10-Q 1 a16-21987_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 23, 2016

 

OR

 

o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

 

Commission File Number 0-20538

 

ISLE OF CAPRI CASINOS, INC.

 

Delaware

 

41-1659606

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

600 Emerson Road, Suite 300, Saint Louis, Missouri

 

63141

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (314) 813-9200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x

 

As of November 30, 2016, the Company had a total of 41,356,919 shares of Common Stock outstanding (which excludes 709,229 shares held by us in treasury).

 

 

 



 

PART I—FINANCIAL INFORMATION

ITEM 1.                         FINANCIAL STATEMENTS

 

ISLE OF CAPRI CASINOS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

October 23,

 

April 24,

 

 

 

2016

 

2016

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

53,927

 

$

62,126

 

Restricted cash

 

22,172

 

461

 

Marketable securities

 

19,023

 

19,338

 

Accounts receivable, net

 

9,677

 

12,484

 

Inventory

 

5,631

 

5,580

 

Prepaid expenses and other assets

 

13,907

 

10,545

 

Assets held for sale

 

138,671

 

2,361

 

Total current assets

 

263,008

 

112,895

 

Property and equipment, net

 

815,532

 

810,450

 

Other assets:

 

 

 

 

 

Goodwill

 

79,776

 

79,776

 

Other intangible assets, net

 

31,819

 

32,237

 

Deferred financing costs, net

 

2,842

 

3,777

 

Restricted cash and investments

 

9,869

 

9,819

 

Prepaid deposits and other

 

4,716

 

4,996

 

Deferred income taxes

 

794

 

1,144

 

Long-term assets held for sale

 

 

139,130

 

Total assets

 

$

1,208,356

 

$

1,194,224

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

83

 

$

80

 

Accounts payable

 

21,630

 

27,432

 

Accrued liabilities:

 

 

 

 

 

Payroll and related

 

31,992

 

34,743

 

Property and other taxes

 

21,063

 

18,814

 

Income tax payable

 

50

 

123

 

Interest

 

14,485

 

14,678

 

Progressive jackpots and slot club awards

 

14,550

 

13,705

 

Deferred proceeds for assets held for sale

 

22,000

 

 

Other

 

24,878

 

20,646

 

Liabilities related to assets held for sale

 

8,347

 

7,326

 

Total current liabilities

 

159,078

 

137,547

 

Long-term debt, less current maturities and net deferred financing costs

 

887,399

 

911,688

 

Deferred income taxes

 

21,929

 

37,902

 

Other accrued liabilities

 

17,416

 

17,557

 

Other long-term liabilities

 

13,912

 

13,912

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued

 

 

 

Common stock, $.01 par value; 60,000,000 shares authorized; shares issued:

 

 

 

 

 

42,066,148 at October 23, 2016 and April 24, 2016

 

421

 

421

 

Class B common stock, $.01 par value; 3,000,000 shares authorized; none issued

 

 

 

Additional paid-in capital

 

239,540

 

244,472

 

Retained earnings (deficit)

 

(121,674

)

(152,868

)

 

 

118,287

 

92,025

 

Treasury stock, 710,846 shares at October 23, 2016 and 1,300,955 at April 24, 2016

 

(9,665

)

(16,407

)

Total stockholders’ equity

 

108,622

 

75,618

 

Total liabilities and stockholders’ equity

 

$

1,208,356

 

$

1,194,224

 

 

See notes to the consolidated financial statements.

 

2



 

ISLE OF CAPRI CASINOS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 23,

 

October 25,

 

October 23,

 

October 25,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

Casino

 

$

209,439

 

$

210,197

 

$

427,420

 

$

428,039

 

Rooms

 

5,897

 

5,624

 

11,614

 

11,235

 

Food, beverage, pari-mutuel and other

 

25,518

 

26,457

 

52,484

 

53,808

 

Gross revenues

 

240,854

 

242,278

 

491,518

 

493,082

 

Less promotional allowances

 

(42,292

)

(41,824

)

(87,310

)

(84,400

)

Net revenues

 

198,562

 

200,454

 

404,208

 

408,682

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Casino

 

29,767

 

30,793

 

60,768

 

62,078

 

Gaming taxes

 

53,187

 

53,503

 

108,437

 

108,994

 

Rooms

 

1,526

 

1,516

 

2,880

 

2,938

 

Food, beverage, pari-mutuel and other

 

8,975

 

9,851

 

18,779

 

20,588

 

Marine and facilities

 

10,464

 

11,011

 

21,139

 

22,176

 

Marketing and administrative

 

44,169

 

45,220

 

90,546

 

92,160

 

Corporate and development

 

8,276

 

6,986

 

15,478

 

14,629

 

Preopening expense

 

 

 

597

 

 

Transaction expense

 

3,413

 

 

3,413

 

 

Depreciation and amortization

 

17,452

 

17,923

 

34,659

 

34,833

 

Total operating expenses

 

177,229

 

176,803

 

356,696

 

358,396

 

Operating income

 

21,333

 

23,651

 

47,512

 

50,286

 

Interest expense

 

(16,797

)

(17,004

)

(33,390

)

(34,445

)

Interest income

 

78

 

79

 

155

 

158

 

Loss on early extinguishment of debt

 

 

 

 

(2,966

)

Income from continuing operations before income taxes

 

4,614

 

6,726

 

14,277

 

13,033

 

Income tax benefit (provision)

 

17,751

 

(892

)

16,732

 

(1,743

)

Income from continuing operations

 

22,365

 

5,834

 

31,009

 

11,290

 

Income from discontinued operations, net of income tax provision of $1,135 and $1,162 for the three and six months ended October 23, 2016, and income taxes of $- for the three and six months ended October 25, 2015

 

1,345

 

5,616

 

3,015

 

3,304

 

Net income and Comprehensive income

 

$

23,710

 

$

11,450

 

$

34,024

 

$

14,594

 

 

 

 

 

 

 

 

 

 

 

Income per common share-basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.54

 

$

0.14

 

$

0.75

 

$

0.28

 

Income from discontinued operations, net of income taxes

 

0.03

 

0.14

 

0.07

 

0.08

 

Net income

 

$

0.57

 

$

0.28

 

$

0.82

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Income per common share-diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.54

 

$

0.14

 

$

0.75

 

$

0.27

 

Income from discontinued operations, net of income taxes

 

0.03

 

0.14

 

0.07

 

0.08

 

Net income

 

$

0.57

 

$

0.28

 

$

0.82

 

$

0.35

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares

 

41,311,259

 

40,697,797

 

41,287,311

 

40,639,301

 

Weighted average diluted shares

 

41,592,045

 

41,426,375

 

41,514,462

 

41,341,575

 

 

See notes to the consolidated financial statements.

 

3



 

ISLE OF CAPRI CASINOS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

(Unaudited)

 

 

 

Shares of

 

 

 

Additional

 

Retained

 

 

 

Total

 

 

 

Common

 

Common

 

Paid-in

 

Earnings

 

Treasury

 

Stockholders’

 

 

 

Stock

 

Stock

 

Capital

 

(Deficit)

 

Stock

 

Equity

 

Balance, April 24, 2016

 

42,066,148

 

$

421

 

$

244,472

 

$

(152,868

)

$

(16,407

)

$

75,618

 

Net income

 

 

 

 

34,024

 

 

34,024

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

(217

)

 

823

 

606

 

Issuance of stock under compensation plans

 

 

 

(7,302

)

(2,830

)

5,480

 

(4,652

)

Issuance of restricted stock

 

 

 

(439

)

 

439

 

 

Stock compensation expense

 

 

 

3,026

 

 

 

3,026

 

Balance, October 23, 2016

 

42,066,148

 

$

421

 

$

239,540

 

$

(121,674

)

$

(9,665

)

$

108,622

 

 

See notes to the consolidated financial statements.

 

4



 

ISLE OF CAPRI CASINOS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

October 23,

 

October 25,

 

 

 

2016

 

2015

 

Operating activities:

 

 

 

 

 

Net income

 

$

34,024

 

$

14,594

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

38,604

 

41,503

 

Amortization of deferred financing costs

 

2,119

 

2,118

 

Amortization of debt premium

 

(231

)

(222

)

Loss on early extinguishment of debt

 

 

2,966

 

Gain on sale of discontinued operations

 

 

(6,424

)

Valuation charges

 

834

 

4,424

 

Deferred income taxes

 

(15,624

)

1,695

 

Stock compensation expense

 

3,026

 

3,072

 

(Gain) loss on disposal of assets

 

(937

)

55

 

Changes in operating assets and liabilities:

 

 

 

 

 

Marketable securities

 

315

 

(90

)

Accounts receivable

 

2,889

 

819

 

Income tax receivable

 

(73

)

(83

)

Prepaid expenses and other assets

 

(2,841

)

(4,201

)

Accounts payable and accrued liabilities

 

879

 

1,164

 

Net cash provided by operating activities

 

62,984

 

61,390

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchase of property and equipment

 

(47,595

)

(33,207

)

Proceeds from sale of assets held for sale

 

 

11,448

 

Proceeds from sale of property and equipment

 

1,011

 

16

 

Decrease (increase) in restricted cash and investments

 

34

 

(250

)

Net cash used in investing activities

 

(46,550

)

(21,993

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Principal payments on debt

 

(39

)

(62,362

)

Net (repayments) borrowings on line of credit

 

(25,200

)

28,100

 

Payment of other long-term obligation

 

 

(9,384

)

Premium payments on retirement of long-term debt

 

 

(2,409

)

Payment of deferred financing costs

 

 

(217

)

Proceeds from exercise of stock options

 

606

 

665

 

Net cash used in financing activities

 

(24,633

)

(45,607

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(8,199

)

(6,210

)

Cash and cash equivalents, beginning of period

 

62,126

 

66,437

 

Cash and cash equivalents, end of the period

 

$

53,927

 

$

60,227

 

 

See notes to the consolidated financial statements.

 

5



 

ISLE OF CAPRI CASINOS, INC.

Notes to Consolidated Financial Statements

(amounts in thousands, except share and per share amounts)

(Unaudited)

 

1.  Nature of Operations

 

Isle of Capri Casinos, Inc., a Delaware corporation, was incorporated in February 1990. Except where otherwise noted, the words “we,” “us,” “our” and similar terms, as well as “Company,” refer to Isle of Capri Casinos, Inc. and all of its subsidiaries. We are a developer, owner and operator of branded gaming facilities and related lodging and entertainment facilities in markets throughout the United States. Our wholly owned subsidiaries own or operate fourteen casino gaming facilities in the United States located in Black Hawk, Colorado; Pompano Beach, Florida; Bettendorf, Marquette and Waterloo, Iowa; Lake Charles, Louisiana; Lula and Vicksburg, Mississippi; Boonville, Cape Girardeau, Caruthersville and Kansas City, Missouri; and Nemacolin, Pennsylvania.

 

Proposed Transaction with Eldorado Resorts, Inc.

 

On September 19, 2016, the Company entered into a definitive merger agreement whereby Eldorado Resorts, Inc. (“Eldorado” or “ERI”) will acquire all of the outstanding shares of Isle of Capri Casinos, Inc. (“Isle”) for $23.00 in cash or 1.638 shares of Eldorado common stock, at the election of each Isle shareholder, reflecting total consideration of approximately $1.7 billion. Upon completion of the transaction, Eldorado and Isle shareholders will hold approximately 62% and 38%, respectively, of the combined company’s outstanding shares. As a result of the merger, Isle will cease to be a publicly traded company.

 

The transaction has been unanimously approved by the Boards of Directors of both Eldorado and Isle. The transaction is subject to approval of the stockholders of Eldorado and Isle, the approval of applicable gaming authorities and other customary closing conditions, and is expected to be consummated in the second calendar quarter of 2017.

 

Other than transaction expenses associated with the merger of $3,413 for the three and six months ended October 23, 2016, the terms of the agreement did not impact the Company’s consolidated financial statements.

 

2.  Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States of America for interim financial reporting. Accordingly, certain information and note disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States have been condensed or omitted. In management’s opinion, the accompanying interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results presented. The accompanying interim condensed consolidated financial statements have been prepared without audit. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended April 24, 2016 as filed with the SEC and all of our other filings, including Current Reports on Form 8-K, filed with the SEC after such date and through the date of this report, which are available on the SEC’s website at www.sec.gov or our website at www.islecorp.com.

 

Our fiscal year ends typically on the last Sunday in April. Periodically, this system necessitates a 53-week year.  Fiscal 2017 and 2016 are both 52-week years, which commenced on April 25, 2016 and April 27, 2015, respectively.

 

The condensed consolidated financial statements include our accounts and those of our subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. We view each

 

6



 

property as an operating segment and all such operating segments have been aggregated into one reporting segment.

 

3.  New Accounting Pronouncements

 

As part of the ongoing convergence of GAAP and the International Accounting Standards Board’s current standards on revenue recognition, the Financial Account Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which provides companies with a single model to use in accounting for revenue arising from contracts with customers. To further clarify certain aspects of the revenue recognition standard pursuant to ASU 2014-09, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedient” and ASU No. 2016-11, “Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” in May 2016, ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” in April 2016 and ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” in March 2016. In July 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date”, deferring the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017 with early adoption permitted only for annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting this accounting standard update on our consolidated financial statements and disclosures.

 

In April 2015, the FASB issued Update No. 2015-03, “Interest-Imputation of Interest.” This update requires debt issuance costs to be presented as a direct deduction from the carrying amount of the related debt liability. The standard was effective for annual periods beginning after December 15, 2015. The standard requires application of the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. We adopted this standard in the first quarter of fiscal 2017 for all periods presented. This reclassification reduced our total assets and total liabilities as previously reported in our consolidated balance sheet for April 24, 2016 by $10.9 million. This reclassification had no effect on our retained earnings or net income previously reported.

 

In August 2015, the FASB issued Update No. 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which further clarifies the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. This update allows for debt issuance costs related to line-of-credit arrangements to be presented as an asset and subsequent amortization of the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The standard is effective for financial statements issued for fiscal years beginning after December 31, 2015, for interim periods within those fiscal years and early adoption is permitted. We adopted this standard in the first quarter of fiscal 2017 and elected to present debt issuance costs related to our Credit Facility as an asset with subsequent amortization.

 

4.  Discontinued Operations

 

On August 22, 2016, we entered into a definitive agreement to sell our casino and hotel property in Lake Charles, Louisiana, for $134,500, subject to a customary purchase price adjustment, to an affiliate of Laguna Development Corporation, a Pueblo of Laguna-owned business based in Albuquerque, New Mexico. The transaction is expected to be completed in late fiscal 2017 or early fiscal 2018, subject to Louisiana Gaming Board approval and other customary closing conditions. We received a $20,000 deposit related to this transaction, which is reflected in restricted cash within current assets in the consolidated balance sheet as of October 23, 2016.

 

On October 13, 2016, we entered into a definitive agreement to sell our casino in Marquette, Iowa, for $40,000, subject to a customary working capital adjustment, to an affiliate of Casino Queen, based in Swansea, Illinois. As a result, we recorded a non-cash pretax valuation charge of $834 to reduce the carrying value of Marquette’s net assets held for sale to the expected net realizable value upon completion of the sale transaction. The transaction is

 

7



 

expected to be completed in early fiscal 2018, subject to the Iowa Racing and Gaming Commission, the Illinois Gaming Control Board and other customary closing conditions. We received a $2,000 deposit related to this transaction, which is reflected in restricted cash within current assets in the consolidated balance sheet as of October 23, 2016.

 

In the second quarter of fiscal 2017, Lake Charles and Marquette met the requirements for presentation as assets held for sale and discontinued operations under generally accepted accounting principles. Accordingly, the operations of Lake Charles and Marquette have been classified as discontinued operations and as assets held for sale for all periods presented.

 

On October 19, 2015, we closed our casino property in Natchez, Mississippi, and completed the previously announced sale of the hotel and certain related non-gaming assets to Casino Holding Investment Partners, LLC for net cash proceeds of $11,448.  As a result, we recorded a net gain of $2,000 in discontinued operations for the six months ended October 25, 2015. The net gain consisted of a gain on the sale of the hotel and related non-gaming assets of $6,424, offset by a non-cash pretax charge of $4,424 related to the write-off of the Natchez gaming vessel and certain other assets. The operations of our Natchez property have been classified as discontinued for all periods presented.

 

The Company incurred $2,121 and $3,179 for capital expenditures at our Lake Charles and Marquette properties during the six months ended October 23, 2016 and October 25, 2015, respectively, and incurred $307 for capital expenditures at our Natchez property during the six months ended October 25, 2015.

 

The results of our discontinued operations are summarized as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 23,

 

October 25,

 

October 23,

 

October 25,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net revenues

 

$

34,283

 

$

39,254

 

$

69,493

 

$

82,493

 

Valuation charges

 

834

 

24

 

834

 

4,424

 

Depreciation expense

 

1,142

 

3,249

 

3,944

 

6,670

 

Pretax income from discontinued operations

 

2,480

 

5,616

 

4,177

 

3,304

 

Income tax provision from discontinued operations

 

(1,135

)

 

(1,162

)

 

Income from discontinued operations

 

1,345

 

5,616

 

3,015

 

3,304

 

 

8



 

The assets and liabilities held for sale were as follows:

 

 

 

October 23,

 

April 24,

 

 

 

2016

 

2016

 

Current assets:

 

 

 

 

 

Accounts receivable

 

$

685

 

$

768

 

Inventory

 

636

 

726

 

Prepaid expenses and other assets

 

869

 

867

 

Property and equipment, net

 

86,902

 

 

Goodwill

 

28,361

 

 

 

Other intangible assets, net

 

20,998

 

 

Other

 

220

 

 

Total current assets held for sale

 

$

138,671

 

$

2,361

 

 

 

 

 

 

 

Long-term assets:

 

 

 

 

 

Property and equipment, net

 

$

 

$

88,717

 

Goodwill

 

 

29,195

 

Other intangible assets, net

 

 

20,998

 

Prepaid deposits and other

 

 

220

 

Total long-term assets held for sale

 

$

 

$

139,130

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,625

 

$

2,291

 

Payroll and related

 

2,125

 

2,173

 

Property and other taxes

 

1,359

 

613

 

Progressive jackpots and slot club awards

 

1,894

 

1,859

 

Other

 

344

 

390

 

Total liabilities related to assets held for sale

 

$

8,347

 

$

7,326

 

 

5.  Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

October 23,

 

April 24,

 

 

 

2016

 

2016

 

Senior Secured Credit Facility:

 

 

 

 

 

Revolving line of credit, expires April 19, 2018, interest payable at least quarterly at either LIBOR and/or prime plus a margin

 

$

42,300

 

$

67,500

 

5.875% Senior Notes, interest payable semi-annually March 15 and September 15, net

 

502,310

 

502,541

 

8.875% Senior Subordinated Notes, interest payable semi-annually June 15 and December 15

 

350,000

 

350,000

 

Other

 

2,613

 

2,652

 

 

 

897,223

 

922,693

 

Less current maturities

 

83

 

80

 

Less deferred financing costs, net

 

9,741

 

10,925

 

Long-term debt less unamortized debt issuance costs

 

$

887,399

 

$

911,688

 

 

Senior Secured Credit Facility—Our Senior Secured Credit Facility as amended and restated (“Credit Facility”) consists of a $300,000 revolving line of credit. The Credit Facility is secured on a first priority basis by substantially all of our assets and guaranteed by substantially all of our significant subsidiaries.

 

Our net revolving line of credit availability at October 23, 2016, as limited by our outstanding borrowings, was approximately $249,400, after consideration of approximately $8,300 in outstanding letters of credit. We have an annual commitment fee related to the unused portion of the Credit Facility of up to 0.55%, which is included in interest expense in the accompanying consolidated statements of operations. The weighted average effective interest rates of the Credit Facility for the six months ended October 23, 2016 was 2.84%.

 

9



 

The Credit Facility includes a number of affirmative and negative covenants. Additionally, we must comply with certain financial covenants including maintenance of a total leverage ratio, senior secured leverage ratio and minimum interest coverage ratio. The Credit Facility also restricts our ability to make certain investments or distributions. We were in compliance with the covenants as of October 23, 2016.

 

On November 14, 2016, we amended the Credit Facility to modify the maximum amount of proceeds allowable for asset sales to exclude the sale of our Lake Charles property.

 

5.875% Senior Notes—In March 2013, we issued $350,000 of 5.875% Senior Notes due 2021 (“5.875% Senior Notes”). The net proceeds from the issuance were used to repay term loans under our Credit Facility. On April 14, 2015, we issued an additional $150,000 of 5.875% Senior Notes at a price of 102.0%, which have the same terms and are treated as the same class as the outstanding 5.875% Senior Notes (the “April 2015 issuance”). After deducting the underwriting fees, the net proceeds of $151,500 from the April 2015 issuance were used to purchase a portion of our previously outstanding 7.75% Senior Notes validly tendered pursuant to a cash tender offer for any and all of our outstanding 7.75% Senior Notes (the “Tender Offer”). As a result of these issuances, we capitalized deferred financing costs of $217 in the six months ended October 25, 2015.

 

The 5.875% Senior Notes are general unsecured obligations and rank junior to all of our senior secured indebtedness and senior to our senior subordinated indebtedness. The 5.875% Senior Notes are redeemable, in whole or in part, at our option as of March 15, 2016, with call premiums as defined in the indenture governing the 5.875% Senior Notes.

 

8.875% Senior Subordinated Notes — In August 2012, we issued $350,000 of 8.875% Senior Subordinated Notes due 2020 (“8.875% Senior Subordinated Notes”).  The 8.875% Senior Subordinated Notes are general unsecured obligations and rank junior to all of our senior indebtedness. The 8.875% Senior Subordinated Notes became redeemable, in whole or in part, at our option on June 15, 2016, with call premiums as defined in the indenture governing the 8.875% Senior Subordinated Notes.

 

The 5.875% Senior Notes and 8.875% Senior Subordinated Notes are guaranteed, on a joint and several basis, by substantially all of our significant subsidiaries and certain other subsidiaries as described in Note 11. All of the guarantor subsidiaries are wholly owned by us.

 

The indentures governing the 5.875% Senior Notes and 8.875% Senior Subordinated Notes limit, among other things, our ability and our restricted subsidiaries’ ability to borrow money, make restricted payments, use assets as security in other transactions, enter into transactions with affiliates, pay dividends, or repurchase stock. The indentures also limit our ability to issue and sell capital stock of subsidiaries, sell assets in excess of specified amounts or merge with or into other companies.

 

Extinguishment of 7.75% Senior Notes—In March 2011, we issued $300,000 of 7.75% Senior Notes due 2019 at a price of 99.264% (“7.75% Senior Notes”).  On April 13, 2015, we accepted for purchase $237,832 of the outstanding 7.75% Senior Notes validly tendered pursuant to a tender offer and we funded the payments utilizing the net proceeds from the 5.875% Senior Notes April 2015 issuance, additional borrowings under our Credit Facility and cash on hand. On April 14, 2015, we issued an irrevocable notice of redemption of the remaining $62,168 of outstanding 7.75% Senior Notes at a redemption price of 103.875% of the principal amount, plus accrued and unpaid interest at the redemption date in accordance with the terms of the indenture governing the 7.75% Senior Notes.  On May 14, 2015, we completed the redemption for approximately $65,000, utilizing additional borrowings under our Credit Facility and cash on hand. As a result of the completed redemption, we incurred expenses related to the write-off of the remaining deferred financing costs and the discount, redemption fees and other related costs of $2,966, recorded as a loss on early extinguishment of debt in the consolidated statement of operations for the six months ended October 25, 2015.

 

6.  Earnings Per Share

 

The following table sets forth the computation of basic and diluted income (loss) per share:

 

10



 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

October 23,

 

October 25,

 

October 23,

 

October 25,

 

 

 

2016

 

2015

 

2016

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

Income applicable to common shares:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

22,365

 

$

5,834

 

$

31,009

 

$

11,290

 

Income from discontinued operations

 

1,345

 

5,616

 

3,015

 

3,304

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,710

 

$

11,450

 

$

34,024

 

$

14,594

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share - weighted average shares

 

41,311,259

 

40,697,797

 

41,287,311

 

40,639,301

 

Effect of dilutive securities

 

 

 

 

 

 

 

 

 

Employee stock options

 

85,398

 

194,050

 

72,319

 

192,873

 

Restricted stock units

 

195,388

 

534,528

 

154,832

 

509,401

 

Denominator for diluted earnings (loss) per share - adjusted weighted average shares and assumed conversions

 

41,592,045

 

41,426,375

 

41,514,462

 

41,341,575

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.54

 

$

0.14

 

$

0.75

 

$

0.28

 

Income from discontinued operations

 

0.03

 

0.14

 

0.07

 

0.08

 

Net income

 

$

0.57

 

$

0.28

 

$

0.82

 

$

0.36

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.54

 

$

0.14

 

$

0.75

 

$

0.27

 

Income from discontinued operations

 

0.03

 

0.14

 

0.07

 

0.08

 

Net income

 

$

0.57

 

$

0.28

 

$

0.82

 

$

0.35

 

 

Our basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share reflect the additional dilution from all potentially dilutive securities such as stock options and restricted stock units. Stock options with an exercise price in excess of the average market price of our common stock during the periods representing 356,195 and 65,460 shares, which were anti-dilutive, were excluded from the calculation of common shares for diluted earnings per share for the three and six months ended October 23, 2016 and October 25, 2015, respectively.

 

7.  Stock Based Compensation

 

Under our 2009 Long-Term Incentive Plan, as amended from time to time, we have issued restricted stock units, performance stock units, restricted stock and stock options.

 

Restricted Stock Units—During the six months ended October 23, 2016, we granted 145,516 restricted stock units (“RSUs”) to employees with a weighted average fair market value of $15.16 per unit on the date of grant. The RSUs are awarded to employees under annual long-term incentive grants which will vest and be converted to stock ratably over three years commencing on the one-year anniversary of the grant date.  Our aggregate estimate of forfeitures for restricted stock units is 10.7%. As of October 23, 2016, our unrecognized compensation cost for these RSUs was $1,756.

 

During fiscal 2013, we granted RSUs containing market performance conditions which determined the number of RSUs awarded. The market condition period ended April 26, 2015 and a gross award of 1,532,417 shares was achieved. Per the terms of the award agreement, the awards were issued net of shares necessary to pay minimum withholding taxes with 50% of the RSUs vesting on April 26, 2015 and the remainder vesting on April 26, 2016.  The fair value of these RSUs was initially determined utilizing a lattice pricing model which considered a range

 

11



 

of assumptions including volatility and risk-free interest rates. On April 26, 2016, 467,073 shares, net of shares to pay minimum withholding taxes, were issued for the vested second RSU tranche.

 

Performance Stock Units—During the six months ended October 23, 2016, we granted performance stock units (“PSUs”) to employees with a company performance condition that will determine the number of shares to ultimately vest, if any, up to 216,699 shares.  Any shares earned will vest at the end of three years from the date of grant.  The probability of meeting the performance condition will be assessed on a regular basis and compensation cost will be adjusted accordingly. Our aggregate estimate of forfeitures for performance stock units for employees is 17.7%. As of October 23, 2016, our unrecognized compensation cost for these PSUs is $2,781, based on current probability assumptions.

 

Restricted Stock—During the six months ended October 23, 2016, we issued 32,239 shares of restricted stock to directors with a grant-date fair value of $21.60. Restricted stock awarded under annual long-term incentive grants to employees primarily vests one-third on each anniversary of the grant date and grants to directors vest one-half on the grant date and one-half on the first anniversary of the grant date. Our aggregate estimate of forfeitures for restricted stock for employees and directors is 10.0% and 0%, respectively. As of October 23, 2016, our unrecognized compensation cost for unvested restricted stock was $795 with a remaining weighted average vesting period of 1.0 years.

 

Stock Options—During the six months ended October 23, 2016, we issued 310,735 non-qualified stock options, which have a maximum term of seven years and are exercisable in yearly installments of 20% commencing one year after the grant date. The options have a per share grant date fair value of $5.968 utilizing the Black-Scholes-Merton option pricing model with the range of assumptions disclosed in the following table:

 

 

 

Six Months Ended

 

 

 

October 23, 2016

 

Weighted average expected volatility

 

44.41

%

Expected dividend yield

 

0.00

%

Weighted average expected term (in years)

 

5

 

Weighted average risk-free interest rate

 

1.69

%

 

Weighted average volatility is calculated using the historical volatility of our stock price over a range of dates equal to the expected term of the grant’s options. The weighted average expected term is calculated using historical data that is representative of the option for which the fair value is to be determined. The expected term represents the period of time that options granted are expected to be outstanding. The weighted average risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant for the approximate period of time equivalent to the grant’s expected term.  As of October 23, 2016, our aggregate forfeiture rate is 14.5% and our unrecognized compensation cost for unvested options was $1,999.

 

8.  Fair Value

 

Items Measured at Fair Value on a Recurring Basis—The following table sets forth the assets measured at fair value on a recurring basis, by input level, in the consolidated balance sheets at October 23, 2016 and April 24, 2016:

 

12



 

 

 

October 23, 2016

 

 

 

Level 1

 

Level 2

 

Total

 

Assets:

 

 

 

 

 

 

 

Marketable securities

 

$

9,092

 

$

9,931

 

$

19,023

 

Restricted cash and investments

 

6,508

 

3,361

 

9,869

 

 

 

 

April 24, 2016

 

 

 

Level 1

 

Level 2

 

Total

 

Assets:

 

 

 

 

 

 

 

Marketable securities

 

$

8,950

 

$

10,388

 

$

19,338

 

Restricted cash and investments

 

6,362

 

3,457

 

9,819

 

 

Marketable securities—The estimated fair values of our marketable securities are determined on an individual asset basis based upon quoted prices of identical assets available in active markets (Level 1), quoted prices of identical assets in inactive markets, or quoted prices for similar assets in active and inactive markets (Level 2), and represent the amounts we would expect to receive if we sold these marketable securities.

 

Restricted cash and investments—The estimated fair values of our restricted cash and investments are based upon quoted prices available in active markets (Level 1), or quoted prices for similar assets in active and inactive markets (Level 2), and represent the amounts we would expect to receive if we sold our restricted cash and investments.

 

Other Financial Instruments - The estimated carrying amounts and fair values of our other financial instruments are as follows:

 

 

 

October 23, 2016

 

April 24, 2016

 

 

 

Carrying

 

 

 

Carrying

 

 

 

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Revolving line of credit

 

$

42,300

 

$

42,089

 

$

67,500

 

$

66,150

 

5.875% Senior notes

 

502,310

 

521,860

 

502,541

 

520,000

 

8.875% Senior subordinated notes

 

350,000

 

371,221

 

350,000

 

367,206

 

Other long-term debt

 

2,613

 

2,613

 

2,652

 

2,652

 

Other long-term liabilities

 

13,912

 

13,912

 

13,912

 

13,912

 

 

The fair value of our long-term debt or other long-term obligations is estimated based on the quoted market price of the underlying debt issue (Level 1) or, when a quoted market price is not available, the discounted cash flow of future payments utilizing current rates available to us for debt of similar remaining maturities (Level 3). Debt obligations with a short remaining maturity have a carrying amount that approximates fair value.

 

9.  Income Taxes

 

Our effective tax rate (“ETR”) from continuing operations for the three and six months ended October 23, 2016 was (384.75%) and (117.2%), as compared to an ETR of 13.25% and 13.37% for the three and six months ended October 25, 2015.  Our ETR is based on statutory rates applied to our pretax book income, adjusted for permanent differences and other items, including partial release of valuation allowances due to current year pretax book income and changes in status of certain indefinite lived intangible assets.

 

As of October 23, 2016, we had a full valuation allowance on our federal and state deferred tax assets other than those related to the state deferred tax assets at our Florida casino.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will be realized.  Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Due to the Company’s history of losses, valuation allowances have been established except for future taxable income that will result from the reversal of taxable temporary differences, other than the indefinite lived intangibles.

 

13



 

The assets and liabilities of Lake Charles and Marquette were classified as held for sale as of October 23, 2016 (see Note 4).  The deferred tax liability associated with the goodwill and intangible assets of these two entities, previously treated as indefinite lived, now have a finite life.  The expected reversal of this deferred tax liability associated with this goodwill and intangible assets have resulted in the release of $19,552 of valuation allowances previously recognized in prior years.  We expect that the estimated tax gain on these probable transactions, combined with the current year estimated income, are expected to offset our remaining federal net operating losses and credits and result in the release of the remaining related valuation allowance.

 

10.  Supplemental Disclosures

 

Cash Flow — For the six months ended October 23, 2016 and October 25, 2015, we made net cash interest payments of $31,712 and $33,208, respectively. Additionally, we made net income tax payments of $125 and $130 during the six months ended October 23, 2016 and October 25, 2015, respectively.

 

The change in accrued purchases of property and equipment in accounts payable was a decrease of $6,069 and an increase of $4,739, for the six months ended October 23, 2016 and October 25, 2015, respectively.

 

During the six months ended October 23, 2016, we capitalized interest of $247, primarily related to our land-based casino construction at our Bettendorf property, which was completed on June 24, 2016. During the six months ended October 25, 2015, we capitalized interest of $212, primarily related to hotel renovations and land-based casino construction at our Bettendorf property.

 

11.  Consolidating Condensed Financial Information

 

Certain of our wholly owned subsidiaries have fully and unconditionally guaranteed on a joint and several basis, the payment of all obligations under our 5.875% Senior Notes and 8.875% Senior Subordinated Notes.

 

The following wholly owned subsidiaries of the Company are guarantors, on a joint and several basis, under the  5.875% Senior Notes and 8.875% Senior Subordinated Notes: Black Hawk Holdings, L.L.C.; CCSC/Blackhawk, Inc.; IC Holdings Colorado, Inc.; IOC-Black Hawk Distribution Company, L.L.C.; IOC-Boonville, Inc.; IOC-Caruthersville, L.L.C.; IOC-Kansas City, Inc.; IOC-Lula, Inc.; IOC-Natchez, Inc.; IOC-Black Hawk County, Inc.; IOC Holdings, L.L.C.; IOC-Vicksburg, Inc.; IOC-Vicksburg, LLC; Rainbow Casino- Vicksburg Partnership, L.P.; IOC Cape Girardeau, LLC; Isle of Capri Bettendorf, L.C; Isle of Capri Black Hawk, L.L.C.; Isle of Capri Marquette, Inc.; PPI, Inc.; and St. Charles Gaming Company, L.L.C. Each of the subsidiaries’ guarantees is joint and several with the guarantees of the other subsidiaries.

 

14



 

Consolidating condensed balance sheets as of October 23, 2016 and April 24, 2016 are as follows:

 

 

 

As of October 23, 2016

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

 

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

39,776

 

$

206,004

 

$

21,063

 

$

(3,835

)

$

263,008

 

Intercompany receivables

 

379,546

 

 

 

(379,546

)

 

Investments in subsidiaries

 

608,995

 

3,358

 

 

(612,353

)

 

Property and equipment, net

 

3,534

 

789,032

 

22,966

 

 

815,532

 

Other assets

 

28,851

 

118,100

 

27,634

 

(44,769

)

129,816

 

Total assets

 

$

1,060,702

 

$

1,116,494

 

$

71,663

 

$

(1,040,503

)

$

1,208,356

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

59,366

 

$

76,886

 

$

26,661

 

$

(3,835

)

$

159,078

 

Intercompany payables

 

 

327,827

 

51,719

 

(379,546

)

 

Long-term debt, less current maturities and net deferred financing costs

 

887,399

 

 

 

 

887,399

 

Other accrued liabilities

 

5,315

 

85,747

 

6,964

 

(44,769

)

53,257

 

Stockholders’ equity

 

108,622

 

626,034

 

(13,681

)

(612,353

)

108,622

 

Total liabilities and stockholders’ equity

 

$

1,060,702

 

$

1,116,494

 

$

71,663

 

$

(1,040,503

)

$

1,208,356

 

 

 

 

As of April 24, 2016

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

 

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

10,575

 

$

76,646

 

$

25,804

 

$

(130

)

$

112,895

 

Intercompany receivables

 

424,693

 

 

 

(424,693

)

 

Investments in subsidiaries

 

586,569

 

3,358

 

 

(589,927

)

 

Property and equipment, net

 

3,650

 

782,636

 

24,164

 

 

810,450

 

Other assets

 

4,205

 

258,204

 

26,974

 

(18,504

)

270,879

 

Total assets

 

$

1,029,692

 

$

1,120,844

 

$

76,942

 

$

(1,033,254

)

$

1,194,224

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

35,862

 

$

77,128

 

$

24,687

 

$

(130

)

$

137,547

 

Intercompany payables

 

 

371,104

 

53,589

 

(424,693

)

 

Long-term debt, less current maturities and net deferred financing costs

 

911,688

 

 

 

 

911,688

 

Other accrued liabilities

 

6,524

 

74,267

 

7,084

 

(18,504

)

69,371

 

Stockholders’ equity

 

75,618

 

598,345

 

(8,418

)

(589,927

)

75,618

 

Total liabilities and stockholders’ equity

 

$

1,029,692

 

$

1,120,844

 

$

76,942

 

$

(1,033,254

)

$

1,194,224

 

 

15



 

Consolidating condensed statements of operations for the three and six months ended October 23, 2016 and October 25, 2015 are as follows:

 

 

 

For the Three Months Ended October 23, 2016

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Operations

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

$

199,295

 

$

10,144

 

$

 

$

209,439

 

Rooms, food, beverage, pari-mutuel and other

 

33

 

30,302

 

2,997

 

(1,917

)

31,415

 

Management fee revenue

 

7,018

 

 

 

(7,018

)

 

Gross revenues

 

7,051

 

229,597

 

13,141

 

(8,935

)

240,854

 

Less promotional allowances

 

 

(40,120

)

(2,172

)

 

(42,292

)

Net revenues

 

7,051

 

189,477

 

10,969

 

(8,935

)

198,562

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

28,085

 

1,682

 

 

29,767

 

Gaming taxes

 

 

48,998

 

4,189

 

 

53,187

 

Rooms, food, beverage, pari-mutuel and other

 

13,068

 

61,883

 

3,789

 

(1,917

)

76,823

 

Management fee expense

 

 

6,718

 

300

 

(7,018

)

 

Depreciation and amortization

 

269

 

16,487

 

696

 

 

17,452

 

Total operating expenses

 

13,337

 

162,171

 

10,656

 

(8,935

)

177,229

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(6,286

)

27,306

 

313

 

 

21,333

 

Interest expense, net

 

(7,603

)

(8,686

)

(430

)

 

(16,719

)

Equity in income (loss) of subsidiaries

 

15,058

 

(360

)

 

(14,698

)

 

Income (loss) from continuing operations before income taxes

 

1,169

 

18,260

 

(117

)

(14,698

)

4,614

 

Income tax benefit (provision)

 

21,196

 

(3,374

)

(71

)

 

17,751

 

Income (loss) from continuing operations

 

22,365

 

14,886

 

(188

)

(14,698

)

22,365

 

Income (loss) of discontinued operations

 

1,345

 

321

 

 

(321

)

1,345

 

Net income (loss)

 

$

23,710

 

$

15,207

 

$

(188

)

$

(15,019

)

$

23,710

 

 

16



 

 

 

For the Three Months Ended October 25, 2015

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Operations

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

$

199,224

 

$

10,973

 

$

 

$

210,197

 

Rooms, food, beverage, pari-mutuel and other

 

17

 

30,957

 

3,150

 

(2,043

)

32,081

 

Management fee revenue

 

7,088

 

 

 

(7,088

)

 

Gross revenues

 

7,105

 

230,181

 

14,123

 

(9,131

)

242,278

 

Less promotional allowances

 

 

(39,368

)

(2,456

)

 

(41,824

)

Net revenues

 

7,105

 

190,813

 

11,667

 

(9,131

)

200,454

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

29,074

 

1,719

 

 

30,793

 

Gaming taxes

 

 

49,103

 

4,400

 

 

53,503

 

Rooms, food, beverage, pari-mutuel and other

 

7,780

 

64,139

 

4,708

 

(2,043

)

74,584

 

Management fee expense

 

 

6,788

 

300

 

(7,088

)

 

Depreciation and amortization

 

433

 

16,420

 

1,070

 

 

17,923

 

Total operating expenses

 

8,213

 

165,524

 

12,197

 

(9,131

)

176,803

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(1,108

)

25,289

 

(530

)

 

23,651

 

Interest expense, net

 

(7,486

)

(8,906

)

(533

)

 

(16,925

)

Equity in income (loss) of subsidiaries

 

12,352

 

497

 

 

(12,849

)

 

Income (loss) from continuing operations before income taxes

 

3,758

 

16,880

 

(1,063

)

(12,849

)

6,726

 

Income tax benefit (provision)

 

2,076

 

(3,670

)

702

 

 

(892

)

Income (loss) from continuining operations

 

5,834

 

13,210

 

(361

)

(12,849

)

5,834

 

Income (loss) of discontinued operations

 

5,616

 

3,675

 

 

(3,675

)

5,616

 

Net income (loss)

 

$

11,450

 

$

16,885

 

$

(361

)

$

(16,524

)

$

11,450

 

 

17



 

 

 

For the Six Months Ended October 23, 2016

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Operations

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

$

406,343

 

$

21,077

 

$

 

$

427,420

 

Rooms, food, beverage, pari-mutuel and other

 

35

 

61,907

 

6,121

 

(3,965

)

64,098

 

Management fee revenue

 

14,318

 

 

 

(14,318

)

 

Gross revenues

 

14,353

 

468,250

 

27,198

 

(18,283

)

491,518

 

Less promotional allowances

 

 

(82,859

)

(4,451

)

 

(87,310

)

Net revenues

 

14,353

 

385,391

 

22,747

 

(18,283

)

404,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

57,333

 

3,435

 

 

60,768

 

Gaming taxes

 

 

99,749

 

8,688

 

 

108,437

 

Rooms, food, beverage, pari-mutuel and other

 

21,308

 

127,086

 

8,403

 

(3,965

)

152,832

 

Management fee expense

 

 

13,718

 

600

 

(14,318

)

 

Depreciation and amortization

 

606

 

32,396

 

1,657

 

 

34,659

 

Total operating expenses

 

21,914

 

330,282

 

22,783

 

(18,283

)

356,696

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(7,561

)

55,109

 

(36

)

 

47,512

 

Interest expense, net

 

(15,220

)

(17,154

)

(861

)

 

(33,235

)

Loss on early extinguishment of debt

 

 

 

 

 

 

Equity in income (loss) of subsidiaries

 

27,063

 

224

 

 

(27,287

)

 

Income (loss) from continuing operations before income taxes

 

4,282

 

38,179

 

(897

)

(27,287

)

14,277

 

Income tax benefit (provision)

 

26,727

 

(10,630

)

635

 

 

16,732

 

Income (loss) from continuining operations

 

31,009

 

27,549

 

(262

)

(27,287

)

31,009

 

Income (loss) of discontinued operations

 

3,015

 

(31

)

 

31

 

3,015

 

Net income (loss)

 

$

34,024

 

$

27,518

 

$

(262

)

$

(27,256

)

$

34,024

 

 

18



 

 

 

For the Six Months Ended October 25, 2015

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Operations

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

$

405,843

 

$

22,196

 

$

 

$

428,039

 

Rooms, food, beverage, pari-mutuel and other

 

35

 

62,811

 

6,380

 

(4,183

)

65,043

 

Management fee revenue

 

14,419

 

 

 

(14,419

)

 

Gross revenues

 

14,454

 

468,654

 

28,576

 

(18,602

)

493,082

 

Less promotional allowances

 

 

(79,449

)

(4,951

)

 

(84,400

)

Net revenues

 

14,454

 

389,205

 

23,625

 

(18,602

)

408,682

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

58,507

 

3,571

 

 

62,078

 

Gaming taxes

 

 

100,101

 

8,893

 

 

108,994

 

Rooms, food, beverage, pari-mutuel and other

 

15,127

 

130,855

 

10,692

 

(4,183

)

152,491

 

Management fee expense

 

 

13,819

 

600

 

(14,419

)

 

Depreciation and amortization

 

889

 

31,810

 

2,134

 

 

34,833

 

Total operating expenses

 

16,016

 

335,092

 

25,890

 

(18,602

)

358,396

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(1,562

)

54,113

 

(2,265

)

 

50,286

 

Interest expense, net

 

(15,329

)

(17,890

)

(1,068

)

 

(34,287

)

Loss on early extinguishment of debt

 

(2,966

)

 

 

 

(2,966

)

Equity in income (loss) of subsidiaries

 

24,643

 

41

 

 

(24,684

)

 

Income (loss) from continuing operations before income taxes

 

4,786

 

36,264

 

(3,333

)

(24,684

)

13,033

 

Income tax benefit (provision)

 

6,504

 

(10,096

)

1,849

 

 

(1,743

)

Income (loss) from continuining operations

 

11,290

 

26,168

 

(1,484

)

(24,684

)

11,290

 

Income (loss) of discontinued operations

 

3,304

 

175

 

 

(175

)

3,304

 

Net income (loss)

 

$

14,594

 

$

26,343

 

$

(1,484

)

$

(24,859

)

$

14,594

 

 

19



 

Consolidating condensed statements of cash flows for the six months ended October 23, 2016 and October 25, 2015 are as follows:

 

 

 

Six Months Ended October 23, 2016

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Cash Flows

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Net cash (used in) provided by operating activities

 

$

(26,317

)

$

86,739

 

$

2,562

 

$

 

$

62,984

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment, net of proceeds

 

(680

)

(45,542

)

(362

)

 

(46,584

)

Restricted cash and investments

 

 

 

34

 

 

34

 

Parent company investment in subsidiaries

 

50,147

 

 

 

(50,147

)

 

Net cash provided by (used in) investing activities

 

49,467

 

(45,542

)

(328

)

(50,147

)

(46,550

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on debt

 

(39

)

 

 

 

(39

)

Net repayments on line of credit

 

(25,200

)

 

 

 

(25,200

)

Proceeds from exercise of stock options

 

606

 

 

 

 

606

 

Net proceeds from (payments to) related parties

 

 

(43,278

)

(6,869

)

50,147

 

 

Net cash provided by (used in) by financing activities

 

(24,633

)

(43,278

)

(6,869

)

50,147

 

(24,633

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(1,483

)

(2,081

)

(4,635

)

 

(8,199

)

Cash and cash equivalents at beginning of period

 

5,155

 

48,382

 

8,589

 

 

62,126

 

Cash and cash equivalents at end of the period

 

$

3,672

 

$

46,301

 

$

3,954

 

$

 

$

53,927

 

 

 

 

Six Months Ended October 25, 2015

 

 

 

Isle of Capri

 

 

 

 

 

Consolidating

 

 

 

 

 

Casinos, Inc.

 

 

 

Non-

 

and

 

Isle of Capri

 

 

 

(Parent

 

Guarantor

 

Guarantor

 

Eliminating

 

Casinos, Inc.

 

Statement of Cash Flows

 

Obligor)

 

Subsidiaries

 

Subsidiaries

 

Entries

 

Consolidated

 

Net cash (used in) provided by operating activities

 

$

(8,372

)

$

66,169

 

$

3,593

 

$

 

$

61,390

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment, net of proceeds

 

(362

)

(32,562

)

(267

)

 

(33,191

)

Proceeds from sales of assets held for sale

 

 

11,448

 

 

 

11,448

 

Restricted cash and investments

 

 

 

(250

)

 

(250

)

Parent company investment in subsidiaries

 

45,783

 

 

 

(45,783

)

 

Net cash provided by (used in) investing activities

 

45,421

 

(21,114

)

(517

)

(45,783

)

(21,993

)

 

 

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

 

 

 

Principal payments on debt

 

(62,204

)

 

(158

)

 

(62,362

)

Net borrowings on line of credit

 

28,100

 

 

 

 

28,100

 

Payment of other long-term obligation

 

 

(9,384

)

 

 

(9,384

)

Premium payments on retirement of long-term debt

 

(2,409

)

 

 

 

(2,409

)

Payments of deferred financing costs

 

(217

)

 

 

 

(217

)

Proceeds from exercise of stock options

 

665

 

 

 

 

665

 

Net proceeds from (payments to) related parties

 

 

(42,576

)

(3,207

)

45,783

 

 

Net cash used in financing activities

 

(36,065

)

(51,960

)

(3,365

)

45,783

 

(45,607

)

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

984

 

(6,905

)

(289

)

 

(6,210

)

Cash and cash equivalents at beginning of period

 

5,077

 

53,033

 

8,327

 

 

66,437

 

Cash and cash equivalents at end of the period

 

$

6,061

 

$

46,128

 

$

8,038

 

$

 

$

60,227

 

 

20



 

12.  Commitments and Contingencies

 

We are subject to certain federal, state and local environmental protection, health and safety laws, regulations and ordinances that apply to businesses generally, and are subject to cleanup requirements at certain of our facilities as a result thereof. We have not made, and do not anticipate making material expenditures, nor do we anticipate incurring delays with respect to environmental remediation or protection. However, in part because our present and future development sites have, in some cases, been used as manufacturing facilities or other facilities that generate materials that are required to be remediated under environmental laws and regulations, there can be no guarantee that additional pre-existing conditions will not be discovered and we will not experience material liabilities or delays.

 

We are subject to various contingencies and litigation matters and have a number of unresolved claims. Although the ultimate liability of these contingencies, this litigation and these claims cannot be determined at this time, we believe they will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

21



 

ITEM 2.                         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains statements that we believe are, or may be considered to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact included in this report regarding the prospects of our industry or our prospects, plans, financial position or business strategy, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plans,” “forecasts,” “continue” or “could” or the negatives of these terms or variations of them or similar terms. Furthermore, such forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct and are not guarantees of future performance. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.

 

For a more complete description of the risks that may affect our business, see our Annual Report on Form 10-K for the year ended April 24, 2016.

 

Executive Overview

 

We are a developer, owner and operator of branded gaming facilities and related dining, lodging and entertainment facilities in regional markets in the United States. We have sought and established geographic diversity to limit the risks caused by weather, regional economic difficulties, gaming tax rates and regulations of local gaming authorities. We currently operate casinos in Colorado, Florida, Iowa, Louisiana, Mississippi, Missouri and Pennsylvania.

 

Our operating results for the periods presented have been affected, both positively and negatively, by current economic conditions and several other factors discussed in detail below. Our historical operating results may not be indicative of our future results of operations because of these factors and the changing competitive landscape in each of our markets, as well as by factors discussed elsewhere herein. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the year ended April 24, 2016 and by giving consideration to the following:

 

Items Impacting Income from Continuing Operations

 

Pending Merger—On September 19, 2016, we entered into a definitive merger agreement whereby Eldorado Resorts, Inc. (“Eldorado,” or “ERI”) will acquire all of the outstanding shares of Isle of Capri Casinos, Inc. (“Isle”) for $23.00 in cash or 1.638 shares of Eldorado common stock, at the election of each Isle shareholder, reflecting total consideration of approximately $1.7 billion. Upon completion of the transaction, Eldorado and Isle shareholders will hold approximately 62% and 38%, respectively, of the combined company’s outstanding shares. As a result of the merger, Isle will cease to be a publicly traded company.

 

The transaction has been unanimously approved by the Boards of Directors of both Eldorado and Isle. The transaction is subject to approval of the stockholders of Eldorado and Isle, the approval of applicable gaming

 

22



 

authorities and other customary closing conditions, and is expected to be consummated in the second calendar quarter of 2017.

 

Other than transaction expenses associated with the merger of $3.4 million for the three and six months ended October 23, 2016, the terms of the agreement did not impact the Company’s consolidated financial statements.

 

Debt Refinancing—In May 2015, we redeemed the remaining $62.0 million of our 7.75% Senior Notes and incurred a loss on early extinguishment of debt of $3.0 million in the six months ended October 25, 2015.

 

Hurricane Matthew—On October 6, 2016, our property in Pompano Beach, Florida was closed for 24 hours due to Hurricane Matthew.

 

Income Tax Benefit—During the three and six months ended October 23, 2016, we released a valuation allowance of $19.6 million as a result of the change in status of the indefinite lived intangible assets associated with our Lake Charles and Marquette properties.

 

Discontinued Operations— On August 22, 2016, we entered into a definitive agreement to sell our casino and hotel property in Lake Charles, Louisiana, for $134.5 million, subject to a customary purchase price adjustment, to an affiliate of Laguna Development Corporation, a Pueblo of Laguna-owned business based in Albuquerque, New Mexico. The transaction is expected to be completed in late fiscal 2017 or early fiscal 2018, subject to Louisiana Gaming Board approval and other customary closing conditions.

 

On October 23, 2016, we entered into a definitive agreement to sell our casino in Marquette, Iowa, for $40.0 million, subject to a customary working capital adjustment, to an affiliate of Casino Queen, based in Swansea, Illinois. The transaction is expected to be completed in early fiscal 2018, subject to the Iowa Racing and Gaming Commission, the Illinois Gaming Control Board and other customary closing conditions.

 

In the second quarter of fiscal 2017, Lake Charles and Marquette met the requirements for presentation as assets held for sale and discontinued operations under generally accepted accounting principles. Accordingly, the operations of Lake Charles and Marquette have been classified as discontinued operations and as assets held for sale for all period presented.

 

On October 19, 2015, we closed our casino property in Natchez, Mississippi and completed the previously announced sale of the hotel and certain related non-gaming assets to Casino Holding Investment Partners, LLC for net cash proceeds of $11.4 million.  As a result of our decision to separately sell the Natchez gaming vessel and certain other assets, we determined that the carrying value of the assets were greater than their net realizable value and recorded a non-cash pretax charge of $4.4 million during the six months ended October 25, 2015. Subsequently, we recorded a net gain of $2.0 million in discontinued operations during fiscal 2016. The net gain consisted of a gain on the sale of the hotel and related non-gaming assets of $6.4 million, offset by the non-cash pretax charge of $4.4 million. The operations of our Natchez property have been classified as discontinued for all periods presented.

 

Results of Operations

 

Revenues and operating expenses for the three and six months ended October 23, 2016 and October 25, 2015 are as follows:

 

23



 

 

 

Three Months Ended

 

 

 

 

 

 

 

October 23,

 

October 25,

 

 

 

Percentage

 

(in thousands)

 

2016

 

2015

 

Variance

 

Variance

 

Revenues:

 

 

 

 

 

 

 

 

 

Casino

 

$

209,439

 

$

210,197

 

$

(758

)

-0.4

%

Rooms

 

5,897

 

5,624

 

273

 

4.9

%

Food, beverage, pari-mutuel and other

 

25,518

 

26,457

 

(939

)

-3.5

%

Gross revenues

 

240,854

 

242,278

 

(1,424

)

-0.6

%

Less promotional allowances

 

(42,292

)

(41,824

)

(468

)

1.1

%

Net revenues

 

198,562

 

200,454

 

(1,892

)

-0.9

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Casino

 

29,767

 

30,793

 

(1,026

)

-3.3

%

Gaming taxes

 

53,187

 

53,503

 

(316

)

-0.6

%

Rooms

 

1,526

 

1,516

 

10

 

0.7

%

Food, beverage, pari-mutuel and other

 

8,975

 

9,851

 

(876

)

-8.9

%

Marine and facilities

 

10,464

 

11,011

 

(547

)

-5.0

%

Marketing and administrative

 

44,169

 

45,220

 

(1,051

)

-2.3

%

Corporate and development

 

8,276

 

6,986

 

1,290

 

18.5

%

Transacton expense

 

3,413

 

 

3,413

 

N/M

 

Depreciation and amortization

 

17,452

 

17,923

 

(471

)

-2.6

%

Total operating expenses

 

$

177,229

 

$

176,803

 

426

 

0.2

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

October 23,

 

October 25,

 

 

 

Percentage

 

(in thousands)

 

2016

 

2015

 

Variance

 

Variance

 

Revenues:

 

 

 

 

 

 

 

 

 

Casino

 

$

427,420

 

$

428,039

 

$

(619

)

-0.1

%

Rooms

 

11,614

 

11,235

 

379

 

3.4

%

Food, beverage, pari-mutuel and other

 

52,484

 

53,808

 

(1,324

)

-2.5

%

Gross revenues

 

491,518

 

493,082

 

(1,564

)

-0.3

%

Less promotional allowances

 

(87,310

)

(84,400

)

(2,910

)

3.4

%

Net revenues

 

404,208

 

408,682

 

(4,474

)

-1.1

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Casino

 

60,768

 

62,078

 

(1,310

)

-2.1

%

Gaming taxes

 

108,437

 

108,994

 

(557

)

-0.5

%

Rooms

 

2,880

 

2,938

 

(58

)

-2.0

%

Food, beverage, pari-mutuel and other

 

18,779

 

20,588

 

(1,809

)

-8.8

%

Marine and facilities

 

21,139

 

22,176

 

(1,037

)

-4.7

%

Marketing and administrative

 

90,546

 

92,160

 

(1,614

)

-1.8

%

Corporate and development

 

15,478

 

14,629

 

849

 

5.8

%

Preopening expense

 

597

 

 

597

 

N/M

 

Transaction expense

 

3,413

 

 

3,413

 

N/M

 

Depreciation and amortization

 

34,659

 

34,833

 

(174

)

-0.5

%

Total operating expenses

 

$

356,696

 

$

358,396

 

(1,700

)

-0.5

%

 

Casino Casino revenues decreased $0.8 million, or 0.4%, for the three months ended October 23, 2016, as compared to the same period in fiscal 2016.

 

Casino revenues decreased $0.6 million, or 0.1%, for the six months ended October 23, 2016, as compared to the same period in fiscal 2016.

 

24



 

Casino operating expenses decreased $1.0 million, or 3.3%, and $1.3 million, or 2.1%, for the three and six months ended October 23, 2016, respectively, as compared to the same period in the prior fiscal year. The decrease in casino operating expenses reflects our continuing efforts to manage our casino operating expenses.

 

Gaming Taxes State and local gaming taxes decreased $0.3 million, or 0.6%, and $0.6 million, or 0.5%, for the three and six months ended October 23, 2016, respectively, as compared to the same period in the prior fiscal year, which is a result of changes in our overall gaming revenues and changes in the mix of gaming revenues derived from states with different gaming tax rates.

 

Rooms Rooms revenue increased $0.3 million, or 4.9%, and $0.4 million, or 3.4%, during the three and six months ended October 23, 2016, respectively, as compared to the same period in the prior fiscal year.

 

Food, beverage, pari-mutuel and other — Food, beverage, pari-mutuel and other revenue decreased $0.9 million, or 3.5%, and $1.3 million, or 2.5%, for the three and six months ended October 23, 2016, as compared to the same period in fiscal 2016, primarily resulting from the closures of our buffets in Kansas City and Black Hawk for renovations.  The Kansas City buffet closed during the first quarter and the Black Hawk buffet closed in early September. Both buffets are expected to reopen in December of this year.

 

Food, beverage, pari-mutuel and other expense — Food, beverage, pari-mutuel and other expense decreased $0.9 million, or 8.9%, and $1.8 million, or 8.8%, for the three and six months ended October 23, 2016, as compared to the same period in fiscal 2016, due in part to the closure of the Kansas City and Black Hawk buffets and initiatives to reduce cost of sales.

 

Promotional Allowances Promotional allowances increased $0.5 million, or 1.1%, and $2.9 million, or 3.4%, for the three and six months ended October 23, 2016, as compared to the same period in the prior fiscal year, reflecting changes in our marketing programs.

 

Marketing and Administrative   Marketing and administrative expenses decreased $1.1 million, or 2.3%, for the three months ended October 23, 2016 as compared to the same period in the prior fiscal year. Excluding a $1.0 million gain on the sale of the Bettendorf vessel and the $0.3 million write-off of costs related to the potential development of a new administration building at Pompano, which we determined we would not move forward with during the quarter, marketing and administrative expenses decreased $0.4 million, or 0.8%, reflecting changes in our marketing programs as well as savings from cost reduction initiatives.

 

Marketing and administrative expenses decreased $1.6 million, or 1.8%, for the six months ended October 23, 2016 as compared to the same period in the prior fiscal year. Excluding a $1.0 million gain on the sale of the Bettendorf vessel and the $0.3 million write-off of costs related to the potential development of a new administration building at Pompano, which we determined we would not move forward with during the quarter, marketing and administrative expenses decreased $0.9 million, or 1.0%, reflecting changes in our marketing programs as well as savings from cost reduction initiatives.

 

Corporate and Development —Our corporate and development expenses increased $1.3 million during the three months ended October 23, 2016, compared to the same period of the prior fiscal year, largely a result of less favorable results year over year from our captive insurance company as well as higher legal fees related to ongoing litigation during the quarter.

 

During the six months ended October 23, 2016, our corporate and development expenses were $15.5 million compared to $14.6 million for the six months ended October 25, 2015.

 

Depreciation and Amortization Depreciation and amortization expense for the three and six months ended October 23, 2016 decreased $0.5 million and $0.2 million, respectively, primarily due to certain assets becoming fully depreciated during the quarter.

 

25



 

Other Income (Expense) and Income Taxes

 

Interest expense, interest income, loss on early extinguishment of debt and income tax (provision) benefit for the three and six months ended October 23, 2016 and October 25, 2015 are as follows:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

October 23,

 

October 25,

 

 

 

Percentage

 

(in thousands)

 

2016

 

2015

 

Variance

 

Variance

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(16,797

)

$

(17,004

)

$

207

 

-1.2

%

Interest income

 

78

 

79

 

(1

)

-1.3

%

Income tax benefit (provision)

 

17,751

 

(892

)

18,643

 

-2090.0

%

 

 

 

Six Months Ended

 

 

 

 

 

 

 

October 23,

 

October 25,

 

 

 

Percentage

 

(in thousands)

 

2016

 

2015

 

Variance

 

Variance

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

(33,390

)

$

(34,445

)

$

1,055

 

-3.1

%

Interest income

 

155

 

158

 

(3

)

-1.9

%

Loss on early extinguishment of debt

 

 

(2,966

)

2,966

 

-100.0

%

Income tax benefit (provision)

 

16,732

 

(1,743

)

18,475

 

-1060.0

%

 

Interest Expense Interest expense decreased $0.2 million, or 1.2%, and $1.0 million, or 3.1%, for the three and six months ended October 23, 2016, as compared to the same periods in the prior fiscal year. This decrease is primarily a result of a decrease in our overall debt balance and the benefit of refinancing our 7.75% Senior Notes in May 2015.  We capitalized interest expense of $0.2 million during the six months ended October 23, 2016, primarily related to our land-based casino construction at our Bettendorf property. We capitalized interest expense of $0.2 million during the six months ended October 25, 2015, primarily related to hotel renovations and land-based casino construction at our Bettendorf property.

 

Liquidity and Capital Resources

 

Cash Flows from Operating Activities - During the six months ended October 23, 2016, we generated $63.0 million in cash flows from operating activities compared to generating $61.4 million during the six months ended October 25, 2015. The year-over-year increase in cash flows from operating activities is primarily the result of the increase in operating income.

 

Cash Flows used in Investing Activities - During the six months ended October 23, 2016, we used $46.6 million for investing activities compared to using $22.0 million during the six months ended October 25, 2015. Significant investing activities for the six months ended October 23, 2016 included capital expenditures of $47.6 million, of which $27.9 million related to construction of our land based casino in Bettendorf. Significant investing activities for the six months ended October 25, 2015 included capital expenditures of $33.2 million offset by proceeds received from sales of assets held for sale of $11.4 million.

 

Cash Flows used in Financing Activities — During the six months ended October 23, 2016, our net cash flows used in financing activities were primarily utilized to repay $25.2 million in borrowings under our Credit Facility.

 

26



 

Significant transactions during the six months ended October 25, 2015 are as follow:

 

·                  On May 14, 2015, we redeemed the remaining $62.2 million of our 7.75% Senior Notes at a price of 103.875%, including accrued and unpaid interest.

 

·                  Net borrowings under our Credit Facility increased $28.1 million.

 

·                  On May 4, 2015, we paid $9.4 million related to our obligation for certain bonds issued by the City of Bettendorf, Iowa.

 

·                  We received $0.7 million in proceeds from the exercise of stock options.

 

Availability of Cash and Additional Capital - At October 23, 2016, we had cash and cash equivalents of $53.9 million and marketable securities of $19.0 million. As of October 23, 2016, we had $42.3 million in outstanding revolving credit borrowings under our Credit Facility and our net line of credit availability was approximately $249.4 million, as limited by our outstanding borrowings and undrawn letters of credit.

 

Capital Expenditures and Development Activities— On June 24, 2016, we opened our new land-based casino at our property in Bettendorf. As of October 23, 2016, we have spent $51.6 million on the project, of which $27.9 million was during the six months ended October 23, 2016. We will continue to fund capital projects with cash generated by our operations and borrowings under our Credit Facility.

 

Historically, as part of our business development activities, we have entered into agreements which have resulted in the acquisition or development of businesses or assets. These business development efforts and related agreements typically require the expenditure of cash, which may be significant. The amount and timing of our cash expenditures relating to development activities may vary based upon our evaluation of current and future development opportunities, our financial condition and the condition of the financing markets. Our development activities are subject to a variety of factors including but not limited to: obtaining permits, licenses and approvals from appropriate regulatory and other agencies, legislative changes and, in certain circumstances, negotiating acceptable leases.

 

Historically, we have made significant investments in property and equipment and expect that our operations will continue to demand ongoing investments to keep our properties competitive. The timing, completion and amount of additional capital projects will be subject to improvement of economic and local market conditions, cash flows from our operations and borrowing availability under our Credit Facility.

 

Typically, we have funded our daily operations through net cash provided by operating activities and our significant capital expenditures through operating cash flow and debt financing. While we believe that cash on hand, cash flow from operations, and available borrowings under our Credit Facility will be sufficient to support our working capital needs, planned capital expenditures and debt service requirements for the foreseeable future, there is no assurance that these sources will in fact provide adequate funding for our planned and necessary expenditures or that the level of our capital investments will be sufficient to allow us to remain competitive in our existing markets.

 

We are highly leveraged and may be unable to obtain additional debt or equity financing on acceptable terms if our current sources of liquidity are not sufficient or if we fail to stay in compliance with the covenants of our Credit Facility. We will continue to evaluate our planned capital expenditures at each of our existing locations in light of the operating performance of the facilities at such locations.

 

Critical Accounting Estimates

 

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles that require our management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

 

27



 

·                  those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made;

 

·                  those estimates where, had we chosen different estimates or assumptions, the resulting differences would have had a material impact on our financial condition, changes in financial condition or results of operations; and

 

·                  those estimates that, if they were to change from period to period, likely would result in a material impact on our financial condition, changes in financial condition or results of operations.

 

For a discussion of our significant accounting policies and estimates, please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements presented in our 2016 Annual Report on Form 10-K. There were no newly identified significant accounting estimates in the second quarter of fiscal year 2017, nor were there any material changes to the critical accounting policies and estimates set forth in our 2016 Annual Report.

 

ITEM 3.                         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, commodity prices and equity prices. Our primary exposure to market risk is interest rate risk associated with our Credit Facility.

 

28



 

ITEM 4.   CONTROLS AND PROCEDURES

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of October 23, 2016.  Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that, as of October 23, 2016, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports we file or submit under the Exchange Act of 1934 and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended October 23, 2016, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM 1.                         LEGAL PROCEEDINGS

 

A reference is made to the information contained in Footnote 11 of our unaudited consolidated financial statements included herein, which is incorporated herein by reference.

 

ITEM 1A.                RISK FACTORS

 

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended April 24, 2016, except for the following additional risk factors related to our acquisition by Eldorado Resorts, Inc., (“ERI”).

 

The merger agreement subjects us to restrictions on our business activities during the pendency of the merger.

 

The merger agreement pursuant to which ERI will acquire Isle subjects us to restrictions on our business activities and obligates us to generally operate our businesses in the ordinary course in all material respects during the pendency of the merger. These restrictions could prevent us from pursuing attractive business opportunities that arise prior to the completion of the merger and are outside of our ordinary course of business, and could otherwise have an adverse effect on our results of operations, cash flows and financial position.

 

We would also remain liable for significant transaction costs, including legal, accounting and financial advisory fees if the merger is not completed.

 

The market price of our common stock may reflect various market assumptions as to whether and when the merger will be completed. Consequently, the completion of, the failure to complete, or any delay in the completion of the merger could result in significant changes in the market price of our common stock. In addition, we have incurred and will continue to incur significant costs relating to the merger, such as legal, accounting, financial advisor and printing fees that will be required to be paid whether or not the merger is consummated. Further, we may be required to pay a termination fee depending on the circumstances surrounding the termination.

 

Whether or not the merger is completed, the pendency of the transaction could cause disruptions in our businesses, which could have an adverse effect on our businesses and financial results.

 

These disruptions could include the following:

 

29



 

·                  Our current and prospective employees may experience uncertainty about their future roles with the combined company or consider other employment alternatives, which might adversely affect our ability to retain or attract their respective key managers and other employees;

 

·                  Our current and prospective customers may anticipate changes in how they are served or the benefits offered by the our loyalty reward programs and may, as a result, choose to discontinue their patronage of casinos; and

 

·                  Our management’s attention may be diverted from the operation of the businesses toward the completion of the merger.

 

Obtaining required approvals and satisfying closing conditions may delay or prevent completion of the merger and may significantly reduce the benefits anticipated to be realized from the merger or could adversely affect the market price of our common stock or our future business and financial results.

 

Completion of the merger is subject to various closing conditions, including (a) our stockholders adopting the merger agreement and approving the merger at the Isle Special Meeting, (b) ERI’s stockholders approving the issuance of shares at the ERI Special Meeting, (c) the approval or expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Act, (d) obtaining certain gaming approvals to the standards set forth in the merger agreement and (e) each of our and ERI’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. If such conditions are not satisfied, the merger will not be consummated unless such conditions are validly waived. Such conditions may jeopardize or delay completion of the merger or may reduce the anticipated benefits of the merger. Further, no assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied. Even if all such consents and approvals are obtained, no assurance can be given as to the terms, conditions and timing of the consents and approvals or that they will satisfy the terms of the merger agreement. If the merger is not completed by June 19, 2017, assuming that neither we nor ERI elect to extend this deadline as contemplated by the merger agreement, either ERI or we may terminate the merger agreement.

 

On October 21, 2016, the waiting period under the Hart-Scott-Rodino Act was terminated early by the FTC.

 

If the merger is not completed, the price of our common stock and our future business and operations could be harmed.

 

If the merger is not completed, we may be subject to material risks, including:

 

·                  failure to complete the merger may result in negative publicity and a negative impression of us in the investment community;

 

·                  certain costs related to the merger, such as legal, accounting and certain financial advisory fees, must be paid even if the merger is not completed;

 

·                  the diversion of management attention from day-to-day business and the unavoidable disruption to our employees and relationships with clients as a result of efforts and uncertainties relating to the merger may detract from our ability to grow revenue and minimize costs, which, in turn, may lead to a loss of market position that we could be unable to regain if the merger does not occur;

 

·                  under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing the merger, which may affect our ability to execute certain of our business strategies;

 

·                  if our Board of Directors seeks another merger or business combination, you cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than ERI  has agreed to pay; and

 

30



 

·                  the price of our common stock may decline to the extent that the current market price of our common stock reflects a higher price than it otherwise would have based on the assumption that the merger will be completed.

 

ITEM 2.                         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We have purchased our common stock under stock repurchase programs. These programs allow for the repurchase of up to 6,000,000 shares.  To date, we have purchased 4,895,792 shares of our common stock under these programs.  These programs have no approved dollar amount, nor expiration dates.  No purchases have been made under the program since September 2007.

 

ITEM 3.                         DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.                         MINE SAFETY DISCLOSURE

 

Not Applicable.

 

ITEM 5.                         OTHER INFORMATION

 

None.

 

ITEM 6.                         EXHIBITS

 

See the Index to Exhibits following the signature page hereto for a list of the exhibits filed pursuant to Item 601 of Regulation S-K.

 

31



 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ISLE OF CAPRI CASINOS, INC.

 

 

Dated: December 1, 2016

/s/ Michael A. Hart

 

Michael A. Hart

 

Sr. Vice President, Accounting and Treasurer

 

(Principal Financial Officer and Authorized Officer)

 

32



 

EXHIBIT
NUMBER

 

DESCRIPTION

10.1

 

Seventh Agreement to Credit Agreement, dated as of November 14, 2016, among Isle of Capri Casinos, Inc., as borrower, certain subsidiaries of Isle of Capri Casinos, Inc., the financial institution listed therein, as Lenders, and Wells Fargo Bank, National Association, as one of the Requisite Lenders, Issuing Bank, Swing Line Lender and as the Administrative Agent.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934.

 

 

 

31.2

 

Certification of Principal Financial Officer pursuant to Rule 13a—14(a) under the Securities Exchange Act of 1934.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

 

 

 

101

 

The following financial statements and notes from the Isle of Capri Casinos, Inc. Quarterly Report on Form 10-Q for the quarter ended October 23, 2016, filed on December 1, 2016 formatted in XBRL: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.

 

33