<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 18, 1998
ARGOSY GAMING COMPANY
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-21122 37-1304247
- -------------------------------------------------------------------------------
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification
incorporation) Number)
219 Piasa Street, Alton, Illinois 62002
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(618) 474-7500
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ARGOSY GAMING COMPANY
The purpose of this Current Report is to file certain financial
information regarding the Registrant (Argosy Gaming Company) and its
subsidiaries. Such financial information is set forth in the exhibits to this
Current Report.
ITEM 5. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
-----------------------------------------
(c) EXHIBITS.
23 Consent of Independent Auditors
27 Financial Data Schedule
99 Argosy Gaming Company and Subsidiary Companies-Certain Financial
Information as of and for the Year Ended December 31, 1997:
-- Management's Discussion and Analysis of Financial
Condition and Results of Operations
-- Consolidated Balance Sheets
-- Consolidated Statements of Operations
-- Consolidated Statements of Cash Flows
-- Consolidated Statements of Stockholders' Equity
-- Notes to Consolidated Financial Statements
-- Report of Independent Auditors
<PAGE>
ARGOSY GAMING COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ARGOSY GAMING COMPANY
(Registrant)
Date: March 17, 1998 /s/ Dale R. Black
-------------------------------------
Dale R. Black
Vice President
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
Consent of Independent Auditors 23
Financial Data Schedule 27
Argosy Gaming Company and Subsidiary Companies-Certain Financial
Information as of and for the Year Ended December 31, 1997: 99
-- Management's Discussion and Analysis of Financial
Condition and Results of Operations
-- Consolidated Balance Sheets
-- Consolidated Statements of Operations
-- Consolidated Statements of Cash Flows
-- Consolidated Statements of Stockholders' Equity
-- Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-76418) pertaining to the Stock Option Plan and Director
Option Plan of Argosy Gaming Company of our report dated February 13, 1998,
with respect to the consolidated financial statements of Argosy Gaming Company
filed as an Exhibit to this Form 8-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Chicago, Illinois
March 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997
ANNUAL REPORT OF ARGOSY GAMING COMPANY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 59,354
<SECURITIES> 0
<RECEIVABLES> 2,139
<ALLOWANCES> 1,624
<INVENTORY> 1,157
<CURRENT-ASSETS> 69,983
<PP&E> 462,129
<DEPRECIATION> 71,786
<TOTAL-ASSETS> 559,856
<CURRENT-LIABILITIES> 68,999
<BONDS> 350,000
0
0
<COMMON> 245
<OTHER-SE> 32,148
<TOTAL-LIABILITY-AND-EQUITY> 559,856
<SALES> 0
<TOTAL-REVENUES> 344,083
<CGS> 0
<TOTAL-COSTS> 337,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,383
<INTEREST-EXPENSE> 47,116
<INCOME-PRETAX> (34,649)
<INCOME-TAX> (1,352)
<INCOME-CONTINUING> (36,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,213)
<EPS-PRIMARY> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
<PAGE>
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company opened its first riverboat casino, the Alton Belle Casino, in Alton,
Illinois, in September 1991. Subsequently, the Company opened the Argosy Casino
in Riverside, Missouri, in June 1994; the Belle of Baton Rouge in Baton Rouge,
Louisiana, in September 1994; and the Belle of Sioux City in Sioux City, Iowa,
in October 1994. In addition, the Company, through its 57.5% equity interest in
Indiana Gaming Company, L.P., opened a temporary casino in Lawrenceburg,
Indiana, on December 10, 1996, and opened the permanent pavilion on December 10,
1997.
The Company's results of operations for the year ended December 31, 1997,
were adversely affected by increased competition at its Alton and Riverside
properties and by a market decline in Baton Rouge. The Company expects the
competitive environment in each of its markets to remain intense. These factors
have resulted in the Company reporting decreased revenues at its Alton,
Riverside and Baton Rouge properties in 1997. The Company believes that the
competitive pressures in these markets will continue to adversely effect the
operating revenues and profitability at these properties. In addition, the
Company has made significant capital expenditures in developing the Lawrenceburg
casino project. These competitive pressures on revenues and the increased
interest expense associated with the issuance, in June 1996, of $235 million of
First Mortgage Notes ("Mortgage Notes") will continue to adversely affect the
Company's results of operations.
The Company is in a net operating loss carryforward position at December 31,
1997, and, as such, the Company has not recorded any federal tax benefits on its
1997 operating losses due to the uncertainty of realization.
26
<PAGE>
<TABLE>
<CAPTION>
OPERATIONAL INFORMATION YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995
- --------------------------------------------------------------------------------
CASINO REVENUES
<S> <C> <C> <C>
Alton Belle Casino $ 61,877 $ 72,369 $ 81,413
Argosy Casino Riverside 61,750 82,247 86,443
Belle of Baton Rouge Casino 47,628 51,007 48,877
Belle of Sioux City Casino 20,667 18,835 20,880
Argosy Casino Lawrenceburg 127,908 3,930
Corporate
Other
--------------------------------------
Total $319,830 $228,388 $237,613
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET REVENUES
Alton Belle Casino $ 67,208 $ 77,933 $ 85,992
Argosy Casino Riverside 66,548 88,473 94,058
Belle of Baton Rouge Casino 50,436 53,420 49,805
Belle of Sioux City Casino 21,672 19,887 21,994
Argosy Casino Lawrenceburg 137,024 4,412
Corporate 816 337
Other 379 355 842
--------------------------------------
Total $344,083 $244,817 $252,691
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS(1)
Alton Belle Casino $ 7,489 $ 12,240 $ 22,446
Argosy Casino Riverside(3) 2,481 9,410 22,057
Belle of Baton Rouge Casino(4) (4,146) 3,507 2,875
Belle of Sioux City Casino 848 295 3,137
Argosy Casino Lawrenceburg 25,625 334
Corporate (11,432) (14,207) (14,161)
Other (2,954) (4,447) (2,865)
--------------------------------------
Total(5)(6) $ 17,911 $ 7,132 $ 33,489
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EBITDA(1)(2)
Alton Belle Casino $ 11,944 $ 16,446 $ 26,734
Argosy Casino Riverside(3) 8,428 16,134 29,452
Belle of Baton Rouge Casino(4) 1,322 9,151 8,305
Belle of Sioux City Casino 1,861 1,141 3,610
Argosy Casino Lawrenceburg 36,547 712
Corporate (9,324) (12,520) (12,586)
Other 425 (1,516) (1,576)
--------------------------------------
Total(5)(6) $ 51,203 $ 29,548 $ 53,939
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Income from operations and EBITDA are presented before consideration of any
management fees paid to the Company, and in the case of the Belle of Sioux
City and the Argosy Casino Lawrenceburg before the 30 percent and 42.5
percent minority interests, respectively.
(2) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization, and is presented before any management fees paid to Argosy.
EBITDA should not be construed as an alternative to operating income or net
income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance, or as
an alternative to cash flows generated by operating, investing and
financing activities (as determined in accordance with generally accepted
accounting principles) as an indicator of cash flow or a measure of
liquidity. EBITDA is presented solely as a supplemental disclosure because
management believes that it is a widely used measure of operating
performance in the gaming industry and for companies with a significant
amount of depreciation and amortization. The Company has other significant
uses of cash flows, including interest and capital expenditures, which are
not reflected in EBITDA.
(3) Excludes $3,508 for the year ended December 31, 1996, related to lease
termination costs in connection with assets formerly used at the Riverside
temporary facility.
(4) Excludes operating expenses of $1,347 for the year ended December 31, 1996,
related to referendum costs.
(5) Excludes preopening expenses of $11,528 for the year ended December 31,
1996, and $2,350 for the year ended December 31, 1995.
(6) Excludes severance expenses of $1,750 and a loss of $9,600 in connection
with a writedown of assets held for sale for the year ended December 31,
1997, a charge of $1,500 in connection with the termination of a private
placement for the year ended December 31, 1996, and $3,477 in connection
with a cessation of the development of a downtown St. Louis riverboat
casino site for the year ended December 31, 1995.
27
<PAGE>
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
CASINO - Casino revenues for the year ended December 31, 1997, increased to
$319.8 million from $228.4 million for the year ended December 31, 1996, due to
the opening of the Lawrenceburg casino, which generated $127.9 million of casino
revenues, offset by decreased revenues at three of the Company's other
properties. Alton casino revenues decreased from $72.4 million to $61.9 million
and Riverside casino revenues decreased from $82.2 million to $61.8 million due
to the effects of increased competition. Baton Rouge casino revenues decreased
from $51.0 million to $47.6 million due primarily to an overall decline in the
Baton Rouge market.
Casino expenses increased to $163.9 million for the year ended December 31,
1997, from $121.0 million for the year ended December 31, 1996, due primarily to
the opening of the Lawrenceburg casino. Casino expenses decreased in Alton,
Riverside and Baton Rouge in connection with the decline in revenues.
ADMISSIONS - Admissions revenues (net of complimentary admissions) increased
from $0.6 million in 1996 to $4.6 million in 1997 due to net admission fees in
Lawrenceburg.
FOOD, BEVERAGE AND OTHER - Food, beverage and other revenues increased $5.6
million to $34.8 million for the year ended December 31, 1997, due primarily to
the opening of the Lawrenceburg casino. Food, beverage and other expenses
increased from $23.8 million in 1996 to $30.0 million in 1997 due primarily to
the opening of the Lawrenceburg casino.
OTHER OPERATING EXPENSES - Other operating expenses increased $9.6 million to
$28.7 million for the year ended December 31, 1997. This increase is due
primarily to costs associated with operating the Lawrenceburg casino.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses increased $17.7 million to $69.7 million for the year ended December
31, 1997, due primarily to the opening of the Lawrenceburg casino. This increase
occurred in spite of 1996 expenses of approximately $1.5 million related to the
Company's response to a Marion County, Indiana, grand jury document subpoena and
the related termination of a private placement of first mortgage notes.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased $10.9
million from $22.4 million for the year ended December 31, 1996, to $33.3
million for the year ended December 31, 1997. This increase is due primarily to
additional assets associated with the Lawrenceburg casino.
DEVELOPMENT AND PREOPENING COSTS - Development and preopening costs decreased
from $12.4 million for the year ended December 31, 1996, to $0.6 million for the
year ended December 31, 1997, due primarily to expenses related to developing
the casino in Lawrenceburg, Indiana, in 1996.
INTEREST EXPENSE - Net interest expense increased $10.6 million to $41.2
million for the year ended December 31, 1997. The increase is attributable to
interest expense on borrowings on the Company's $235 million First Mortgage
Notes which were issued in June 1996. This increase was offset somewhat by $8.4
million of capitalized interest in 1997, as opposed to $3.0 million in 1996.
28
<PAGE>
NET LOSS - Net loss increased from $24.8 million for the year ended December
31, 1996, to $40.2 million for the year ended December 31, 1997, primarily for
the reasons discussed above. In addition, in 1997 the Company recorded pretax
charges of $9.6 million relating to the write-down of assets held for sale and
$1.8 million for severance expenses. In 1996 the Company recorded a pretax
charge of $3.5 million related to lease termination costs in connection with
assets formerly used at its temporary facility in Riverside. Also, the Company
recorded an extraordinary loss of $0.9 million (net of tax) related to the
write-off of deferred finance costs associated with extinguishment of its
revolving secured line of credit in 1996. The Company is in a net operating loss
position and, therefore, has not recorded any federal tax benefits against its
losses for the year ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
CASINO - Casino revenues for the year ended December 31, 1996, decreased to
$228.4 million from $237.6 million for the year ended December 31, 1995. Alton
casino revenues decreased from $81.4 million to $72.4 million due to severe
weather conditions in January and February 1996 and the impact of increased
competition. This decrease is also attributed to flooding in 1995, as Alton
benefited when two competing riverboat casinos were temporarily closed in the
St. Louis area. Riverside casino revenues decreased to $82.2 million from $86.4
million due to additional competition in the Kansas City market, which was
partially offset by the opening of the Company's permanent land-based
entertainment pavilion on January 15, 1996. Baton Rouge casino revenues
increased $2.1 million from $48.9 million to $51.0 million. Sioux City casino
revenues decreased $2.1 million to $18.8 million due to the effects of increased
competition from two riverboat casinos which opened in January 1996 and from
expanded operations at nearby Native American casinos. These decreases were
partially offset by $3.9 million of casino revenues in Lawrenceburg.
Casino expenses increased to $121.0 million for the year ended December 31,
1996, compared to $117.3 million for the year ended December 31, 1995, due
primarily to $2.1 million of casino expenses in Lawrenceburg and $1.0 million of
increased admission taxes in Riverside. In addition, admission taxes increased
by $1.25 per passenger in Baton Rouge on October 1, 1996.
ADMISSIONS - Admissions revenue (net of complimentary admissions) decreased
from $8.0 million for the year ended December 31, 1995, to $0.6 million for the
year ended December 31, 1996. This decrease is due to the Company's elimination
of admission fees in January 1996 in Riverside in reaction to competitive
pressures in the Kansas City market.
FOOD, BEVERAGE AND OTHER - Food, beverage and other revenues increased
$10.7 million to $29.2 million for the year ended December 31, 1996,
primarily due to increased food, beverage and other sales at the expanded
Riverside and Baton Rouge facilities. Riverside revenues increased from $5.2
million to $11.1 million, while Baton Rouge revenues increased from $4.9
million to $7.6 million. Food, beverage and other revenues remained stable
with the year ended December 31, 1995, in Alton and Sioux City. Food,
beverage and other net profit margin improved $4.1 million to $5.4 million
for the year ended December 31, 1996, due primarily to improved operating
efficiencies in the Company's food and beverage operations.
29
<PAGE>
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
OTHER OPERATING EXPENSES - Other operating expenses increased $3.5 million to
$19.1 million for the year ended December 31, 1996. This increase is primarily
due to the opening of the permanent land-based entertainment pavilion at
Riverside, the opening of the Catfish Town development atrium in Baton Rouge,
the addition of expanded entertainment facilities in Sioux City, and the
additional services required to operate during the severe weather conditions
experienced in January and February 1996 at the Alton, Riverside and Sioux City
casinos.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses increased from $47.5 million in 1995 to $52.0 million for the year
ended December 31, 1996. Selling and marketing expenses increased $3.6 million
due primarily to increases in advertising and promotional expenses necessitated
by increased competition in Alton and Riverside, and for the opening of the
Riverside permanent facility. Additionally, general and administrative expenses
increased as the Company recorded a charge in 1996 of approximately $1.5 million
for professional and other fees related to its response to a Marion County,
Indiana, grand jury document subpoena and the related termination of a private
placement of first mortgage notes. These increases were offset somewhat by the
extinguishment of lease fees in connection with the temporary site in Riverside.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization increased $2.0
million from $20.4 million for the year ended December 31, 1995, to $22.4
million for the year ended December 31, 1996. This increase is primarily due to
increased depreciation in Riverside in connection with the Company's land-based
entertainment pavilion which opened on January 15, 1996, at an approximate cost
of $45 million, and for increased depreciation at the Catfish Town development
in Baton Rouge.
DEVELOPMENT AND PREOPENING COSTS - Development and preopening costs increased
from $3.4 million for the year ended December 31, 1995, to $12.4 million for the
year ended December 31, 1996. The increase is due primarily to expenses related
to developing the casino in Lawrenceburg, Indiana, which opened at its temporary
site on December 10, 1996.
INTEREST EXPENSE - Net interest expense increased from $14.3 million in 1995
to $30.6 million for the year ended December 31, 1996. The increase is
attributable to interest expense on the increased borrowings under the $100
million line of credit, which was used to fund the Company's expansion and
development program through June 5, 1996, and to interest expense related to the
$235 million First Mortgage Notes issued June 5, 1996.
NET INCOME (LOSS) - Net income decreased from $7.0 million for the year ended
December 31, 1995, to a net loss of $24.8 million for the year ended 1996
primarily for the reasons discussed above. In addition, the Company recorded a
pretax charge of $3.5 million related to lease termination costs in connection
with assets formerly used at its temporary facility in Riverside. Further, the
Company recorded an extraordinary loss of $0.9 million (net of tax) related to
the writeoff of deferred finance costs associated with the early extinguishment
of its line of credit in 1996 and a $1.3 million charge related to referendum
costs in Baton Rouge. In 1995, the Company recorded a pretax charge of
approximately $3.5 million primarily related to loans made pursuant to a lease
option related to the development of a downtown St. Louis casino site.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company generated cash flows from operating activities of $31.6
million compared to using $7.5 million for 1996. The increase in cash flow is
primarily attributed to the opening of the Lawrenceburg casino and the receipt
of a $10.0 million income tax refund.
During 1997, the Company used cash flows for investing activities of $72.6
million versus $179.8 million for 1996. The primary use of funds in 1997 was the
investment in the construction of the Lawrenceburg facility. In 1996, the
Company placed $94.3 million in a restricted fund to be used for the
construction of the Lawrenceburg facility and used $97.4 million for capital
expenditures, primarily at the Lawrenceburg facility.
During 1997, the Company generated $62.0 million in cash flows from financing
activities compared to generating $209.4 million of cash flows from financing
activities for the same period in 1996. The primary sources of cash flows in
1997 were $46.6 million in loans from the Company's partner in Lawrenceburg and
$25.0 million in proceeds from an equipment loan at the Lawrenceburg Partnership
offset by payments on installment contracts and payments to partners. In 1996,
the Company received proceeds from its issuance of $235 million of First
Mortgage Notes and capital contributions and loans from its partner of $42.2
million, offset by the repayment of $90.0 million on its previous line of
credit.
As of December 31, 1997, the Company had approximately $59.4 million of cash
and cash equivalents, including approximately $41.3 million held at the Indiana
Partnership. Approximately $22.6 million of the cash held at the Indiana
Partnership is expected to be used toward the completion of the Lawrenceburg
project. In addition, the Company had $25.5 million of restricted cash, $12.4
million of which is in a disbursement account to be used to fund the Company's
portion of the remaining Lawrenceburg construction costs, which cannot be used
for any other purpose. In addition to the disbursement account, the Indiana
Partnership has placed approximately $13.1 million in an escrow account
representing unbilled construction costs of the permanent Lawrenceburg facility.
On June 5, 1996, the Company issued $235 million of First Mortgage Notes
which are due June 2004. Additionally, the Company has $115 million of
Convertible Subordinated Notes outstanding which were issued in June 1994 and
are due June 2001.
31
<PAGE>
MANAGMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Company has made a significant investment in property and equipment and
plans to make significant additional investments at certain of its existing
properties, particularly in Lawrenceburg, Indiana. The Company currently
estimates that the total construction costs of the Lawrenceburg casino and
entertainment project will approximate $225 million (excluding capitalized
interest). This is a forward-looking statement that involves certain risks and
uncertainties, and this amount is subject to numerous factors including weather
and other construction risks. As of December 31, 1997, approximately $210
million has been contributed to the partnership for the project by all partners,
including approximately $14 million in preopening costs. Of the remaining
Lawrenceburg construction costs, approximately $22.5 million is expected to be
funded through the remaining proceeds from equipment financing which was
completed in 1997, and the balance will be funded by the Company from the
disbursement account under provisions of the Partnership agreement, as Conseco
has fulfilled its funding obligation as of December 31, 1997. The Company
expects that the restricted cash on hand at December 31, 1997, together with the
$22.5 million in remaining proceeds from the equipment financing, will be
sufficient to complete the Lawrenceburg project.
As a result of its June 1995 acquisition of Jazz, the Company is now the
developer of the Catfish Town real estate project in Baton Rouge, Louisiana. The
Company estimates that the completion of the Catfish Town project will cost an
additional $2 million to $5 million (primarily tenant allowance) as of December
31, 1997. Further, if a Predecessor entity of the Company's status as an
S-Corporation, which has been asserted as an issue by the IRS during an ongoing
audit, is successfully challenged, the Company currently estimates that it would
require up to approximately $13.9 million (excluding penalties) to fund the
potential income tax liability.
The Company believes that cash on hand will be sufficient to fund its current
capital expenditure obligations, including the completion of the permanent
Lawrenceburg casino development. The Company's ability to meet its operating and
debt service requirements, however, is substantially dependent upon the success
of the permanent Lawrenceburg casino. If the permanent Lawrenceburg casino fails
to meet the Company's operating and cash flow expectations or if there are any
other events that negatively impact its sources or uses of cash -- such as an
overrun in the project costs at the permanent Lawrenceburg casino, a significant
deterioration in the operating results of the Company's other properties, or an
adverse IRS ruling -- the Company may be unable to meet future debt service
payments without obtaining additional debt or equity financing or without the
disposition of assets. No assurance can be given that the Company would be able
to obtain such additional financing on suitable terms or sell assets on
favorable terms, if required. In light of the foregoing, the Company has
retained and has been working with financial advisory firms to consider various
options with respect to the Company's capital structure, including possible debt
and equity financing and asset dispositions. The disposal of assets could result
in a significant charge to earnings.
32
<PAGE>
YEAR 2000
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the Year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate their computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff and outside consultants. The team's activities are designed to
ensure that there is no adverse effect on the Company's core business operations
and that transactions with customers, suppliers, and financial institutions are
fully supported. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no guarantee that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the Company.
The cost of the Year 2000 initiatives is not expected to be material to the
Company's results of operation or financial position.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS DOCUMENT,
THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "EXPECT" AND SIMILAR
EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS, INCLUDING THOSE
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS
MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT
LIMITED TO, (i) GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY
OPERATES, (ii) COMPETITIVE PRESSURES IN THE MARKETS IN WHICH THE COMPANY
OPERATES, (iii) DELAYS OR COST-OVERRUNS WITH RESPECT TO THE LAWRENCEBURG CASINO
WHICH COULD SIGNIFICANTLY IMPAIR THE ABILITY OF THE COMPANY TO MEET ITS DEBT
SERVICE REQUIREMENTS, (iv) THE EFFECT OF FUTURE LEGISLATION OR REGULATORY
CHANGES ON THE COMPANY'S OPERATIONS, AND (v) OTHER RISKS DETAILED FROM TIME TO
TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY
DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
33
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DECEMBER 31,
- ------------------------------------------------------------------------------------------
(in thousands, except share and per share data) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 59,354 $ 38,284
Accounts receivable, net of allowance for doubtful
accounts of $1,624 and $1,271, respectively 2,139 1,918
Income taxes receivable 1,176 11,111
Deferred income taxes 2,011
Other current assets 5,303 7,528
-----------------------
Total current assets 69,983 58,841
-----------------------
Net property and equipment 390,343 314,480
-----------------------
OTHER ASSETS:
Restricted cash and cash equivalents 25,545 84,551
Deferred finance costs, net of accumulated
amortization of $4,312 and $2,386, respectively 10,809 12,096
Goodwill and other intangible assets, net of accumulated
amortization of $3,614 and $1,579, respectively 54,689 56,116
Other 8,487 4,444
-----------------------
Total other assets 99,530 157,207
-----------------------
TOTAL ASSETS $559,856 $530,528
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------------------------
(in thousands, except share and per share data) 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,570 $ 15,293
Accrued payroll and related expenses 8,912 6,772
Other accrued liabilities 17,052 10,628
Installment contracts payable 3,288 3,346
Accrued interest 9,246 6,027
Current portion of long-term obligations 4,583 5,169
Current maturities of long-term debt 13,348 2,900
-----------------------
Total current liabilities 68,999 50,135
-----------------------
Long-term debt 436,442 377,308
Deferred income taxes 1,947 689
Other long-term obligations 2,186 15,171
Minority interests in equity of consolidated subsidiaries 17,619 14,524
Commitments and contingent liabilities (Note 16)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par; 60,000,000 shares
authorized; 24,498,333 shares issued and
outstanding in 1997 and 24,333,333 shares
issued and outstanding in 1996 245 243
Capital in excess of par 72,038 71,865
Retained (deficit) earnings (39,620) 593
-----------------------
Total stockholders' equity 32,663 72,701
-----------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $559,856 $530,528
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Casino $ 319,830 $ 228,388 $ 237,613
Admissions 16,809 2,759 15,300
Food, beverage and other 34,836 29,212 18,537
----------------------------------------
371,475 260,359 271,450
Less promotional allowances (27,392) (15,542) (18,759)
----------------------------------------
Net revenues 344,083 244,817 252,691
----------------------------------------
COSTS AND EXPENSES:
Casino 163,935 121,004 117,284
Food, beverage and other 29,962 23,769 17,242
Other operating expenses 28,695 19,111 15,616
Selling, general and administrative 69,725 52,048 47,549
Depreciation and amortization 33,292 22,416 20,450
Development and preopening costs 594 12,365 3,411
Notes receivable writeoff 3,477
Lease termination costs 3,508
Referendum expenses 1,347
Severance expenses 1,750
Writedown of assets held for sale 9,600
----------------------------------------
337,553 255,568 225,029
----------------------------------------
Income (Loss) from operations 6,530 (10,751) 27,662
----------------------------------------
OTHER INCOME (EXPENSE):
Interest income 5,937 4,235 436
Interest expense (47,116) (34,842) (14,708)
----------------------------------------
(41,179) (30,607) (14,272)
----------------------------------------
(Loss) Income before minority interests, income taxes
and extraordinary item (34,649) (41,358) 13,390
Minority interests (6,916) 4,879 526
Income tax benefit (expense) 1,352 12,530 (6,963)
----------------------------------------
Net (loss) income before extraordinary item (40,213) (23,949) 6,953
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $594) (890)
----------------------------------------
Net (loss) income $ (40,213) $ (24,839) $ 6,953
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
BASIC AND DILUTED (LOSS) INCOME PER SHARE
(Loss) Income before extraordinary item per share $ (1.65) $ (0.98) $ 0.29
Extraordinary loss on extinguishment of debt per
share (net of income tax benefit of $0.02) (0.04)
----------------------------------------
(Loss) Income per share $ (1.65) $ (1.02) $ 0.29
----------------------------------------
Average shares outstanding 24,333,333 24,333,333 24,333,333
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(40,213) $(24,839) $ 6,953
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation 31,250 21,501 19,593
Amortization 3,968 2,660 2,287
Deferred income taxes (753) (3,538) 4,723
Notes receivable writeoff 3,477
Compensation expense recognized on issuance of stock 175
Gain on sale of assets (153)
Minority interests 6,916 (4,879) (526)
Lease termination costs 1,941
Extraordinary item 890
Writedown of assets held for sale 9,600
Changes in operating assets and liabilities (net of the
effects of the purchase of Jazz Enterprises, Inc. in 1995):
Accounts receivable (221) 1,279 (289)
Other current assets 3,218 (2,803) (699)
Deposits (161) 770
Accounts payable (2,723) 3,011 12,058
Accrued liabilities 10,637 5,614 2,810
Income taxes receivable 9,935 (8,914) (823)
--------------------------------------
Net cash provided by (used in) operating activities 31,628 (7,460) 49,564
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities 1,952 548
Purchases of marketable securities (126)
Proceeds from sales of property and equipment 153
Long-term obligations (13,586)
Increase in notes receivable (5,178)
Purchases of property and equipment (117,444) (97,409) (71,854)
Goodwill (9,388)
Other long-term assets (543) 171 (772)
Restricted cash held by trustees 59,006 (84,551)
--------------------------------------
Net cash used in investing activities (72,567) (179,810) (86,644)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 25,000 235,000
Proceeds from line of credit 44,500 49,500
Repayment of line of credit (90,000) (4,000)
Payments on installment contracts (4,211) (2,991) (6,268)
Payments on long-term debt (115) (2,191) (186)
Increase in deferred finance costs (638) (9,716) (2,441)
Proceeds from partner loans 46,648 23,197
Repayment of partner loans (2,710)
Capital contributions from partner 19,044 1,718
Partnership equity distributions (1,514)
Payment of preferred equity return to partner (1,163)
Other 712 (7,448) (3,375)
--------------------------------------
Net cash provided from financing activities 62,009 209,395 34,948
--------------------------------------
Net increase (decrease) in cash and cash equivalents 21,070 22,125 (2,132)
Cash and cash equivalents, beginning of year 38,284 16,159 18,291
--------------------------------------
Cash and cash equivalents, end of year $ 59,354 $ 38,284 $ 16,159
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
<PAGE>
<TABLE>
<CAPTION>
RETAINED TOTAL
CONSOLIDATED STATEMENTS COMMON CAPITAL IN EARNINGS STOCKHOLDERS'
OF STOCKHOLDERS' EQUITY SHARES STOCK EXCESS OF PAR (DEFICIT) EQUITY
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 24,333,333 $243 $71,865 $ 18,479 $90,587
Net income 6,953 6,953
----------------------------------------------------------------------
Balance, December 31, 1995 24,333,333 243 71,865 25,432 97,540
Net loss (24,839) (24,839)
----------------------------------------------------------------------
Balance, December 31, 1996 24,333,333 243 71,865 593 72,701
RESTRICTED STOCK ISSUED 165,000 2 173 175
NET LOSS (40,213) (40,213)
----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 24,498,333 $245 $72,038 $(39,620) $32,663
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Argosy Gaming Company (collectively with its subsidiaries, "Argosy" or
"Company") is engaged in the business of providing casino style gaming and
related entertainment to the public and, through its subsidiaries, operates
riverboat casinos in Alton, Illinois; Lawrenceburg, Indiana; Riverside,
Missouri; Baton Rouge, Louisiana; and Sioux City, Iowa. Indiana Gaming Company,
L.P., ("Indiana Partnership") a limited partnership in which the Company is
general partner and holds a 57.5% partnership interest, opened a riverboat
casino and related entertainment and support facilities at a temporary site in
Lawrenceburg, Indiana, on December 10, 1996. The Partnership opened its
permanent pavilion on December 10, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. The consolidated financial
statements include the accounts of Argosy and its controlled subsidiaries and
partnerships. All significant intercompany transactions have been eliminated.
Under certain conditions, subsidiaries are required to obtain approval from
state gaming authorities before making distributions to Argosy.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS - The Company considers cash and all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Buildings and shore improvements 5 to 31 years
Riverboats, docks and improvements 5 to 20 years
Furniture, fixtures and equipment 5 to 10 years
DEFERRED FINANCE COSTS - Deferred finance costs are amortized over the life
of the respective loans using the effective interest method.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the cost in excess
of fair value of net assets acquired, and is amortized over 40 years. Other
intangible assets, primarily payments to cities, are amortized over the lives of
the respective leases or development agreements including extensions.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CASINO REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as
casino revenues the net win from gaming activities, which is the difference
between gaming wins and losses. The retail value of admissions, food, beverage
and other items, which were provided to customers without charge, has been
included in revenues, and a corresponding amount has been deducted as
promotional allowances. The estimated direct cost of providing promotional
allowances has been included in costs and expenses as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Admissions $6,935 $ 505 $4,601
Food, beverage and other 7,626 4,054 2,989
- ----------------------------------------------------------------------
</TABLE>
ADMISSIONS REVENUE -- Admissions revenue is recognized at the time the
related service is performed.
ADVERTISING COSTS -- The Company expenses advertising costs as incurred.
Advertising expense was $12,475, $9,192 and $7,908 in 1997, 1996 and 1995,
respectively.
DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an effort
to identify and develop new gaming locations are expensed as incurred, as there
can be no assurance that such costs, if capitalized, would be realizable.
Preopening costs are expensed as incurred.
EARNINGS PER SHARE -- The Company adopted the provisions of Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings Per Share" in
1997. This adoption had no impact on basic or diluted earnings per share in
1997, 1996 or 1995. Because the Company is in a loss position, its restricted
common stock and stock options outstanding are anti-dilutive.
2 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Land $ 38,890 $ 40,094
Buildings, leasehold and shore improvements 189,058 92,686
Riverboats, docks and improvements 149,318 122,930
Furniture, fixtures and equipment 78,168 66,551
Construction in progress 6,695 39,283
----------------------
462,129 361,544
Less accumulated depreciation and amortization (71,786) (47,064)
----------------------
Net property and equipment $390,343 $314,480
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
40
<PAGE>
3 ASSETS HELD FOR SALE
The Company recorded a charge of $9,600 to adjust the carrying value of certain
assets held for sale to their estimated fair value in 1997. These assets include
the original riverboat casino the Company utilized in Alton, Illinois, from
September 1991 until May 1993 and a barge utilized as a temporary landing
facility in Lawrenceburg, Indiana, until December 10, 1997. The estimated fair
value of the assets was determined through discussions with a broker and
comparison to other riverboats and barges currently available for sale.
The adjusted carrying value of the boat and barge of approximately $4,300 is
included in other assets in the accompanying balance sheet at December 31, 1997.
4 LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage notes due June 1, 2004, interest payable semi-annually at 13 1/4% $235,000 $235,000
Convertible subordinated notes due June 1, 2001, convertible into
common stock at $17.70 per share, interest payable semi-annually at 12% 115,000 115,000
Notes payable, principal and interest payments due quarterly through
September 2015, discounted at 10.5% 7,656 7,011
Notes payable, principal and interest payments due monthly through
December 2001, interest payable at prime + 1%
(9.5% at December 31, 1997), secured by gaming
vessel and certain equipment 25,000
Loans from partner, principal due in equal annual installments
through 2004, interest payable at prime + 6%
(14.5% at December 31, 1997) 67,134 23,197
-----------------------
449,790 380,208
Less: current maturities 13,348 2,900
-----------------------
Long-term debt, less current maturities $436,442 $377,308
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
On June 5, 1996 the Company issued $235,000 of First Mortgage Notes due
2004 ("Mortgage Notes"). The Mortgage Notes are senior obligations of the
Company secured by substantially all of its assets, except the assets of the
Indiana Partnership.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Mortgage Notes contain certain restrictions on the payment of dividends
on the Company's common stock and the occurrence of additional indebtedness, as
well as other covenants customary in senior secured financings. Under terms of
the indenture governing the Mortgage Notes, Argosy is required to make offers to
purchase notes, at 101, at an amount equal to 50% of the proceeds from certain
distributions, above specified levels, received from the Indiana Partnership. In
addition, $94,300 of the proceeds of the Mortgage Notes were initially placed in
a disbursement account which can only be used to fund the Company's obligations
for the construction of the Lawrenceburg project. Approximately $12,431 of this
amount remains and is included in restricted cash and cash equivalents at
December 31, 1997.
The Company used a portion of the proceeds from the issuance of the Mortgage
Notes to repay and terminate its senior secured line of credit ("Line of
Credit"). In connection with this early termination of the Line of Credit, the
Company expensed approximately $1,484 of deferred finance costs ($890 net of
tax).
The convertible subordinated notes ("Notes") are convertible into common
stock at any time and may be redeemed by the Company in whole or in part, at
specified percentages of principal plus accrued and unpaid interest to the date
of redemption. The Notes are subordinated to prior payment in full of all senior
indebtedness as defined, including such indebtedness incurred in the future.
Interest expense for the years ended December 31, 1997, 1996 and 1995 was
$47,116 (net of $8,391 capitalized), $34,842 (net of $3,033 capitalized) and
$14,708 (net of $3,203 capitalized), respectively.
Maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 13,348
1999 13,726
2000 14,136
2001 139,464
2002 10,334
Thereafter 258,782
</TABLE>
OTHER LONG-TERM OBLIGATIONS
Included in other long-term obligations is approximately $6,583 representing the
remaining grants and infrastructure payments due from the Indiana Partnership
under terms of a development agreement with the City of Lawrenceburg.
42
<PAGE>
6 INCOME TAXES
Income tax benefit (expense) for the years ended December 31, 1997, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal $ $ 7,877 $(1,522)
State 866 1,117 (760)
-------------------------------------
866 8,994 (2,282)
-------------------------------------
DEFERRED:
Federal 2,521 (4,003)
State 486 1,015 (678)
-------------------------------------
486 3,536 (4,681)
-------------------------------------
Income tax benefit (expense) $1,352 $12,530 $(6,963)
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes for the years ended December 31, 1997, 1996
and 1995 differs from that computed at the federal statutory corporate tax rate
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (35.0)% (35.0)% 35.0%
State income taxes, net of federal benefit (2.6) (2.5) 6.8
Valuation allowance 38.7
Prior year taxes 4.4
Goodwill amortization 0.4 0.5 0.9
Minority interest (6.7) 4.6 2.6
Other, net 1.3 2.1 2.3
----------------------------------
(3.9)% (30.3)% 52.0%
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Basis of assets held for sale $ 3,727 $
Depreciation (13,392) (11,605)
Preopening 4,755 5,766
Benefit of net operating loss carryforward 17,986 6,464
Other, net 1,320 (390)
-----------------------
14,396 235
Valuation allowance (14,332) (924)
-----------------------
Net deferred tax asset (liability) $ 64 $ (689)
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
The valuation allowance relates to deferred tax assets established under SFAS
109 for net operating loss carryforwards of approximately $46,600. These loss
carryforwards, which will expire through 2012, will be carried forward to future
years for possible utilization.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
7 SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amounts of $4,154, $5,191 and $1,681 in
1997, 1996 and 1995, respectively, which was financed through installment
contracts.
The Company paid $51,185, $33,302 and $16,052 for interest, and $143, $332
and $3,105 for income taxes in 1997, 1996 and 1995, respectively.
8 LEASES
Future minimum lease payments for operating leases with initial terms in excess
of one year as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ------------------------------------------------------------------------------
<S> <C>
1998 $ 1,547
1999 1,054
2000 748
2001 573
2002 202
Thereafter 14,942
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $7,205,
$6,204 and $4,947, respectively.
9 STOCK OPTION PLANS
The Company adopted the Argosy Gaming Company Stock Option Plan, as amended,
("Stock Option Plan"), which provides for the grant of non-qualified stock
options for up to 2,500,000 shares of common stock to key employees of the
Company. These options expire 10 years after their respective grant dates
and become exercisable over a specified vesting period. At December 31, 1997,
options for 624,909 shares are exercisable under the Stock Option Plan. The
weighted average life of outstanding options at December 31, 1997, is
approximately five years.
The Company also has adopted the Argosy Gaming Company 1993 Directors
Stock Option Plan ("Directors Option Plan"), which provides for a total of
50,000 shares of common stock to be authorized and reserved for issuance. The
Directors Option Plan provides for the grant of non-qualified stock options
at fair market value to non-employee directors of the Company as of the date
such individuals become directors of the Company. These options expire five
years after their respective grant dates and become exercisable over a
specified vesting period. At December 31, 1997, options for 21,000 shares are
exercisable under the Directors Option Plan.
On November 7, 1997 ("Grant Date"), the Company's board of directors
approved a plan that will allow certain employees to exchange their existing
stock options for an amount of options equal to the number of options to be
exchanged multiplied by a fraction, the numerator of which is $4.25 (closing
price on Grant Date) and the denominator of which is the prior option price.
If all the eligible employees elect this alternative, the number of options
outstanding would be reduced by 491,690.
44
<PAGE>
In addition, the Company is committed to issuing options for 74,000 shares of
common stock in 1998. The options will be priced $3.44 per share.
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations in
accounting for its employee stock options. Under APB 25, when the exercise price
of employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." Accordingly, no compensation expense has been recognized for
either stock plan. Had the valuation methods under SFAS 123 been used for the
Company's stock option grants, the fiscal 1997 pro forma net loss would have
been $40,336 and the pro forma loss per share would have been $1.66. The fair
value of each option was estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: dividend yield of zero;
expected volatility 36.5%; risk free interest rate of 6% and expected option
life of five years. There was no pro forma compensation expense in 1996 or 1995.
These pro forma amounts may not be representative of future disclosures because
the estimated fair value of the options is amortized to expense over the vesting
period and additional options may be granted in the future.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
STOCK OPTION PLAN DIRECTORS OPTION PLAN
- ---------------------------------------------------------------------------------------------------------
EXERCISE EXERCISE
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
December 31, 1994 2,285,962 $16.75 - $19.38 15,000 $19.00
Granted 150,000 $16.75 6,000 $11.50
Forfeited (20,709) $16.75 - $19.38
---------------------------------------------------------------------
Outstanding,
December 31, 1995 2,415,253 $16.75 - $19.38 21,000 $11.50 - $19.00
Forfeited (10,000) $16.75
---------------------------------------------------------------------
Outstanding,
December 31, 1996 2,405,253 $16.75 - $19.38 21,000 $11.50 - $19.00
GRANTED 406,000 $ 3.13 - $ 3.63
FORFEITED (744,343) $16.75 - $19.38
---------------------------------------------------------------------
OUTSTANDING
DECEMBER 31, 1997 2,066,910 $ 3.13 - $19.38 21,000 $11.50 - $19.00
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10 RESTRICTED STOCK
The Company issued 165,000 shares of restricted common stock to certain new
employees in 1997 at prices ranging from $3 1/8 to $3 5/8. The restricted stock
vests 66,000 shares in 1998 and 99,000 shares in 1999.
Compensation expense of $566 is being amortized over the period from the date
of grant until the respective vesting dates. Compensation expense of $175 was
recorded in 1997.
11 EMPLOYEES BENEFIT PLAN
The Company established a 401(k) defined-contribution plan which covers
substantially all of its full-time employees. Participants can contribute a
portion of their eligible salaries (as defined) subject to maximum limits, as
determined by provisions of the Internal Revenue Code. The Company will match
a portion of participants' contributions in an amount determined annually
by the Company. Expense recognized under the Plan was approximately $2,168,
$1,546 and $1,708 in 1997, 1996 and 1995, respectively.
12 SUBSIDIARY GUARANTORS
On June 5, 1996, the Company issued the Mortgage Notes in a private placement
transaction. In October 1996, the Company exchanged all of the outstanding
privately placed Mortgage Notes for a like amount of identical Mortgage Notes
registered with the Securities and Exchange Commission. The Mortgage Notes rank
senior in right of payment to all existing and future indebtedness of the
Company.
The Mortgage Notes are unconditionally guaranteed, on a joint and several
basis, by the following wholly owned subsidiaries of the Company: Alton Gaming
Company; The Missouri Gaming Company; The St. Louis Gaming Company; Iowa Gaming
Company; Jazz Enterprises, Inc.; Argosy of Louisiana, Inc.; Catfish Queen
Partnership in Commendam; and The Indiana Gaming Company (the "Guarantors"). The
Mortgage Notes are secured, subject to certain prior liens, by a first lien on
(i) substantially all of the assets of the Company including the assets used in
the Company's Alton, Riverside, Baton Rouge and Sioux City operations, (ii) a
pledge of all the capital stock of, and partnership interests in, the Company's
subsidiaries, excluding the Company's partnership interest in its Sioux City
property, (iii) a pledge of the intercompany notes payable to the Company from
its subsidiaries, and (iv) an assignment of the proceeds of the management
agreement relating to the Lawrenceburg casino project. The collateral for the
Mortgage Notes does not include assets of the Indiana Partnership.
46
<PAGE>
The following tables present summarized balance sheet information of the
Company as of December 31, 1997 and 1996, and summarized operating statement
information for the years ended December 31, 1997, 1996 and 1995. The column
labeled "Parent Company" represents the holding company for each of the
Company's direct subsidiaries, the column labeled "Guarantors" represents each
of the Company's direct subsidiaries, all of which are wholly owned by the
parent company, and the column labeled "Non-Guarantors" represents the
partnerships which operate the Company's casinos in Sioux City and in
Lawrenceburg. The Company believes that separate financial statements and other
disclosures regarding the Guarantors, except as otherwise required under
Regulation S-X, are not material to investors.
Summarized balance sheet information as of December 31, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 10,106 $ 27,874 $ 44,581 $ (12,578) $ 69,983
Non-current assets 381,368 387,009 222,577 (501,081) 489,873
-------------------------------------------------------------------------------------
$391,474 $414,883 $267,158 $(513,659) $559,856
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Current liabilities $ 8,811 $ 20,595 $ 57,088 $ (17,495) $ 68,999
Non-current liabilities 350,000 348,504 169,605 (409,915) 458,194
Stockholders' equity 32,663 45,784 40,465 (86,249) 32,663
-------------------------------------------------------------------------------------
$391,474 $414,883 $267,158 $(513,659) $559,856
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 29,353 $ 25,301 $ 13,191 $ (9,004) $ 58,841
Non-current assets 403,873 314,287 119,727 (366,200) 471,687
-------------------------------------------------------------------------------------
$433,226 $339,588 $132,918 $(375,204) $530,528
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY:
Current liabilities $ 10,525 $ 26,939 $ 25,799 $ (13,128) $ 50,135
Non-current liabilities 350,000 267,428 73,687 (283,423) 407,692
Stockholders' equity 72,701 45,221 33,432 (78,653) 72,701
-------------------------------------------------------------------------------------
$433,226 $339,588 $132,918 $(375,204) $530,528
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Summarized operating statement information for the years ended December 31,
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 5,795 $189,388 $158,696 $ (9,796) $344,083
Costs and expenses 23,630 184,818 136,039 (6,934) 337,553
Net interest (expense) income (32,145) 2,366 (6,616) (4,784) (41,179)
Net (loss) income (40,213) 8,696 10,599 (19,295) (40,213)
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 4,875 $211,319 $ 24,299 $ 4,324 $244,817
Costs and expenses 16,043 209,955 35,552 (5,982) 255,568
Net interest expense (22,177) (7,176) (738) (516) (30,607)
Net (loss) income (24,839) (2,297) (15,718) 18,015 (24,839)
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 4,071 $233,205 $ 21,994 $ (6,579) $252,691
Costs and expenses 14,161 195,517 21,930 (6,579) 225,029
Net interest expense (8,964) (5,185) (123) (14,272)
Net (loss) income 6,953 18,101 (59) (18,042) 6,953
</TABLE>
13 PURCHASE OF JAZZ ENTERPRISES, INC.
Effective May 30, 1995, the Company acquired 100% of the stock of Jazz
Enterprises, Inc. ("Jazz"), formerly a 10% partner in the Company's Baton Rouge,
Louisiana, riverboat casino. The acquisition was accounted for as a purchase.
Terms of the transaction allowed the Company to acquire Jazz's 10% limited
partnership interest in the Company's Baton Rouge casino and all of Jazz's
interest in the Catfish Town real estate development.
Under terms of the purchase agreement, the Company made initial cash payments
to Jazz totaling $8,500 and is required to make additional payments of $1,350
annually for ten years, and payments of $500 annually for the following ten
years. The net present value of these additional payments was approximately
$9,400 assuming a discount rate of 10.5%, and the remaining portion is included
in long-term debt in the accompanying balance sheets. In addition, the Company
forgave loans to Jazz and its principals of approximately $20,700, assumed
certain construction obligations, ordinary course accounts payable and other
liabilities totaling approximately $7,300, and paid expenses of approximately
$900. Under terms of the Purchase Agreement, substantially all other obligations
of Jazz existing at the time of the purchase remain the responsibility of the
former owners of Jazz.
48
<PAGE>
14 FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 59,354 $ 59,354
Restricted cash and cash equivalents 25,545 25,545
First mortgage notes 235,000 239,700
Convertible subordinated notes 115,000 97,750
Other long-term debt 99,790 99,790
- ------------------------------------------------------------------------------------------
</TABLE>
The fair value of the first mortgage notes and the convertible subordinated
notes are based on quoted market prices. The Company estimates that the fair
value of the remainder of the Company's long-term debt approximates market
value.
15 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Net revenues $82,495 $87,509 $82,351 $91,728
Income (loss) from operations (a) 1,961 7,106 933 (3,470)
Other expense, net 10,460 9,920 9,778 11,021
Net loss (9,017) (4,265) (9,623) (17,308)
Net loss per share (0.37) (0.17) (0.39) (0.71)
<CAPTION>
FIRST SECOND THIRD FOURTH
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Net revenues $62,689 $63,265 $60,022 $58,841
Income (loss) from operations (b) 1,912 103 (3,748) (9,018)
Other expense, net 4,121 6,785 10,251 9,450
Loss before extraordinary item (3,931)
Loss per share before extraordinary item (0.16)
Net loss (c) (1,047) (4,821) (7,708) (11,263)
Net loss per share (0.04) (0.20) (0.32) (0.46)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Income from operations includes a charge of $1,750 related to severance
expense for the first quarter of 1997 and a charge of $9,600 for a
writedown of assets held for sale in the fourth quarter of 1997.
(b) Income from operations includes a charge of $1,500 in connection with
termination of a private placement for the first quarter of 1996 and a
charge of $3,508 related to lease termination costs associated with assets
formerly used at the Riverside temporary facility for the second quarter
of 1996.
(c) Net loss for the second quarter of 1996 includes an after tax charge of
$890 related to an extraordinary item for the early extinguishment of a
line of credit.
49
<PAGE>
Notes to CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16 COMMITMENTS AND CONTINGENT LIABILITIES
LAWRENCEBURG, INDIANA DEVELOPMENT - On June 30, 1995, the Indiana Partnership
was awarded a preliminary suitability certificate from the Indiana Gaming
Commission to develop a riverboat casino project on the Ohio River in
Lawrenceburg, Indiana. The Company is a 57.5% general partner in the Indiana
Partnership. On December 10, 1996, the Indiana Partnership was awarded a gaming
license and commenced operations at a temporary facility. The Indiana
Partnership opened its permanent pavilion on December 10, 1997.
Under terms of the Lawrenceburg partnership agreement, after the third
anniversary date of commencement of operations at the Lawrenceburg casino, each
limited partner has the right to sell its interest to the other partners (pro
rata in accordance with their respective percentage interests). In the event of
this occurrence, if the partners cannot agree on a selling price, the Indiana
Partnership will be sold in its entirety.
OTHER - A predecessor entity to the Company ("Predecessor"), as a result of a
certain shareholder loan transaction, could be subject to federal and certain
state income taxes (plus interest and penalties, if any) if it is determined
that it failed to satisfy all of the requirements of the S-Corporation
provisions of the Internal Revenue Code relating to the prohibition concerning a
second class of stock.
An audit is currently being conducted by the Internal Revenue Service ("IRS")
of the Company's federal income tax returns for the 1992 and 1993 tax years, and
the IRS has identified the S-Corporation status as one of the issues, although
the IRS has yet to make a formal claim of deficiency. If the IRS successfully
challenges the Predecessor's S-Corporation status, the Company would be required
to pay federal and certain state income taxes on the Predecessor's taxable
income from the commencement of its operations until February 25, 1993 (plus
interest and penalties, if any, thereon until the date of payment). If the
Predecessor was required to pay federal and state income taxes on its taxable
earnings through February 25, 1993, such payments could amount to approximately
$13,900, including interest through December 31, 1997, but excluding penalties,
if any. While the Company believes the Predecessor has legal authority for its
position that it is not subject to federal and certain state income taxes
because it met the S-Corporation requirements, no assurances can be given that
the Predecessor's position will be upheld. This contingent liability could have
a material adverse effect on the Company's results of operations, financial
condition and cash flows. No provision has been made for this contingency in the
accompanying consolidated financial statements.
The Company is subject, from time to time, to various legal and regulatory
proceedings, in the ordinary course of business. The Company believes that
current proceedings will not have a material effect on the financial condition
of the Company.
50
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Argosy Gaming Company
We have audited the accompanying consolidated balance sheets of Argosy Gaming
Company as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Argosy Gaming
Company at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 13, 1998
51
