REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Casino America, Inc.
We have audited the accompanying consolidated balance sheets of Casino
America, Inc. as of April 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Casino
America, Inc. at April 30, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
June 3, 1996
CASINO AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30
-------------------------
ASSETS 1995 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents.......................... $ 18,997,000 $ 18,585,000
Accounts receivable:
Related parties.................................. 2,409,000 3,171,000
Other............................................ 825,000 1,764,000
Income tax receivable.............................. 1,189,000 --
Deferred income taxes.............................. -- 1,001,000
Prepaid expenses and other assets.................. 1,941,000 2,858,000
------------ ------------
Total current assets........................... 25,361,000 27,379,000
Property and equipment--Net.......................... 133,485,000 129,306,000
Other assets:
Investment in and advances to joint ventures....... 20,861,000 34,281,000
Notes receivable--Related party.................... 4,700,000 4,700,000
Other investments.................................. 2,250,000 2,250,000
Property held for development or sale.............. 1,398,000 15,840,000
Restricted cash.................................... 12,171,000 --
Berthing, concession, and leasehold rights, net of
accumulated
amortization of $896,000 and $1,209,000,
respectively...................................... 5,373,000 5,060,000
Deferred financing costs, net of accumulated
amortization of $682,000 and $1,229,000,
respectively...................................... 4,089,000 4,327,000
Prepaid expenses................................... 955,000 743,000
Deposits and other................................. 1,256,000 2,588,000
------------ ------------
53,053,000 69,789,000
------------ ------------
Total assets................................... $211,899,000 $226,474,000
============ ============
See notes to consolidated financial statements.
CASINO AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------------------------------------ ------------ ------------
Current liabilities:
Current maturities of long-term debt............... $ 6,793,000 $ 8,884,000
Accounts payable--Trade............................ 8,369,000 6,169,000
Accrued liabilities:
Interest......................................... 5,631,000 5,802,000
Payroll and payroll related...................... 5,670,000 6,333,000
Property and other taxes......................... 1,207,000 6,880,000
Progressive jackpots and slot club awards........ 2,232,000 1,851,000
Deferred income taxes............................ 1,477,000 --
Other............................................ 480,000 2,392,000
------------ ------------
Total current liabilities...................... 31,859,000 38,311,000
Long-term debt, less current maturities.............. 132,064,000 130,894,000
Deferred income taxes................................ 5,961,000 6,999,000
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued........................... -- --
Common stock, $.01 par value; 45,000,000 shares
authorized; shares
issued and outstanding: 14,853,124 and 16,038,882,
respectively...................................... 149,000 160,000
Class B common stock, $.01 par value; 3,000,000
shares authorized; none issued.................... -- --
Additional paid-in capital......................... 7,168,000 13,857,000
Retained earnings.................................. 34,698,000 36,253,000
------------ ------------
Total stockholders' equity..................... 42,015,000 50,270,000
------------ ------------
Total liabilities and stockholders' equity..... $211,899,000 $226,474,000
============ ============
See notes to consolidated financial statements.
CASINO AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED APRIL 30
----------------------------------------
1994 1995 1996
------------ ------------ ------------
Revenue:
Casino............................. $140,994,000 $117,613,000 $123,936,000
Rooms.............................. -- -- 4,422,000
Management fee--Joint ventures..... -- 4,613,000 6,308,000
Pari-mutuel commissions and fees... -- -- 15,063,000
Food, beverage, and other.......... 3,639,000 5,311,000 8,234,000
------------ ------------ ------------
Total revenue.................... 144,633,000 127,537,000 157,963,000
Operating expenses:
Casino............................. 42,726,000 46,039,000 49,910,000
Rooms.............................. -- -- 2,602,000
Gaming taxes....................... 16,915,000 13,924,000 15,116,000
Pari-mutuel........................ -- -- 11,375,000
Food and beverage.................. 2,253,000 3,678,000 5,382,000
Marine and facilities.............. 7,764,000 7,199,000 10,781,000
Marketing and administrative....... 26,113,000 26,895,000 33,167,000
One-time charge.................... -- -- 11,798,000
Preopening expenses................ 3,475,000 483,000 1,311,000
Loss on disposal of equipment...... 22,000 178,000 1,217,000
Depreciation and amortization...... 5,450,000 8,945,000 12,111,000
------------ ------------ ------------
Total operating expenses......... 104,718,000 107,341,000 154,770,000
------------ ------------ ------------
Operating income..................... 39,915,000 20,196,000 3,193,000
Interest expense:
Related parties.................... (1,333,000) -- (56,000)
Other.............................. (6,909,000) (14,029,000) (15,237,000)
Interest income:
Unconsolidated joint ventures...... 1,107,000 2,961,000 747,000
Other.............................. 1,016,000 1,022,000 622,000
Equity in income (loss) of
unconsolidated joint ventures....... (2,241,000) 19,904,000 16,434,000
------------ ------------ ------------
Income before income taxes........... 31,555,000 30,054,000 5,703,000
Income taxes......................... 11,202,000 11,985,000 4,148,000
------------ ------------ ------------
Net income........................... $ 20,353,000 $ 18,069,000 $ 1,555,000
============ ============ ============
Net income per common and common
equivalent share.................... $ 1.28 $ 1.16 $ 0.10
Weighted average common and common
equivalent shares................... 15,886,000 15,604,000 15,721,000
See notes to consolidated financial statements.
CASINO AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHARES OF ADDITIONAL TOTAL
COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
---------- -------- ----------- ------------ -------------
Balance, April 30, 1993. 15,804,620 $158,000 $4,761,000 $ 10,026,000 $ 14,945,000
Exercise of stock
options.............. 102,869 1,000 301,000 -- 302,000
Purchase and
retirement of common
stock................ (1,125,000) (11,000) (489,000) (13,750,000) (14,250,000)
Issuance of warrants.. -- -- 2,300,000 -- 2,300,000
Net income............ -- -- -- 20,353,000 20,353,000
---------- -------- ----------- ------------ ------------
Balance, April 30, 1994. 14,782,489 148,000 6,873,000 16,629,000 23,650,000
Exercise of stock
options.............. 64,715 1,000 220,000 -- 221,000
Issuance of stock for
services............. 5,920 -- 75,000 -- 75,000
Net income............ -- -- -- 18,069,000 18,069,000
---------- -------- ----------- ------------ ------------
Balance, April 30, 1995. 14,853,124 149,000 7,168,000 34,698,000 42,015,000
Issuance of common
stock................ 1,020,940 10,000 5,988,000 -- 5,998,000
Exercise of stock
options.............. 145,218 1,000 566,000 -- 567,000
Issuance of stock for
compensation......... 18,100 -- 115,000 -- 115,000
Issuance of stock for
services............. 1,500 -- 20,000 -- 20,000
Net income............ -- -- -- 1,555,000 1,555,000
---------- -------- ----------- ------------ ------------
Balance, April 30, 1996. 16,038,882 $160,000 $13,857,000 $ 36,253,000 $ 50,270,000
========== ======== =========== ============ ============
See notes to consolidated financial statements.
CASINO AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 30
----------------------------------------
1994 1995 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................... $ 20,353,000 $ 18,069,000 $ 1,555,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 5,450,000 8,945,000 12,111,000
Amortization of bond discount and
deferred financing costs......... 311,000 786,000 705,000
Deferred income taxes............. 1,422,000 5,544,000 (1,440,000)
Equity in (income) loss of
unconsolidated joint ventures.... 2,241,000 (19,904,000) (16,434,000)
Write-down of assets held for
sale............................. -- -- 9,257,000
Other............................. 22,000 308,000 1,346,000
Changes in current assets and
liabilities, net of Pompano Park
acquisition:
Accounts receivable............. 68,000 (3,952,000) 179,000
Prepaid expenses and other
assets......................... 409,000 (932,000) 675,000
Accounts payable and accrued
expenses....................... 14,269,000 (321,000) 3,802,000
------------ ------------ ------------
Net cash provided by operating
activities......................... 44,545,000 8,543,000 11,756,000
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment.. (45,975,000) (46,584,000) (22,201,000)
Purchase of Pompano Park............ -- -- (7,959,000)
Increase in notes receivable and
other investments.................. -- (6,950,000) --
Proceeds from disposals of property
and equipment...................... 105,000 1,408,000 2,767,000
Advances to joint ventures.......... (33,319,000) (10,553,000) --
Repayments and distributions from
joint ventures..................... -- 43,413,000 3,014,000
(Increase) decrease in restricted
cash............................... (11,672,000) (499,000) 12,171,000
Deposits and other.................. 170,000 (986,000) (1,332,000)
------------ ------------ ------------
Net cash used in investing
activities......................... (90,691,000) (20,751,000) (13,540,000)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings............ 109,063,000 15,000,000 10,500,000
Principal payments on borrowings.... (37,397,000) (7,941,000) (14,908,000)
Deferred financing costs............ (2,045,000) (1,226,000) (785,000)
Proceeds from sale of stock and
exercise of options................ 243,000 221,000 6,565,000
Purchase and retirement of common
stock.............................. (7,000,000) -- --
------------ ------------ ------------
Net cash provided by financing
activities......................... 62,864,000 6,054,000 1,372,000
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... 16,718,000 (6,154,000) (412,000)
Cash and cash equivalents at
beginning of year.................. 8,433,000 25,151,000 18,997,000
------------ ------------ ------------
Cash and cash equivalents at end of
year............................... $ 25,151,000 $ 18,997,000 $ 18,585,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest, net of amounts
capitalized...................... $ 2,284,000 $ 13,259,000 $ 14,417,000
Income taxes--net................. 10,020,000 7,758,000 (341,000)
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Debt issued for:
Land.............................. $ 450,000 $ 2,290,000 $ --
Property and equipment............ 12,618,000 2,125,000 4,316,000
Purchase and retirement of common
stock............................ 7,250,000 -- --
Insurance premiums................ -- -- 855,000
Allocation of deferred financing
costs to unconsolidated joint
venture............................ 1,912,000 -- --
Bond discount recorded to reflect
the issuance of warrants........... 2,300,000 -- --
Underwriting discount on first
mortgage notes..................... 3,412,000 -- --
See notes to consolidated financial statements.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Casino
America, Inc. and its wholly owned subsidiaries (the Company). All material
intercompany balances and transactions have been eliminated in consolidation.
The Company's investments in its 50%-owned joint ventures, Louisiana Riverboat
Gaming Partnership (LRGP) and LRG Hotels, LLC and LRGP's 50%-owned joint
venture, St. Charles Gaming Company, Inc. (SCGC) are accounted for using the
equity method of accounting. Certain reclassifications have been made to the
prior-year financial statements to conform to the 1996 presentation.
The Company is engaged in the business of developing, owning, and operating
riverboat and dockside casinos and related facilities. The Company commenced
operations in Biloxi, Mississippi, and Vicksburg, Mississippi, on August 1,
1992 and August 9, 1993, respectively. LRGP and SCGC commenced operations in
Bossier City, Louisiana and Lake Charles, Louisiana on May 20, 1994 and July
29, 1995, respectively.
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as revenues and expenses during the reporting
period. Actual amounts when ultimately realized could differ from those
estimates.
Cash Equivalents and Concentrations of Cash
The Company considers cash and all highly liquid investments with a maturity
at the time of purchase of three months or less to be cash equivalents. Cash
and cash equivalents are placed primarily with one high-credit-quality
financial institution. At April 30, 1996, cash equivalents were invested in a
short-term certificate of deposit and an overnight repurchase agreement. The
carrying amount of cash and cash equivalents approximates fair value because
of the short maturity of these instruments.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
YEARS
-----
Leasehold improvements.............................................. 10-31
Buildings and land improvements..................................... 25
Riverboats and floating pavilions................................... 25
Furniture, fixtures, and equipment.................................. 5-10
Interest capitalized during the years ended April 30, 1994, 1995 and 1996
totaled $773,000, $1,006,000 and $1,525,000, respectively. Depreciation
expense for the years ended April 30, 1994, 1995 and 1996, totaled $5,134,000,
$8,632,000, and $11,788,000, respectively.
Debt Acquisition Costs
The costs of issuing long-term debt have been capitalized and are being
amortized using the bonds outstanding method.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended April 30, 1994, 1995 and 1996 totaled $6,373,000, $5,665,000 and
$7,085,000, respectively.
Berthing, Concession, and Leasehold Rights
Berthing, concession, and leasehold rights are recorded at cost and are
being amortized over approximately 20 years using the straight-line method.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue and Promotional Allowances
Casino revenue is the net win from gaming activities which is the difference
between gaming wins and losses. Casino revenues are net of accruals for
anticipated payouts of progressive electronic gaming device jackpots.
Revenue does not include the retail amount of food, beverage, and other
items provided gratuitously to customers, which totaled $10,169,000,
$9,987,000, and $13,797,000 for the years ended April 30, 1994, 1995 and 1996,
respectively. The estimated cost of providing such complimentary services,
which is included in casino expense, was $8,234,000, $7,960,000, and
$11,608,000 for the years ended April 30, 1994, 1995 and 1996, respectively.
Preopening Expenses
Preopening expenses, which consist principally of payroll and marketing
costs, are expensed as incurred.
Net Income per Common Share
Net income per common and common equivalent share is based on the weighted-
average number of common shares outstanding during the period plus, in periods
in which they have a dilutive effect, the effect of common shares contingently
issuable upon the exercise of warrants and stock options.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for the stock option grants.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in fiscal 1997 and, based on current circumstances, does not
believe the adoption will have a material effect on the Company's financial
statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
APRIL 30
-------------------------
1995 1996
------------ ------------
Property and equipment:
Land and land improvements................... $ 18,687,000 $ 25,485,000
Leasehold improvements....................... 5,368,000 50,130,000
Buildings and improvements................... 5,203,000 6,099,000
Riverboats and floating pavilions............ 51,020,000 33,591,000
Furniture, fixtures, and equipment........... 35,211,000 35,835,000
Construction in progress..................... 33,082,000 375,000
------------ ------------
148,571,000 151,515,000
Less: Accumulated depreciation............... 15,086,000 22,209,000
------------ ------------
$133,485,000 $129,306,000
============ ============
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
APRIL 30
-------------------------
1995 1996
------------ ------------
11 1/2% first mortgage notes, less unamortized
discount of $1,885,000 and $1,727,000,
respectively, due November 2001.................... $103,115,000 $103,273,000
Variable rate note (10.25% at April 30, 1996), due
in monthly installments of $188,000, including
interest, with the remaining principal and interest
due October 2000................................... 15,000,000 14,670,000
8% note payable, due in monthly installments of
$83,334, including interest, through July 2002..... 5,488,000 4,906,000
12% note payable, principal due in annual
installments of $1,812,500 and $3,625,000 through
November 1996...................................... 5,438,000 3,625,000
9 1/4% note payable to bank, due in monthly
installments of $172,333, including interest,
through February 1997.............................. 3,479,000 1,664,000
8% note payable due in monthly installments of
$11,365, including interest, commencing December
1995 through December 2015......................... 1,470,000 1,347,000
Variable rate note (9.25% at April 30, 1996), due in
monthly installments ranging from $11,458 to
$34,722, including interest, with the remaining
principal and interest due June 2000............... -- 4,861,000
9 1/4% note payable, due in monthly installments
ranging from $46,045 to $97,595, including
interest, through October 1999..................... -- 3,354,000
Other............................................... 4,867,000 2,078,000
------------ ------------
138,857,000 139,778,000
Less: Current maturities............................ 6,793,000 8,884,000
------------ ------------
Long-term debt...................................... $132,064,000 $130,894,000
============ ============
In November 1993, the Company issued 105,000 units, consisting of $1,000
principal amount of 11 1/2% First Mortgage Notes due 2001 (the "First Mortgage
Notes" ) and 3.263 warrants (the Warrants) to purchase 1.5 shares of common
stock per warrant at an exercise price of $16 per share. The First Mortgage
Notes and the Warrants are separately transferable. Interest on the First
Mortgage Notes is payable semiannually on each May 15 and November 15 through
maturity.
The First Mortgage Notes are redeemable at the option of the Company, in
whole or in part, at any time after November 15, 1997, at the redemption
prices set forth in the indenture, plus accrued interest. The Company is
required to redeem, at par plus accrued interest, 20% of the original
aggregate principal amount of the First Mortgage Notes in November 1999 and
November 2000.
The First Mortgage 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
April 30, 1995 and 1996, no dividends were permitted to be paid under these
restrictions.
The Company has $3,500,000 available in bank lines of credit. As of April
30, 1996, 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.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate principal payments due on a total long-term debt over the next
five years and thereafter are as follows:
Year ending April 30:
1997...................... $ 8,884,000
1998...................... 2,952,000
1999...................... 3,048,000
2000...................... 27,398,000
2001...................... 22,655,000
Thereafter................ 74,841,000
------------
$139,778,000
============
The fair value of the 11 1/2% First Mortgage Notes, estimated based on
quoted market prices, was approximately $106,265,000 and $106,773,000 as of
April 30, 1995 and 1996, respectively. The carrying value of the Company's
other short- and long-term obligations approximates fair value at April 30,
1996.
4. LEASE COMMITMENTS
The Company has an agreement with the Biloxi Port Commission which provides
the Company with certain docking rights. This agreement expires July 1999,
with eight renewal options of five years each. Annual rentals are the greater
of $500,000 or 1% of gross monthly gaming revenue, as defined. Annual rent
during each renewal term is adjusted for increases in the Consumer Price
Index, limited to 6% for each renewal period.
In addition, the Company leases certain land, buildings, and other
improvements from the City of Biloxi under a lease and concession agreement.
This agreement expires on July 1999, with options to renew for seven
additional terms of five years each. Annual rent is $500,000 plus 3% of gross
gaming revenue, as defined, in excess of $25,000,000. Annual rent during each
renewal term is adjusted for increases in the Consumer Price Index, limited to
6% for each renewal period. This agreement also allows rent credits to be
amortized over the initial term of the lease, for costs and expenses incurred
by the Company for construction of certain improvements to the leased assets.
Such rent credits, net of accumulated amortization, are included in prepaid
expenses in the consolidated balance sheet.
In April 1994, the Company entered an Addendum to the lease with the City of
Biloxi, which requires the Company to pay 4% of gross non-gaming revenues
received as defined, net of sales tax, comps and discounts. Additional rent
will be due to the City of Biloxi for the amount of any increase from and
after January 1, 2016 in the rent due to the State Institutions of Higher
Learning under a lease between the City of Biloxi and the State Institutions
of Higher Learning (the "IHL Lease") and for any increases in certain
tidelands leases between the City of Biloxi and the State of Mississippi.
In April 1994, in connection with the construction of a hotel, the Company
entered a lease for additional land. The Company first acquired the leasehold
interest of Sea Harvest, Inc., the original lessee, for consideration of
$8,000 per month for a period of ten years. The Company's lease is with the
City of Biloxi, Mississippi, for an initial term of 25 years, with options to
renew for six additional terms of 10 years each and a final option period with
a termination date commensurate with the termination date of the IHL Lease,
but in no event later than December 31, 2085. Annual rent (which includes
payments to be made pursuant to the purchase of a related leasehold interest)
is $404,000, plus 4% of gross non-gaming revenue, as defined. The annual rent
is adjusted after each five-year period based on increases in the Consumer
Price Index, limited to a 10% increase in any five-year period. The annual
rent will increase 10 years after the commencement of payments pursuant to a
termination of lease and settlement agreement to an amount equal to the sum of
annual rent had it been $500,000 annually plus adjustments thereto based on
the Consumer Price Index.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1995, in conjunction with its planned Colorado operation, the
Company entered into a lease agreement for the use of land. The lease has an
initial term of 25 years, with options to renew for seven additional terms of
10 years each. The base rent is $250,000 per year increased by $10,000 each
year until the annual rent is $300,000. After seven years, and every two years
thereafter, the annual rent is adjusted based on increases in the Consumer
Price Index, limited to a 4% increase in any two-year period.
Minimum rental obligations under all noncancelable operating leases with
terms of one year or more as of April 30, 1996, are as follows:
Year ending April 30:
1997....................... $ 2,799,000
1998....................... 2,458,000
1999....................... 2,394,000
2000....................... 1,477,000
2001....................... 895,000
Thereafter................. 14,950,000
-----------
$24,973,000
===========
Rent expense for operating leases was approximately $3,857,000, $3,085,000,
and $4,076,000 for the years ended April 30, 1994, 1995 and 1996,
respectively. Such amounts include contingent rentals of $1,619,000, $833,000,
and $1,288,000 for the years ended April 30, 1994, 1995 and 1996,
respectively.
5. RELATED PARTY TRANSACTIONS
During November 1993, in connection with two capital lease agreements with
certain related parties, the Company exercised a bargain purchase option and
purchased the equipment for approximately $17,161,000.
During the year ended April 30, 1994, the Company issued $3,000,000 of 10%
promissory notes to several directors of the Company which were repaid with
the proceeds of the First Mortgage Notes.
During the years ended April 30, 1994, 1995 and 1996, the Company incurred
construction costs of approximately $8,093,000, $3,501,000 and $2,391,000,
respectively, which were paid to related parties. As of April 30, 1996, there
were no outstanding amounts owed to related parties for construction services.
During 1995, the Company entered into a lease agreement for a tugboat with a
related party. The agreement provides for monthly rental payments that range
from $3,781 to $7,500. The Company has a purchase option on the vessel which
is exercisable at any time during the 10-year term of the lease, at a price
equal to the unamortized balance of the $450,000 original cost of the vessel
at the time of exercise of the purchase option.
During the year ended April 30, 1996, the Company repaid $1,556,000 in loans
and interest payable to the Chairman and Chief Executive Officer and a related
party.
The Company provides management services to LRGP and SCGC pursuant to
respective management agreements. Management fees for these services are based
upon a percentage of LRGP's and SCGC's revenue and operating income, as
defined in the management agreements. The revenue under the management
agreements is reflected as management fee--joint ventures in the accompanying
consolidated income statements.
The note receivable in the accompanying consolidated balance sheets bears
interest at 11 1/2% and is due from SCGC. The note is due three days after
certain debt of SCGC is repaid.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Income tax expense (benefit) consists of the following:
YEAR ENDED APRIL 30
------------------------------------
1994 1995 1996
----------- ----------- -----------
Current:
Federal........................... $ 9,548,000 $ 4,501,000 $ 3,976,000
State............................. 232,000 1,940,000 1,612,000
----------- ----------- -----------
9,780,000 6,441,000 5,588,000
Deferred:
Federal........................... 1,422,000 5,599,000 (1,561,000)
State............................. -- (55,000) 121,000
----------- ----------- -----------
1,422,000 5,544,000 (1,440,000)
----------- ----------- -----------
$11,202,000 $11,985,000 $ 4,148,000
=========== =========== ===========
A reconciliation of income tax expense to the statutory corporate federal tax
rate of 35% is as follows:
YEAR ENDED APRIL 30
----------------------------------
1994 1995 1996
----------- ----------- ----------
Statutory tax expense.................. $11,044,000 $10,519,000 $1,996,000
Effects of:
State taxes.......................... 151,000 1,225,000 1,048,000
Adjustment to prior years' taxes..... -- -- 720,000
Other--Net........................... 7,000 241,000 384,000
----------- ----------- ----------
$11,202,000 $11,985,000 $4,148,000
=========== =========== ==========
Significant components of the Company's net deferred income tax liability are
as follows:
YEAR ENDED APRIL 30
------------------------
1995 1996
----------- -----------
Deferred tax liabilities:
Property and equipment........................ $ 8,143,000 $12,866,000
LRGP.......................................... 2,399,000 940,000
Other......................................... 92,000 59,000
----------- -----------
Total deferred tax liabilities.................. 10,634,000 13,865,000
Deferred tax assets:
Dividends..................................... 920,000 680,000
Write-down of assets held for sale............ -- 3,240,000
Preopening costs.............................. 2,016,000 1,500,000
Accrued expenses.............................. 819,000 1,600,000
Alternative minimum tax credit................ -- 1,186,000
Other......................................... 361,000 341,000
----------- -----------
Total deferred tax assets....................... 4,116,000 8,547,000
Valuation allowance on deferred tax assets...... (920,000) (680,000)
----------- -----------
Net deferred tax asset.......................... 3,196,000 7,867,000
----------- -----------
Net deferred tax liability...................... $ 7,438,000 $ 5,998,000
=========== ===========
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At April 30, 1996, the Company's alternative minimum tax credit can be
carried forward indefinitely to reduce future regular tax liabilities.
7. COMMON STOCK
Under the Company's 1992 and 1993 Stock Option Plans, as amended, a maximum
of 958,750 and 875,000 options, respectively, may be granted to directors,
officers, and employees. The plans provide for the issuance of incentive stock
options and nonqualified options which have a maximum term of 10 years and
are, generally, exercisable in yearly installments of 25%, commencing one year
after the date of grant.
Stock options outstanding are as follows:
EXERCISE
OPTIONS PRICE
--------- -----------
Outstanding options at April 30, 1995............. 1,327,599 $ .89-18.00
Options granted................................... 493,375 5.69- 6.25
Options exercised................................. (145,218) .89-13.33
Options canceled.................................. (157,568) .89-17.75
--------- -----------
Outstanding options at April 30, 1996............. 1,518,188 $ .89-18.00
========= ===========
At April 30, 1996, 543,251 options are exercisable at prices ranging from
$.89 to $18.00.
In addition, the Company has the following outstanding warrants:
NUMBER OF
---------------- EXERCISE
DATE ISSUED EXPIRATION DATE WARRANTS SHARES PRICE
- ----------- ----------------- -------- ------- --------
February 1993....................... October 31, 1997 900,000 900,000 $ 5.33
November 1993....................... November 15, 1996 342,615 513,923 16.00
June 1995........................... June 9, 2001 1 416,667 12.00
On March 11, 1996, the Company sold an aggregate of 1,020,940 shares of its
common stock at a price of $5.875 per share to the Chairman and Chief
Executive Officer of the Company and three members of his family. On March 1,
1996, when the Board adopted resolutions authorizing the Company's officers to
consummate the sale of these shares, the last reported sales price on NASDAQ
was $5.75 per share. Proceeds from the sale totaled $5,998,000.
The Company's board of directors has authorized the offering (the
"Offering"), on a pro rata basis, of rights to purchase shares of the
Company's common stock at a price of $5.875 per share at a ratio of
approximately one share for every four shares owned to its shareholders of
record on March 15, 1996. The primary purpose of the Offering is to ensure
that all shareholders have the same opportunity to purchase shares of the
Company's common stock as has been afforded to the Chairman and Chief
Executive Officer of the Company and his family.
8. ACQUISITION OF POMPANO PARK
On June 30, 1995, the Company acquired 100% of Pompano Park ("Pompano
Park"), a harness racing track located in Pompano, Florida, for approximately
$8,000,000. The acquisition was accounted for as a purchase, and the results
of operations of Pompano Park have been included in the consolidated income
statement from the date of acquisition. Pro forma operating results giving
effect to the Pompano Park acquisition have not been provided because the pro
forma effect of the acquisition was not material to the operating results of
the Company. If casino gaming is legally permitted in Florida at the Pompano
Park site by June 30, 2001, the Company is required to pay additional
consideration to the seller amounting to $25,000,000 plus 5% of net gaming
win, as defined. The probability of the Company paying such additional
consideration is remote; however, if such payments are made in the future,
they would be accounted for as additional purchase price and allocated to
goodwill. Such goodwill will be amortized over a period to be determined at
date of payment not to exceed 40 years.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. ONE-TIME CHARGE
During January 1996, the Company recorded an $11,798,000 pretax one-time
charge. The components of the one-time charge include $9,257,000 related to
the write-down of two riverboats, a barge and certain gaming equipment all of
which were reclassified during the quarter as being held for sale, $1,991,000
related to costs associated with the recent change in executive management and
$550,000 related to costs associated with certain abandoned projects. The
write-down relates to two riverboats which are currently not being used in
operations and have been placed for sale. Each riverboat was written down to a
carrying value of approximately $5,000,000 based upon a recent purchase/lease
option agreement on one riverboat and a recent oral purchase offer received by
the Company. The amount of such offer and purchase/lease option range from
$5,000,000 to $6,000,000. The Company currently does not expect to take
further write-downs relating to these riverboats.
10. INVESTMENT IN LRGP
Summarized results of operations of LRGP are as follows:
YEAR ENDED APRIL 30
--------------------------------------
1994 1995 1996
----------- ------------ ------------
Total revenue..................... $ -- $147,012,000 $150,846,000
Operating income (loss)........... (3,625,000) 44,097,000 38,381,000
Net income (loss)................. (3,775,000) 40,162,000 34,453,000
Summarized balance sheet information for LRGP is as follows:
APRIL 30
------------------------
1995 1996
----------- ------------
Current assets................................... $ 6,549,000 $ 6,950,000
Property and equipment, net...................... 52,727,000 49,204,000
Investment in and advances to affiliates......... 4,289,000 67,832,000
Other assets..................................... 507,000 335,000
----------- ------------
Total assets................................. $64,072,000 $124,321,000
=========== ============
Current liabilities:
Note payable to the Company.................... $ 2,300,000 $ --
Other.......................................... 17,130,000 27,834,000
Long-term debt, less current maturities.......... 8,514,000 27,500,000
Partners' capital................................ 36,128,000 68,987,000
----------- ------------
Total liabilities and partners' capital...... $64,072,000 $124,321,000
=========== ============
At April 30, 1996, the Company's retained earnings includes approximately
$20,627,000 of undistributed earnings of LRGP. Certain debt covenants restrict
LRGP from making dividend payments to the Company.
On June 9, 1995, LRGP acquired a 50% interest in SCGC, which operates a
riverboat casino in Lake Charles, Louisiana, for $1,000,000 cash and a
$20,000,000 note payable to the seller, The note bears interest at 11 1/2% and
requires equal quarterly principal payments commencing June 1996 through June
2000 with interest payable monthly. Additionally, the Company has issued a
warrant that allows the seller to convert 50% of the outstanding principal
balance of the note payable (up to a maximum of $5,000,000) into 416,667
shares of common stock of the Company at $12 per share. The difference between
the carrying amount of the investment and LRGP's equity in SCGC's net assets
is being amortized on a straight-line basis over 25 years. The purchase
agreement obligates LRGP to provide loans or a financing source to SCGC for
all expenses and development costs of the Lake Charles riverboat casino up to
a maximum of $45,000,000. As of April 30, 1996, advances to SCGC totaled
approximately $41,702,000.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized results of operations of SCGC from the date of acquisition to
April 30, 1996 are as follows:
Total revenue................................................ $57,263,000
Operating loss............................................... (643,000)
Net loss..................................................... (5,346,000)
Summarized balance sheet information for SCGC as of April 30, 1995 and 1996
is as follows:
APRIL 30
------------------------
1995 1996
----------- -----------
Current assets................................. $ 1,125,000 $ 7,142,000
Property and equipment, net.................... 24,399,000 69,919,000
Other assets................................... 9,442,000 10,126,000
----------- -----------
Total assets............................... $34,966,000 $87,187,000
=========== ===========
Current liabilities:
Advances from and notes payable to related
parties..................................... $ 9,856,000 $48,787,000
Other........................................ 26,190,000 44,357,000
Long-term debt, less current maturities........ 2,266,000 637,000
Partners' deficit.............................. (3,346,000) (6,594,000)
----------- -----------
Total liabilities and partners' deficit.... $34,966,000 $87,187,000
=========== ===========
11. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution, profit-sharing plan, including
401(k) plan provisions, covering substantially all of its employees. The
Company's contribution expense related to this plan was approximately
$220,000, $203,000, and $328,000 for the years ended April 30, 1994, 1995, and
1996, respectively. The Company's contribution is based on a percentage of
employee contributions and may include an additional discretionary amount.
12. LITIGATION
The Company has been named, along with two gaming equipment suppliers, 41 of
the country's largest gaming operators, and four gaming distributors (the
"Gaming Industry Defendants") in a consolidated class action lawsuit pending
in Las Vegas, Nevada. The suits 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 early stages of
discovery and preliminary motions. 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.
The Company is engaged in various 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 likely to be material to the Company's
consolidated financial position or results of operations.
CASINO AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS
Purchase of GPRI and SCGC
On May 3, 1996, the Company purchased all of the outstanding shares of
common stock of Grand Palais Riverboat, Inc. (GPRI) in a bankruptcy
proceeding. Pursuant to the Plan of Reorganization adopted in such bankruptcy
proceeding, the Company purchased 100% of the shares of the reorganized GPRI,
which at the time of closing owned the Grand Palais Riverboat, gaming
equipment, certain other furniture, fixtures and equipment, all necessary
gaming licenses issued by the State of Louisiana, and other permits and
authorizations. The Company intends to operate the Grand Palais vessel as part
of a two-riverboat operation with SCGC. The aggregate consideration paid by
the Company in connection with the GPRI acquisition was approximately $62.4
million, consisting of $8.4 million in cash, approximately $37.9 million in
promissory notes and assumed indebtedness. The Company also issued 2,250,000
shares of its common stock, and five-year warrants to purchase an additional
500,000 shares of common stock at an exercise price of $10 per share, to
GPRI's former secured debt holders.
At the time of the GPRI acquisition, the Company also purchased the
remaining 50% interest in SCGC not already owned by LRGP, in exchange for
1,850,000 shares of the Company's common stock and a five-year warrant. The
warrant allows the seller to convert its note payable to LRGP (up to a maximum
of $5,000,000) to 416,667 shares of common stock of the Company at an exercise
price of $12 per share. The purchase agreement also provides for the
restructuring of certain indebtedness owed to the seller.
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1995
------------------------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30
----------- ----------- ----------- -----------
Revenue....................... $33,616,000 $32,017,000 $30,143,000 $31,761,000
Operating income.............. 6,073,000 4,945,000 5,001,000 4,177,000
Net income.................... 3,908,000 4,685,000 4,772,000 4,704,000
Net income per common and
common equivalent share...... 0.25 0.30 0.31 0.30
1996
------------------------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30
----------- ----------- ----------- -----------
Revenue....................... $32,418,000 $35,691,000 $43,418,000 $46,436,000
Operating income (loss)....... 2,367,000 2,128,000 (7,315,000) 6,013,000
Net income (loss)............. 2,334,000 2,044,000 (6,547,000) 3,724,000
Net income (loss) per common
and common equivalent share.. 0.15 0.13 (0.44) 0.23
The fourth quarter of 1996 was adversely affected by interest expense
totaling $400,000 that had been capitalized in the second quarter of 1996 and
a $720,000 adjustment to prior years' taxes.