 million and $0.2 million respectively, related to ICBH are
included in the results for the quarter ended January 24, 1999. This compares to
$2.5 million, $0.7 million and $0.6 million for the comparable prior year
quarter ended January 25, 1998.
The Company's effective tax rate for the quarter was approximately 50.9%, which
includes the effects of non-deductible goodwill amortization.
Three Fiscal Months Ended January 24, 1999, Compared to the Three Fiscal Months
Ended January 25, 1998-By Casino Location
Isle-Biloxi
For the quarter ended January 24, 1999, the Isle-Biloxi had total revenue of
$21.9 million of which $19.0 million was casino revenue, compared to total
revenue of $20.9 million of which $18.4 million was casino revenue for the
quarter ended January 25, 1998. Operating income for the three fiscal months
ended January 24, 1999 totaled $4.3 million or 20% of total revenues compared to
$2.4 million or 11% of total revenues for the three months ended January 25,
1998. Operating income and operating income percentage increased, due primarily
to the inclusion of $0.6 million of business
14
interruption claim funds collected in the current third quarter related to
Hurricane Georges, a low table hold in the prior year third quarter related to a
few players, and aggressive marketing expenditures in the prior year third
quarter.
Isle-Vicksburg
For the quarter ended January 24, 1999, the Isle-Vicksburg had total revenue of
$12.4 million of which $11.8 million was casino revenue, compared to total
revenue of $11.8 million of which $11.4 million was casino revenue for the
quarter ended January 25, 1998. Operating income for the three fiscal months
ended January 24, 1999 totaled $2.0 million or 16% of total revenue compared to
$2.5 million or 21% of total revenue for the three months ended January 25,
1998. The slight increase in revenues is due primarily to overall market
revenue growth. The decrease in operating income and operating income margin is
primarily due to increased competition from the opening of a competitor's new
hotel and the inclusion of additional maintenance expenses related to the
replacement of carpet in the facility during the current third quarter.
Isle-Bossier City
For the quarter ended January 24, 1999, the Isle-Bossier City had total revenue
of $29.4 million of which $28.2 million was casino revenue, compared to total
revenue of $29.6 million of which $28.3 million was casino revenue for the
quarter ended January 25, 1998. Revenue remained flat while the market revenues
increased, due to decreased market share relating 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
January 24, 1999 totaled $6.0 million or 20% of total revenue compared to $5.6
million or 19% of total revenue for the three months ended January 25, 1998.
Increased operating income and operating income margin is due primarily to
reduced marketing expenses.
Isle-Lake Charles
For the quarter ended January 24, 1999, the Isle-Lake Charles had total revenue
of $39.6 million of which $38.3 million was casino revenue, compared to total
revenue of $36.2 million of which $34.8 million was casino revenue for the
quarter ended January 25, 1998. Operating income for the three months ended
January 24, 1999 totaled $6.9 million or 17% of total revenue compared to
operating income of $4.7 million or 13% of total revenue for the three months
ended January 25, 1998. The increase in revenue, operating income and operating
income margin has resulted primarily from increased market share due to improved
utilization of the 241-room Inn at the Isle during September 1997, increased use
of the casino's player database, and the increased utilization of the Isle-Lake
Charles' entertainment center.
Isle-Black Hawk
For the quarter ended January 24, 1999 (Isle-Black Hawk commenced operations on
December 30, 1998), the Isle-Black Hawk had total revenue of $4.7 million of
which $4.4 million was casino revenue. Operating income for the period ended
January 24, 1999 was $0.6 million, before a preopening charge of $3.3 million
but after a gaming equipment operating lease expense of $0.3 million.
Nine Fiscal Months Ended January 24, 1999 Compared to the Nine Fiscal Months
Ended January 25, 1998 - Consolidated Company
Total revenue for the nine months ended January 24, 1999 was $336.1 million,
which included $297.7 million of casino revenue, $8.0 million of rooms revenue,
$13.5 million of pari-mutuel commissions, and $16.9 million of food, beverage
and other revenue. Comparably, total revenue for the nine months ended January
25, 1998 was $323.8 million which included $288.0 million of casino revenue,
$6.7 million of rooms revenue, $14.4 million of pari-mutuel commissions, and
$14.7 million of food, beverage and other revenue. Casino revenue increased
primarily as a result of increased revenue at the Isle-Lake Charles in
connection with the addition of the 241-room Inn at the Isle in Lake Charles,
which opened in September 1997 and the commencement of operations at the Isle-
Black Hawk on December 30, 1998. Room revenue and food, beverage and other
revenue have increased as a result of the increased number of hotel rooms
15
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 and fees have decreased slightly compared to the prior
year as a result of adverse weather conditions and increased competition for
simulcasting contracts at Pompano Park. Revenue does not reflect the retail
value of any complimentaries.
Casino operating expenses for the nine months ended January 24, 1999 totaled
$55.8 million, or 18.7% of casino revenue versus $58.4 million, or 20% of casino
revenue for the nine months ended January 25, 1998. 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 nine months ended January 24, 1999 also included room
expenses of $2.8 million from the Isle-Biloxi Hotel, the Isle-Bossier City Hotel
and the Inn at the Isle, Lake Charles. Comparably, operating expenses for the
nine months ended January 25, 1998 included $2.3 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 primarily as a result of the addition of rooms at
the Isle Lake-Charles in September, 1997.
State and local gaming taxes paid in Mississippi, Louisiana and Colorado totaled
$61.2 million for the nine months ended January 24, 1999 versus $58.4 million
for the nine months ended January 25, 1998. The increase is consistent with the
increase in casino revenues, relative to each jurisdiction's applicable gaming
tax rate.
Food, beverage and other expenses totaled $10.4 million, or 62% of food,
beverage and other revenues, for the nine months ended January 24, 1999 versus
$9.7 million, or 66% of food, beverage and other revenues, for the nine months
ended January 25, 1998. 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
the opening of the Isle-Black Hawk and were partially offset by the Company's
payroll and inventory cost reduction efforts.
Marine and facilities expenses totaled $20.6 million for the nine months ended
January 24, 1999 versus $19.7 million for the nine months ended January 25,
1998. 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 and the
opening of the Isle-Black Hawk.
Marketing and administrative expenses totaled $101.4 million, or 30% of total
revenues, for the nine months ended January 24, 1999 versus $97.5 million, or
30% of total revenues, for the nine months ended January 25, 1998. 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 increased
primarily due to the opening of the Isle-Black Hawk while these expenses as a
percentage of total revenues continue to benefit from the Company's refinement
of its direct response marketing and other expense reduction efforts.
Preopening expenses of $3.3 million for the nine months ended January 24, 1999
represent salaries, benefits, training, marketing and other non-capitalizable
costs, which were expensed in connection with the opening of the Isle-Black
Hawk, during the current year third quarter.
16
The nine months ended January 24, 1999 includes the reversal of an accrued
litigation settlement of $4.2 million related to the boarding tax liability at
the Isle-Bossier City, for which the courts have determined the Company is not
liable. The Company has also recorded a write-down of the assets held for
development or sale of $2.4 million related to its two original riverboat casino
vessels and land the Company was planning to develop in Cripple Creek, Colorado.
During the third quarter ended January 24, 1999, the Company entered an
agreement to sell one of its two original riverboats for less than the recorded
value. This sale had not closed as of the end of the quarter, however, the
Company has adjusted the valuation allowance related to both riverboats to
reflect the fair value, based on the agreed upon sales price. Also, management
has delayed its plans to develop a casino on land it owns in Cripple Creek,
Colorado. Accordingly, management has established a valuation allowance on the
land it owns in Cripple Creek to reflect the fair value as the carrying value.
Additionally, the Company wrote-off future obligations under an operating lease
of $2.7 million related to its Cripple Creek, Colorado project. These items
occurred during the third quarter of the current year.
Depreciation and amortization expense was $25.9 million for the nine months
ended January 24, 1999, and $24.8 million for the nine months ended January 25,
1998. 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,
including the assets placed into service upon the commencement of operations at
the Isle-Black Hawk.
Interest expense was $33.4 million for the nine months ended January 24, 1999,
net of capitalized interest of $6.3 million and interest income of $2.3 million,
versus $35.2 million for the nine months ended January 25, 1998, net of
capitalized interest of $1.4 million and interest income of $2.5 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 $7.9 million, $4.8 million and $0.8 million,
respectively, related to the ICBH are included in the nine months ended January
24, 1999. This compares to $4.4 million, $1.1 million and $1.3 million,
respectively, in the comparable prior year nine-month period.
The Company's effective tax rate for the nine-month period was approximately
49.5%, which includes the effects of non-deductible goodwill amortization.
Nine Fiscal Months Ended January 24, 1999, Compared to Nine Fiscal Months Ended
January 25, 1998-By Casino Location
Isle-Biloxi
For the nine months ended January 24, 1999, the Isle-Biloxi had total revenue of
$68.5 million of which $58.0 million was casino revenue, compared to total
revenue of $68.4 million of which $58.7 million was casino revenue for the nine
months ended January 25, 1998. Casino revenues and total revenues were flat
compared to the prior year due to the closing of this location for one week due
to Hurricane Georges offset by an overall increase in hotel, food and beverage
revenues. Operating income for the nine months ended January 24, 1999 totaled
$13.9 million or 20% of total revenues compared to $11.4 million or 17% of total
revenues for the nine months ended January 25, 1998. Increased operating income
margin is due primarily to reduced marketing costs, more efficient management of
payroll costs and decreased depreciation expense, as a result of certain assets
becoming fully depreciated.
Isle-Vicksburg
For the nine months ended January 24, 1999, the Isle-Vicksburg had total revenue
of $37.6 million of which $35.9 million was casino revenue, compared to total
revenue of $37.2 million of which
17
$35.7 million was casino revenue for the nine months ended January 25, 1998.
Operating income for the nine months ended January 24, 1999 totaled $6.9 million
or 18% of total revenue compared to $7.4 million or 20% of total revenues for
the nine months ended January 25, 1998. The slight decrease in operating income
and operating income margin are primarily due to increased competition from the
opening of a competitor's new hotel.
Isle-Bossier City
For the nine months ended January 24, 1999, the Isle-Bossier City had total
revenue of $91.2 million of which $87.1 million was casino revenue, compared to
total revenue of $94.5 million of which $89.9 million was casino revenue for the
nine months ended January 25, 1998. 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 nine months
ended January 24, 1999 totaled $18.6 million or 20% of total revenue compared to
$18.2 million or 19% of total revenue for the nine months ended January 25,
1998. The slight increase in operating income and operating income margin are a
result of reduced marketing costs and more efficient management of payroll
costs.
Isle-Lake Charles
For the nine months ended January 24, 1999, the Isle-Lake Charles had total
revenue of $117.4 million of which $112.2 million was casino revenue, compared
to total revenue of $106.6 million of which $103.4 million was casino revenue
for the nine months ended January 25, 1998. Operating income for the nine
months ended January 24, 1999 totaled $20.2 million or 17% of total revenue
compared to operating income of $15.9 million or 15% of total revenue for the
nine months ended January 25, 1998. The increase in revenue, operating income
and operating income margin are primarily related to increased market share
which has resulted from the addition of the 241-room Inn at the Isle, in
September 1997, increased use of the casino's player database, increased
utilization of the Isle-Lake Charles' entertainment center and lowered cost of
sales related to food and beverage.
Liquidity and Capital Resources
At January 24, 1999, the Company had cash and cash equivalents of $68.7 million
compared to $47.6 million at January 25, 1998. The increase in cash is
primarily a result of increased cash flows from operating activities including
the commencement of operations of the Isle-Black Hawk. During the nine-month
period ended January 24, 1999, the Company's operating activities provided $59.4
million of cash compared to $45.2 million of cash used in operating activities
in the first nine months of fiscal 1998.
The Company invested $73.2 million in property and equipment in the first nine
months of fiscal 1999, primarily for the development of the Isle-Black Hawk,
which was under construction as of the beginning of the fiscal year and
commenced operations on December 30, 1998. Additionally, the Company has also
incurred capital expenditures related to the construction of a 305-room all
suite hotel at the Isle-Bossier City which is expected to open in the summer of
1999 and a 124-room hotel at the Isle-Vicksburg, which opened on February 19,
1999.
On August 20, 1997, ICBH, 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 ICBH'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
18
amount. Additionally, the Company had provided a completion capital commitment
of up to $5.0 million, which was required to be paid if the facility had not
commenced operations by April 1, 1999. This commitment expired upon the
commencement of operations at the Isle-Black Hawk on December 30, 1998. No
amounts were required to be funded related to this commitment.
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. Cruise
operations began in early June 1998. As of January 24, 1999, the Company had
invested $2.9 million into this 50/50 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 and a 124-
room hotel at the Isle-Vicksburg. The Company also anticipates that capital
improvements approximating $10.0 million will be made during fiscal 1999 to
maintain its existing facilities and remain competitive in its markets. On March
2, 1999, the Company acquired an existing, but closed casino facility in Tunica,
Mississippi. The Company intends to re-open this casino facility as an Isle of
Capri Casino (the "Isle-Tunica") during 1999. Total estimated initial cost of
this development is projected to be approximately $33.5 million including the
purchase price of $9.5 million, which is expected to be funded through seller
financing, equipment financing and through the Company's operating cash flows.
Additionally, ICBH plans to construct a hotel containing up to approximately 235
rooms but in no case less than 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 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 $5.5 million has been drawn as of January 24, 1999), for and is
currently constructing a 305-room all-suite hotel, at an anticipated cost of
approximately $42.5 million, at the Isle-Bossier City. Construction of this
hotel facility began on January 29, 1998. Additionally, the Company's 124-room
hotel at the Isle-Vicksburg opened on February 19, 1999. The hotel at the Isle-
Vicksburg cost approximately $11.5 million, which has been funded through the
Company's operating cash flows. Additionally, the Company has received the final
license from the Mississippi Gaming Commission to operate a dockside casino in
Coahoma County, Mississippi and has applied for permits and approvals to develop
the 138-acre property and build a casino, hotel and a restaurant and
entertainment center. This project is expected to cost approximately $58.0
million to develop. The Company is currently in the process of arranging
financing for the Coahoma project. The Company is currently seeking financing
and/or a joint venture partner or partners, among other alternatives, for the
development of additional hotels or time share facilities at its casino
facilities, 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 in
new gaming markets, the Company believes that, in addition to developing hotels,
the development of 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 and adding hotels at the Isle-Lake Charles and the Isle-Tunica. 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 development and opening of the Isle-Tunica,
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 additional
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
19
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 results after
the year 2000). The evaluation included inquiries to the vendors of various
hardware and software products. Most of the Company's information technology
infrastructure is 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 tracking 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 tracking 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
malfunctions, and in a worst case scenario, extensive and costly inability to
communicate with customers and suppliers. The Company can not be certain there
will not be a material adverse 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.
20
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 Gaming Industry Defendants are
committed to vigorously defend all claims asserted in the consolidated
action.
LRGP challenged a statute that purported to permit 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 Louisiana State Court of
Appeals 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. The Bossier Parish
did not appeal to the United States Supreme Court, with the result that
the matter was resolved in favor of the Company. As of January 24, 1999,
the Company accordingly reversed a recorded 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 percentage 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. Summary judgment in favor of
LRGP was granted on June 4, 1998.
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, Mississippi 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 on the Big Black River (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. In December, 1998, the Company's motion
to dismiss the complaint was granted by the United States
21
District Court in Denver, Colorado. The Plaintiff has appealed this
decision to the Tenth Circuit Court of Appeals. The Company 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.
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 third quarter ended January 24, 1999, the Company filed the
following reports on Form 8-K for the following dates:
None
22
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: March 10, 1999 By: /s/ Rexford A. Yeisley
-------------- ------------------------------------------
Rexford A. Yeisley
Chief Financial Officer & Treasurer
(Duly Authorized Officer and
Principal Financial Officer
and Accounting Officer)
23
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 Lease by and among R. M. Leatherman, Jr.,
et al. and Isle of Capri-Tunica, Inc.
10.2 Asset Purchase Agreement
10.3 Amendment No. 1 to Asset Purchase
Agreement
10.4 Amendment No. 2 to Asset Purchase
Agreement
10.5 Promissory Note
27 Financial Data Schedule
24