<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
COMMISSION FILE NUMBER: 1-11853
ARGOSY GAMING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1304247
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
219 PIASA STREET, ALTON, ILLINOIS 62002
-------------------------------------- --------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (618) 474-7500
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH
EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
13-1/4 % First Mortgage Notes due 2004 New York
12% Convertible Subordinated Notes due 2001 New York
Common Stock, par value $.01 per share New York
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
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
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 24, 1998, the aggregate market value of the registrant's
Common Stock held by non-affiliates was $53,725,260. The closing price of
the Common Stock on March 24, 1998 as reported on the New York Stock
Exchange, was $3-3/4.
As of March 24, 1998, the number of shares outstanding of the
registrant's Common Stock, par value $.01 per share, was 24,498,333.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Annual Report to Stockholders for
the fiscal year ended December 31, 1997, and of the registrant's Notice of
Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of
Stockholders to be held on April 23, 1998 as described in the Cross
Reference Sheet and a Table of Contents included herewith, is incorporated
herein by reference into Parts II and III of this Report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AMENDING ITEMS: 1, 2, 3, 6, 7 AND 13
------------------------------------
------------------------------------
<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
PAGE REFERENCE
OR REFERENCE(1)
----------------
PART I
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 18
ITEM 3. LEGAL PROCEEDINGS 19
PART II
ITEM 6. SELECTED FINANCIAL DATA 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 26
CONDITION AND RESULTS OF OPERATIONS
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (2) 34
(1) Certain information is incorporated by reference, as indicated below, from
the Annual Report to Stockholders for the fiscal year ended December 31,
1997 (the "Annual Report") and the registrant's Notice of Annual Meeting of
Stockholders and Proxy Statement for its Annual Meeting of Stockholders to
be held on April 23, 1998, (the "Proxy Statement").
(2) Proxy Statement sections entitled "Executive Compensation" and "Certain
Transactions."
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Argosy Gaming Company (the "Company") is a multi-jurisdictional
developer, owner and operator of riverboat casinos and related entertainment
facilities in the midwestern and southern United States. The Company, through
its subsidiaries, owns and operates riverboat casinos in Alton, Illinois,
Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux
City, Iowa.
Unless the context otherwise requires, "Company" and "Argosy" shall mean
Argosy Gaming Company and its subsidiaries. The Company's principal executive
offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone
number is (618) 474-7500.
CURRENT OPERATIONS
ALTON BELLE CASINO - Alton, Illinois, is located on a leased site on the
Mississippi River approximately 20 miles northeast of downtown St. Louis,
and consists of 22,800 gaming square feet, 684 slot machines and 35 table
games. The facility also includes a 37,000 square foot, three-level
floating entertainment pavilion which features a sports/entertainment
lounge, buffet and restaurant facilities, conference facilities and the
market's only off-track betting parlor.
ARGOSY CASINO OF GREATER KANSAS CITY - Riverside, Missouri, is located on a
55-acre owned site approximately five miles from downtown Kansas City on
the Missouri River and consists of 35,863 gaming square feet, 965 slot
machines and 54 table games. The riverboat casino is complemented by an
85,000 square foot land-based entertainment facility featuring specialty
and buffet restaurants, a sports/entertainment lounge, and 14,000 square
feet of banquet/conference facilities.
BELLE OF BATON ROUGE - Baton Rouge, Louisiana, is located on a site on the
Mississippi River in downtown Baton Rouge and consists of 27,971 gaming
square feet, 776 slot machines and 43 table games. The riverboat casino is
complemented by Argosy's adjacent land-based entertainment development
known as Catfish Town. The Catfish Town development includes a 50,000
square foot festival atrium, entertainment/sports lounge, buffet/coffee
shop, conference facilities and approximately 150,000 square feet of
leasable retail space.
BELLE OF SIOUX CITY - Sioux City, Iowa, is located on a leased site in
downtown Sioux City on the Missouri River and consists of 12,500 gaming
square feet, 419 slot machines and 24 table games, a bar and gift shop.
The casino is complemented by adjacent barge facilities featuring buffet
dining, meeting space and administrative support offices.
LAWRENCEBURG CASINO - In June 1995, Indiana Gaming Company, L.P., a
joint-venture subsidiary of the Company ("Indiana Partnership"), was awarded
the right to develop and operate a riverboat casino and entertainment complex
on the Ohio River in Lawrenceburg, Indiana, which is located approximately
15 miles west of Cincinnati, Ohio. The Company is the sole general partner
of, and holds a 57.5% general partnership interest in the Indiana
partnership. Conseco Entertainment L.L.C. ("Conseco"), an indirect
subsidiary of Conseco, Inc., holds a 29% limited partnership interest and
certain other investors, including H. Steven Norton, a former employee of
the Company, who brought the opportunity to the Company concurrent with his
initial employment, hold the remaining 13.5% limited partnership interest
in the Indiana Partnership. The Company manages the development,
construction and operation of the Lawrenceburg Casino project and receives
a management fee of 7.5% of EBITDA and Conseco receives a financial
advisory fee of 5% of EBITDA.
1
<PAGE>
The Lawrenceburg casino opened December 10, 1996 and, through September 30,
1997, the Indiana Partnership operated at a temporary site utilizing a
leased vessel with approximately 20,500 square feet of gaming space. The
vessel, which had a capacity of 1,600 passengers, featured approximately
870 slot machines and 52 table games for a total of approximately 1,275
gaming positions. In addition, the Indiana Partnership leased, from the
Company, an approximately 24,000 square foot floating entertainment and
support facility which featured ticketing and holding areas, a food court,
two bars and a gift kiosk. Parking for the temporary facility was provided
at a 1,400 space satellite lot. The Indiana Partnership provided free
shuttle service for the parking lot to the temporary site.
On October 1, 1997, the Indiana Partnership began operating its permanent
vessel at the temporary site. The vessel features approximately 74,300
square feet of gaming space on three levels and has approximately 2,470
gaming positions consisting of approximately 1,735 slots and 97 table
games. The vessel can accommodate approximately 4,400 passengers and crew
members. On December 10, 1997, the Indiana Partnership moved the riverboat
casino from the temporary site to its permanent facility which includes a
1,750 space parking garage and a 120,000 square foot land-based
entertainment pavilion and support facility featuring a 350 seat buffet
restaurant, two specialty restaurants, and an entertainment lounge. The
Company continues to utilize the satellite parking lot for employee and
overflow parking. The final component of the Lawrenceburg property, a 300
room hotel is expected to open in the second quarter of 1998.
The partnership agreement governing the Indiana Partnership provides the
$225 million budgeted construction cost of the Lawrenceburg Casino
development would be funded 57.5% by the Company and 42.5% by Conseco. The
Company believes that the Lawrenceburg casino project will be completed
within the budgeted amount and that funds sufficient to meet its
obligations are on hand in its restricted cash account at December 31,
1997. For a further description of the terms of the Indiana Partnership,
see "Lawrenceburg Casino Partnership Agreement".
CORPORATE STRATEGY
In 1997, the Company implemented a change in operating strategy in an
attempt to build strength and gain momentum as a leading riverboat casino
operator. This strategy includes assembling a new management team with
significant experience and expertise in gaming industry operations and
marketing, adopting new marketing strategies with an emphasis on direct
marketing, and prudently investing in gaming and gaming-related assets for
its properties.
Argosy's corporate strategy involves the following elements:
EXPERIENCED MANAGEMENT TEAM. Argosy's Board of Directors assembled a
new, experienced management team during 1997 to emphasize a renewed
commitment to Company-wide operations. In April 1997, the Board of
Directors named James B. Perry President and CEO of the Company. In
June 1997, Mr. Perry recruited Vice President of Operations, James A.
Gulbrandsen, and Vice President of Sales and Marketing, Virginia M.
McDowell. In addition, general managers with significant gaming
industry experience were hired at three of Argosy's properties during
the third and fourth quarters of 1997.
EXPANDED SALES AND MARKETING EFFORTS. The Company adopted a new
marketing strategy designed to confront heightened competition in each
of its markets with stronger, coordinated marketing, increased
promotions and targeted entertainment events. During 1998, Argosy
anticipates replacing or upgrading the player tracking systems at each
property. These enhancements will enable the Company to provide
targeted bonusing based upon customers' playing habits. In addition,
Argosy's marketing department will seek to strengthen brand
recognition in Alton, Baton Rouge and Sioux City by including the
Argosy brand name in the marketing and entertainment efforts of those
properties.
2
<PAGE>
Finally, the Company has analyzed the database at each property, and
has refocused its entertainment events, including concerts, private
parties and sporting events, to attract and reward the targeted Argosy
consumer.
OPERATIONS. The Company's operating strategy is to provide a superior
customer experience to sophisticated gaming customers by offering a
competitive gaming product and by emphasizing prompt, friendly
customer service.
CAPITAL IMPROVEMENTS. Argosy's management team has developed a
capital plan that emphasizes prudent capital investment to enhance the
Company's operations. Anticipated capital expenditures include
replacing older, less competitive slot machines with newer products
and replacing or upgrading player tracking and database systems in
order to better implement the Company's enhanced marketing plan. In
addition, the Company anticipates improving its physical plant,
including parking, public areas, restaurants, etc., as necessary, to
accommodate customers' needs and improve current operating
inefficiencies.
POTENTIAL FUTURE PROJECTS
BATON ROUGE DEVELOPMENT. Argosy has entered into a joint venture agreement
and a development agreement with a developer for the ownership and construction
of a 300-room convention hotel adjacent to the Company's Catfish Town Atrium
development. The hotel joint venture is negotiating with a major national hotel
chain to manage the hotel. The consummation of the hotel transaction is subject
to numerous conditions precedent including, without limitation, obtaining
separate non-recourse project financing. The proposed hotel would be the only
nationally franchised hotel in downtown Baton Rouge and would be located across
from the Baton Rouge Convention Center.
COMPETITION
The Company's Alton Casino faces competition from four other riverboat
casino facilities currently operating in the St. Louis area and expects the
level of competition to remain intense in the future. The most recent casino
complex to open includes two independently owned facilities, each of which
operate two dockside vessels. This casino complex, which increased gaming
capacity in St. Louis by approximately 55%, opened in March of 1997. The
Company's Riverside Casino faces competition from four casino companies in the
Kansas City area that offer dockside gaming, two of which offer two gaming
vessels each. The Company's Baton Rouge Casino faces competition from one
casino located in downtown Baton Rouge, a nearby native American casino and
multiple casinos throughout Louisiana. Currently, the Company faces competition
in Sioux City, Iowa, from two land-based Native American casinos, slot machines
at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat
casinos in the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in
January 1996. The Indiana Partnership faces competition from one other
riverboat casino in the Cincinnati market, which opened in October 1996. There
could be further unanticipated competition in any market which the Company
operates as a result of legislative changes or other events. The Company
expects each market in which it participates, both current and prospective, to
be highly competitive.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,955 full-time and
473 part-time employees. Approximately 2,125 employees are represented by the
Seafarers International Union of North America. The Company has collective
bargaining agreements with that union which expire at various times between June
2001 and June 2003. Twelve employees are represented by the International
Brotherhood of Electrical Workers. In addition, approximately 75 employees have
recently voted to be represented by the United Plant Guard Workers of America
and 40 employees have recently voted to be represented by American Maritime
Officers Union. The Company is currently negotiating collective bargaining
agreements with each group.
3
<PAGE>
The Company has not experienced any work stoppages and believes its
relations with its employees are generally satisfactory.
LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT
GENERAL
The Indiana Partnership operates pursuant to a partnership agreement
entered into among the partners as of April 11, 1994, as amended and restated
as of February 21, 1996. The Indiana Gaming Company manages the partnership
pursuant to a management agreement and as general partner, subject only to
certain actions or major decisions requiring the consent of a majority in
interest of the limited partners. Under the provisions of the partnership
agreement and the management agreement, the Company manages the development,
construction and operation of the Lawrenceburg Casino project and receives a
management fee of 7.5% of EBITDA (as defined in the partnership agreement)
and Conseco receives a financial advisory fee of 5% of EBITDA.
PROJECT FUNDING
The partnership agreement governing the Indiana Partnership provides
that the $225 million budgeted construction cost of the Lawrenceburg Casino
development would be funded 57.5% by the Company and 42.5% by Conseco. The
Indiana Partnership has been funded with $52.5 million of capital
contributions by the partners of which $16.75 million constitutes common
equity and $35.75 million constitutes preferred equity. The Company has
contributed approximately $9.6 million of common equity, and approximately
$20.6 million of preferred equity. The remainder of the common and
preferred equity has been contributed by Conseco. The remainder of the cost
of the Lawrenceburg Casino has been funded by third party financing of $25.0
million and capital loans from the Company and Conseco of approximately
$147.5 million. The capital loans have been funded 57.5% by the Company and
42.5% by Conseco.
In addition to the $225 million budgeted construction cost of the
Lawrenceburg Casino described above, the Company has incurred approximately
$15 million of pre-opening, administrative, training and other soft costs in
connection with opening the temporary and permanent Lawrenceburg Casinos.
Pursuant to the terms of the partnership agreement, the Company had the sole
obligation to fund these costs.
PARTNER DISTRIBUTIONS
The Lawrenceburg Casino partnership agreement sets forth the manner in
which cash flow of the Indiana Partnership is distributed. Pursuant to the
agreement, principal on capital loans is repaid on an eight-year amortizing
schedule and cash flow (after repayment of principal of, and interest on,
capital loans) is distributed by the general partner not less frequently than
quarterly: (i) first, to the partners pro rata for tax payments in an amount
equal to their taxable net income for such period; (ii) second, to the
partners as a prepayment of principal on capital loans to be applied in the
inverse order of maturity, up to 75% of the remaining cash flow; (iii) third,
in payment of a preferred return of 14% on any preferred equity contributed
by the partners; (iv) fourth, as a return of the preferred equity contributed
by the partners; (v) fifth, as a return of common equity contributed by the
partners; and (vi) sixth, to the partners in accordance with their respective
percentage interests. The partnership agreement provides that the net cash
proceeds from a sale or refinancing are distributed by the general partner in
the same order as cash flow except that the proceeds will be used to repay
100% of outstanding capital loans by the partners.
4
<PAGE>
GENERAL PARTNER REMOVAL
The Lawrenceburg Casino partnership agreement provides that the
Company's wholly-owned subsidiary, The Indiana Gaming Company, can be removed
as general partner of the partnership by the limited partners under certain
limited circumstances, including: (i) a material breach (after notice and
expiration of applicable cure periods) of certain material provisions of the
partnership agreement dealing with such things as distributions to partners
or the failure to obtain the required consent of the limited partners for
certain major decisions; (ii) conviction of embezzlement or fraud; (iii)
certain bankruptcy events; (iv) reduction in the Indiana Gaming Company's
partnership interest to less than 40% due to sales or dilution for failure to
pay required capital; (v) a final unappealable judgment against The Indiana
Gaming Company in excess of $25 million which is uninsured and remains
unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts
constituting "gross mismanagement"; (vii) failure of The Indiana Gaming
Company to fund project costs in excess of $215 million (after expiration of
applicable notice and cure periods); and (viii) foreclosure by the Trustee
under the Company's loan agreement on The Indiana Gaming Company's pledge of
its partnership interest the Indiana Partnership. Upon removal as general
partner, the general partnership interest of The Indiana Gaming Company
becomes a "special limited partner" interest with rights to partner
distributions but only limited voting rights on partnership matters. Also, if
the reason for the removal is an event described in clause (i), (ii), (iii),
(v), (vi) or (viii) above the limited partners may acquire all, but not less
than all, of The Indiana Gaming Company's interest for the fair market value
thereof determined by an appraisal process.
LIMITED PARTNERS' SALE RIGHTS
The Lawrenceburg Casino partnership agreement provides that: (i) 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)
or (ii) after a deadlock by the parties with respect to significant items in
any annual operating budget of the partnership for budget year 1999 and
thereafter, any partner has a right to sell its interest to the other
partners (the limited partner pursuant to clause (i) and the partner desiring
to sell pursuant to clause (ii) is hereinafter referred to as a "Selling
Partner" and the non-selling partners are hereinafter referred to as the
"Non-Selling Partners"). The partnership agreement provides that after the
Selling Partner gives notice of its intent to sell, the Selling Partner and
Non-Selling Partners shall have 60 days to attempt in good faith to agree to
a purchase price. If within such period of time no such agreement is reached,
then the Selling Partner's interest shall be appraised pursuant to an
appraisal process to determine the fair market value thereof. After the fair
market value of the Selling Partner's interest is determined by the appraisal
process, the Non-Selling Partners have 60 days to reject such sale at that
price, and if the Non-Selling Partners decline to purchase the interest of
the Selling Partner at the appraisal price then the general partner is to
solicit bids and sell all of the assets of the partnership within twelve
months to the highest bidder and the partnership will be dissolved within a
12-month period. No assurances can be given that The Indiana Gaming Company,
if it is a Non-Selling Partner, will have or will be able to obtain
sufficient funds to acquire any Selling Partner's interest in the
circumstances provided for above and therefore the assets of the partnership
would have to be sold to the highest bidder as provided above. In addition,
the partnership agreement provides all partners with a right of first refusal
on transfers of partnership interests. A foreclosure by the Trustee on the
Company's pledge of its partnership interest shall be deemed a transfer
giving rise to the right of first refusal.
REGULATORY MATTERS
ILLINOIS
In February 1990, the State of Illinois pursuant to the Riverboat
Gambling Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat
Act authorizes riverboat gaming upon any navigable stream within or forming a
boundary of the State of Illinois other than Lake Michigan. The Riverboat Act
does not, however, authorize riverboat gaming or the docking of a riverboat
conducting gaming within a county having a population in excess of 3,000,000.
The Riverboat Act grants the Illinois Gaming Board specific powers and
5
<PAGE>
duties, and all other powers which are necessary and proper to effectuate the
Riverboat Act. The Illinois Gaming Board's jurisdiction extends to every
person, association, corporation, partnership and trust involved in riverboat
gaming operations in the State of Illinois.
The Riverboat Act authorized a five member Illinois Gaming Board to issue
up to ten owner's licenses statewide. Each owner's license permits the operation
of up to two boats as a part of a single riverboat gaming operation with a
combined maximum of 1,200 gaming positions (as defined by the Illinois Gaming
Board). No person, firm or corporation may be licensed as the owner of more than
one riverboat gaming operation in Illinois, although a licensed owner may hold
up to 10% of a second riverboat gaming operation in Illinois. In addition to the
ten owner's licenses which may be authorized under the Riverboat Act, the
Illinois Gaming Board may issue special event licenses allowing persons who are
not otherwise licensed to conduct riverboat gaming and to conduct such gaming on
a specified date or series of dates. Riverboat gaming under such a license may
take place on a riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years (with a
fee of $25,000 for the first year and $5,000 for each of the following two
years) and must be renewed annually thereafter (with a fee of $5,000 for each
year). The Company's Illinois gaming license is subject to renewal in October,
1998. An owner's license is eligible for renewal upon payment of the applicable
fee and a determination by the Illinois Gaming Board that the licensee continues
to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board
also requires that officers, directors and employees of a gaming operation be
licensed. Licenses issued by the Illinois Gaming Board may not be transferred to
another person or entity. All licensees must maintain their suitability for
licensure and have a continuing duty to disclose any material changes in
information provided to the Illinois Gaming Board.
Pursuant to its rule making authority under the Illinois Riverboat Act, the
Illinois Gaming Board has adopted certain regulations that provide that any
beneficial owner of the legal or beneficial interests of a gaming company may be
required, and in the case of a beneficial owner of 5% or more of the legal or
beneficial interests (a "5% Holder") is required, to furnish a detailed personal
disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the
personal disclosure form as the basis for its investigation to determine such
holder's suitability as a stockholder of the company. In the case of a 5%
Holder, the Illinois Gaming Board conducts such an investigation. The Illinois
Gaming Board's decisions as to suitability are based on the same criteria used
for a finding of preliminary suitability for licensure including character,
reputation, experience and financial integrity of such holder. If the Illinois
Gaming Board determines that a holder is not suitable, the holder is entitled to
request a hearing; however, if no hearing is requested after such determination
or such finding is upheld after a hearing, the holder is required to divest his
shares of common stock of the company. After a holder is required to divest and
until divestiture, the licensee is unable to distribute profits to such
stockholder. The Illinois Gaming Board has adopted a regulation that provides
that a licensee can only make distributions to shareholders to the extent such
distributions would not impair the financial viability of the licensee. Factors
which would be considered by the Illinois Gaming Board include working capital
requirements, debt service requirements, requirements for repairs and
maintenance and capital expenditure requirements. Illinois Gaming Board approval
is required for certain changes, including, among other things, to the type of
entity, debt and equity offerings by a company, issuances of debt, riverboat
capacity or significant design changes, changes in the number of gaming
positions and pro forma budgets and financial statements.
Minimum and maximum wagers on games are set by the licensee. Wagering may
not be conducted with money or negotiable currency. No person under the age of
21 is permitted to wager in Illinois, and wagers may only be taken from a person
present on a licensed riverboat. With respect to electronic gaming devices, the
payout percentage may not be less than 80% nor more than 100%.
Under the Riverboat Act, vessels must have the capacity to hold a minimum
of 500 persons if operating on the Mississippi River or the Illinois River south
of Marshall County, and a minimum of 400 persons on any other waterway. In
addition, all riverboats must be accessible to disabled persons, must be either
a replica of a 19th century Illinois riverboat or be a casino cruise ship design
and must comply with applicable federal and state laws, including but not
limited to U.S. Coast Guard regulations.
6
<PAGE>
Gaming may only be conducted on a gaming excursion, which is limited to
a maximum period of four hours. A gaming excursion is deemed to have started
upon the commencement of gaming. For the purpose of orderly ingress of
passengers to a riverboat, gaming is deemed to commence when the first
passenger boards a riverboat for an excursion and may continue while other
passengers are boarding for a period not to exceed thirty minutes, at which
time the gangplank or its equivalent must be pulled up and further boarding
is not permitted. For the purpose of orderly egress of passengers from a
riverboat at the end of an excursion, gaming may continue for a period not to
exceed thirty minutes after the gangplank or its equivalent is lowered.
During this thirty minute period of egress, new passengers may not board a
riverboat. These periods of time do not extend the four-hour maximum. Special
event extended cruises may be authorized by the Illinois Gaming Board.
Although the Riverboat Act provides that no gambling may be conducted
while a riverboat is docked, an Illinois Gaming Board rule currently permits
dockside gaming during the 30-minute time periods prior to and following a
cruise. Furthermore, if the captain of the riverboat reasonably determines
that for reasons of safety, although seaworthy, the riverboat should not
leave the dock or should return immediately thereto due to inclement weather,
mechanical or structural problems, or river icing, then a gaming excursion
may commence or continue while the gang plank or its equipment is raised and
remains raised, and ingress is prohibited until completion of the excursion,
in which case the riverboat is not considered docked. If such a situation
occurs, the holder of the owner's license must promptly file a report with
the administrator of the Illinois Gaming Board detailing the basis for its
decision not to cruise. Recent pronouncements by the Illinois Gaming Board
indicate that the explanations for failure to cruise pursuant to the rule
will be scrutinized and that any abuse of the rule will result in
disciplinary actions, which may include, among other things, any of the
following: cancellation of future cruises, penalties, fines, suspension
and/or revocation of a license.
The Riverboat Act imposes a graduated wagering tax based on adjusted
gross receipts ("AGR") from gambling games at a rate of 15% on AGR up to $25
million, 20% on AGR between $25 million and $50 million, 25% on AGR between
$50 million and $75 million, 30% on AGR between $75 million and $100 million,
and 35% on AGR in excess of $100 million. The tax imposed is to be paid by
the licensed owner to the Illinois Gaming Board on the day after the day when
the wagers were made. The Riverboat Act also requires that licensees pay a
$2.00 admission tax for each person admitted to a gaming cruise. In addition,
all use, occupancy and excise taxes that apply to food and beverages and all
taxes imposed on the sale or use of tangible property apply to sales aboard
riverboats. The Company also pays $.25 admission tax to the City of Alton for
each person admitted to the Alton Belle Casino.
The Illinois Gaming Board is authorized to conduct investigations into
the conduct of gaming as it may deem necessary and proper and into alleged
violations of the Riverboat Act. Employees and agents of the Illinois Gaming
Board have access to and may inspect any facilities relating to riverboat
gaming operations at all times.
A holder of any license is subject to the imposition of fines,
suspension or revocation of such license, or other action for any act or
failure to act by himself or his agents or employees, that is injurious to
the public health, safety, morals, good order and general welfare of the
people of the State of Illinois, or that would discredit or tend to discredit
the Illinois gaming industry or the State of Illinois. Any riverboat
operation not conducted in compliance with the Riverboat Act may constitute
an illegal gaming place and consequently may be subject to criminal
penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or
suspend licenses, as the Board may see fit and in compliance with applicable
laws of Illinois regarding administrative procedures and may suspend an
owner's license, without notice or hearing, upon a determination that the
safety or health of patrons or employees is jeopardized by continuing a
riverboat's operation. The suspension may remain in effect until the Illinois
Gaming Board determines that the cause for suspension has been abated and it
may revoke the owner's license upon a determination that the owner has not
made satisfactory progress toward abating the hazard.
7
<PAGE>
The Illinois Gaming Board may waive any licensing requirement or
procedure provided by rule if it determines that such waiver is in the best
interests of the public and the gaming industry.
INDIANA
In June 1993, the Indiana legislature adopted legislation permitting
riverboat gambling in counties contiguous to Lake Michigan, the Ohio River
and Patoka Lake. The legislation granted authority to supervise gaming
activities to the seven-member Indiana Gaming Commission (the "Indiana Gaming
Commission"). The Indiana Gaming Commission is empowered to administer,
regulate and enforce the system of riverboat gaming established under
Indiana's Riverboat Gambling Act (the "Riverboat Gambling Act") and has
jurisdiction and supervision over all riverboat gaming operations in Indiana,
as well as all persons on riverboats where gaming operations are conducted.
The Indiana Gaming Commission has broad powers to regulate riverboat gaming
operations and to approve the form of ownership and financial structure of
not only riverboat owner licensees, but also their entity qualifiers, and
intermediary and holding companies. The following description reflects both
adopted and proposed rules. Further, the Indiana General Assembly has the
power to promulgate new laws and implement amendments to the Riverboat
Gambling Act, which can materially affect the operation or economic viability
of the gaming industry in Indiana.
No one may operate a riverboat gaming operation in Indiana without
holding a riverboat owner's license. The Indiana Gaming Commission has
implemented strict regulations with respect to the suitability of riverboat
license owners, their key personnel, and employees. The Indiana Gaming
Commission utilizes a "class based" licensing structure that subjects all
individuals associated with a riverboat licensee or a riverboat license
applicant to varying degrees of background investigations.
Under current Indiana law a maximum of 11 owner's licenses may be in
effect at any time with an aggregate of five licenses to be issued to owners
whose home port is a county which is contiguous to Lake Michigan, an
aggregate of five licenses to be issued to owners whose home port is a county
which is contiguous to the Ohio River and one license to be issued to an
owner whose home port is a county contiguous to Lake Patoka. For counties
contiguous to the Ohio River, the Indiana Gaming Commission may not issue a
license unless an ordinance has been passed permitting the docking of a
riverboat by the specified local entity and the voters of the county have
approved riverboat gambling in the county.
A license holder is required to pay an initial license fee of $25,000,
(which covers the first 5 years of operation), a renewal fee of $5,000 per
year thereafter and post a bond to guaranty performance of the licensee's
obligations under the legislation. Gaming will be permitted only on
riverboats which (i) have a valid certificate of inspection from the U.S.
Coast Guard for the carrying of at least 500 passengers, (ii) are at least
150 feet in length, and (iii) for riverboats operating on the Ohio River,
replicate historic Indiana steamboat passenger vessels of the 19th century.
No person or entity may simultaneously own an interest in more than two
riverboat owner's licenses. A person or entity may simultaneously own up to
100% in one riverboat owner's license and no more than 10% in a second
riverboat owner's license. A riverboat owner licensee must possess a level of
skill, experience, or knowledge necessary to conduct a riverboat gaming
operation that will have a positive economic impact on the host site, as well
as the entire State of Indiana. Additional representative, but not exclusive,
qualification criteria with respect to the holder of a riverboat owner's
license include character, reputation, financial integrity, the facilities or
proposed facilities for the conduct of riverboat gaming including related
non-gaming projects such as hotel development, and the good faith affirmative
action plan to recruit, train and upgrade minorities and women in all
employment classifications. The Indiana Gaming Commission shall require
persons holding owner's licenses to adopt policies concerning the
preferential hiring of residents of the city in which the riverboat docks for
riverboat jobs. The Indiana Gaming Commission has broad discretion in regard
to the issuance, renewal, revocation and suspension of licenses and
approvals, and the Indiana Gaming Commission is empowered to regulate a wide
variety of gaming and non-gaming related activities, including the licensing
of suppliers to, and employees at, riverboat gaming operations, and
effectively to approve the form of ownership and financial structure of not
only riverboat owner and supplier licensees, but also their subsidiaries and
affiliates. A riverboat owner's licensee or any other person may not lease,
hypothecate, borrow money against or loan money against a riverboat owner's
license. An ownership interest in a riverboat owner's license may only be
transferred in accordance with the regulations promulgated under the
Riverboat Gambling Act. An applicant
8
<PAGE>
for the approval of the transfer of a riverboat owner's license must comply
with application procedures prescribed by the Indiana Gaming Commission and
present evidence that it meets or possesses the standards, qualifications,
and other criteria under Indiana gaming laws, and pay an investigative fee in
the amount of $50,000 with the application. If the Indiana Gaming Commission
denies the application to transfer an ownership interest, it shall issue
notice of denial to the applicant. Unless specifically stated to the
contrary, a notice of denial of an application for transfer shall not
constitute a finding that the applicant is not suitable for licensure. A
person who is served with notice of denial under this rule may request an
administrative hearing.
"Certificates of Suitability" are issued following selection by the Indiana
Gaming Commission. The "Certificate of Suitability" is valid for 180 days unless
extended by the Indiana Gaming Commission. During this period the prospective
riverboat licensee must among other things: obtain a permit to develop the
riverboat gaming operation from the United States Army Corps of Engineers;
obtain a valid certificate of inspection from the United States Coast Guard for
the vessel on which the riverboat gaming operation will be conducted; apply for
and receive the appropriate permits or certificates from the Indiana Alcoholic
Beverage Commission, fire marshall, and other appropriate local, state and
federal agencies which issue permits including, but not limited to, health
permits, building permits and zoning permits; closing the financing necessary to
complete the development of the gaming operation; post a bond in compliance with
the applicable law; obtain the insurance deemed necessary by the Indiana Gaming
Commission; receive licensure for electronic gaming devices and other gaming
equipment under applicable law; submit an emergency response plan in compliance
with applicable laws; and take any other action that the Indiana Gaming
Commission deems necessary for compliance under Indiana gaming laws. Further,
the Indiana Gaming Commission may place restrictions, conditions or requirements
on the permanent riverboat owner's license. An owner's initial license expires
five years after the effective date of the license, and unless the owner's
license is terminated, expires or is revoked, the owner's license may be renewed
annually by the Indiana Gaming Commission upon satisfaction of certain
conditions contained in the Riverboat Gambling Act.
Pursuant to rules promulgated by the Indiana Gaming Commission, any person
(other than an institutional investor) who individually, or in association with
others, acquires directly or indirectly the beneficial ownership of 5% or more
of any class of voting securities of a publicly-traded corporation that is a
riverboat licensee or 5% or more of the beneficial interest in a riverboat
licensee, directly or indirectly, through any class of the voting securities of
any holding or intermediary company of a riverboat licensee shall apply to the
Indiana Gaming Commission for finding of suitability within 45 days after
acquiring the securities. Each institutional investor who, individually or in
association with others, acquires, directly or indirectly, beneficial ownership
of 5% or more of any class of voting securities of a publicly-traded corporation
that is a riverboat licensee or 5% or more of the beneficial interest in a
riverboat licensee through any class of the voting securities of any holding or
intermediary company of a riverboat licensee shall notify the Indiana Gaming
Commission within 10 days after the institutional investor acquires the
securities and shall provide additional information and may be subject to a
finding of suitability as required by the Indiana Gaming Commission.
An institutional investor who would otherwise be subject to a suitability
finding shall, within 45 days, after acquiring the interests submit information
to the Indiana Gaming Commission including the following: a description of the
institutional investor's business and a statement as to why the institutional
investor satisfies the definitional requirements of an institutional investor
under Indiana gaming rule requirements; a certification made under oath that the
voting securities were acquired and are held for investment purposes only and
were acquired and are held in the ordinary course of business as an
institutional investor; the name, address, telephone number, social security
number or federal tax identification number of each person who has the power to
direct or control the institutional investor's exercise of its voting rights as
a holder of voting securities of the riverboat licensee; the name of each person
who beneficially owns 5% or more of the institutional investor's voting
securities or equivalent; a list of the institutional investor's affiliates; a
list of all securities of the riverboat licensee that are or were beneficially
owned by the institutional investor or its affiliates within the preceding one
year; a disclosure of all criminal and regulatory sanctions imposed during the
preceding ten years; a copy of any filing made under 15 U.S.C. 18(a); and any
other additional information the Indiana Gaming Commission may request to insure
compliance with Indiana gaming laws.
9
<PAGE>
Each institutional investor who, individually or in association with
others, acquires, directly or indirectly, the beneficial ownership of 15% or
more of any class of voting securities of a publicly-traded corporation that
owns a riverboat owner's license or 15% or more of the beneficial interest in
a riverboat licensee directly or indirectly through any class of voting
securities of any holding company or intermediary company of a riverboat
licensee shall apply to the Indiana Gaming Commission for a finding of
suitability within 45 days after acquiring the securities.
An institutional investor means any of the following: a retirement fund
administered by a public agency for the exclusive benefit of federal, state
or local public employees; an investment company registered under the
Investment Company Act of 1940; a collective investment trust organized by
banks under Part 9 of the Rules of the Comptroller of the Currency; a closed
end investment trust; a chartered or licensed life insurance company or
property and casualty insurance company; a banking, chartered or licensed
lending institution; an investment adviser registered under the Investment
Advisers Act of 1940; and any other entity the Indiana Gaming Commission
determines constitutes an institutional investor.
The Riverboat Gambling Act imposes a tax on admissions to gaming
excursions at a rate of $3.00 for each person admitted to the gaming
excursion. This admission tax is imposed upon the license owner conducting
the gaming excursion on a per-person basis without regard to the actual fee
paid by the person using the ticket, with the exception that no tax shall be
paid by admittees who are actual and necessary officials, employees of the
licensee or other persons actually working on the riverboat. A tax is imposed
on the adjusted gross receipts received from gaming games under the Riverboat
Gambling Act at a rate of twenty percent (20%) of the amount of the adjusted
gross receipts. Adjusted gross receipts is defined as the total of all cash
and property (including checks received by a licensee), whether collected or
not, received by a licensee from gaming operations less the total of all cash
paid out as winnings to patrons including a provision for uncollectible
gaming receivables as is further set forth in the Riverboat Gambling Act. The
Indiana Gaming Commission may, from time to time, impose other fees and
assessments on riverboat owner licensees. In addition, all use, excise and
retail taxes apply to sales aboard riverboats.
In general, riverboat excursions are limited to a duration of at least
two and no more than four hours, and no gaming may be conducted while the
riverboat is docked, with the exception of (i) the 30 minutes during
passenger embarkation and disembarkation and (ii) when weather, water or
traffic prevent the riverboat from cruising. Minimum and maximum wagers on
games are set by the licensee, and wagering may not be conducted with money
or other negotiable currency. No person under the age of 21 is permitted to
be present on a riverboat, and wagers may only be taken from a person present
on a licensed riverboat.
No riverboat licensee or riverboat license applicant may enter into or
perform any contract or transaction in which it transfers or receives
consideration which is not commercially reasonable or which does not reflect the
fair market value of the goods or services rendered or received as determined at
the time the contract is executed. Any contract entered into by a riverboat
licensee or riverboat license applicant that exceeds the total dollar amount of
$50,000 shall be a written contract. A riverboat license applicant means an
applicant for a riverboat owner's license that has been issued a certificate of
suitability.
Pursuant to Indiana Gaming Commission rules, riverboat licensees and
riverboat license applicants must submit an internal control procedure
regarding purchasing transactions which must contain provisions regarding
ethical standards, compliance with state and federal laws, and prohibitions
on the acceptance of gifts and gratuities by purchasing and contracting
personnel from suppliers of goods or services. The rules also require any
riverboat licensee or applicant to submit any contract, transaction or series
of transactions greater than $500,000 in any 12-month period to the Indiana
Gaming Commission within 10 days of execution, and to submit a summary of all
contracts or transactions greater than $50,000 in any 12-month period on a
quarterly basis. The rules provide that contracts submitted to the Indiana
Gaming Commission are not submitted for approval, but grant the Indiana
Gaming Commission authority to cancel or terminate any contract not in
compliance with Indiana law and Indiana Gaming Commission rules.
10
<PAGE>
Indiana gaming laws provide that the opportunity for full minority and
women's business enterprise participation in the riverboat industry in
Indiana is essential to social and economic parity for minority and women
business persons. The Indiana Gaming Commission has the power to review
compliance with the goals of participation by minority and women business
persons and impose appropriate conditions on licensees to insure that goals
for such business enterprises are met.
Under the Riverboat Gambling Act, a riverboat licensee or a riverboat
license applicant shall designate certain minimum percentages of the value of
its contracts for goods and services to be expended with minority business
enterprises and womens' business enterprises such that 10% of the dollar
value of the riverboat licensee's or the riverboat license applicant's
contracts be expended with minority enterprises and 5% of the dollar value of
the riverboat licensee's or the riverboat license applicant's contracts be
expended with women's business enterprises. Expenditures with minority and
women business enterprises are not mutually exclusive. Licensees are required
to report the dollar value and percentage of contracts awarded to minority
business enterprises and women's business enterprises annually. If the
Indiana Gaming Commission determines that a licensee has not met these
requirements, it may suspend, limit or revoke the owner's license or fine or
impose appropriate conditions on the licensee.
All licensees subject to the jurisdiction of the Indiana Gaming
Commission have a continuing duty to maintain suitability for licensure. The
Indiana Gaming Commission may initiate an investigation or disciplinary
action or both against a licensee about whom the commission has reason to
believe is not maintaining suitability for licensure, is not complying with
licensure conditions, and/or is not complying with Indiana gaming laws or
regulations. The Indiana Gaming Commission may suspend, revoke, restrict or
place conditions on the license of a licensee; require the removal of a
licensee or an employee of a licensee; impose a civil penalty or take any
other action deemed necessary by the Indiana Gaming Commission to insure
compliance with Indiana gaming laws.
IOWA
In 1989, the State of Iowa legalized riverboat gaming on the Mississippi
and Missouri Rivers and certain other waterways located in Iowa. The Excursion
Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa
Commission") jurisdiction over all gambling operations.
The legislation authorized the granting of licenses to conduct riverboat
gaming to not-for-profit corporations which, in turn, are permitted to enter
into operating agreements with persons who are licensed by the Iowa Commission
to operate riverboat casinos. The number of licenses which may be granted is not
limited by statute or regulation.
Gaming is permitted only on riverboats which recreate, as nearly as
practicable, Iowa's riverboat history and have a capacity for at least 250
persons with tickets. In addition the licensee must utilize Iowa resources,
goods and services in the operation of the riverboat. An excursion gambling boat
must operate at least one excursion each day for 100 days during the excursion
season, (from April 1 through October 31). Excursions consist of a minimum two
hours during the excursion season. While an excursion gambling boat is docked,
passengers may embark or disembark at any time during its business hours. If
during the excursion season it is determined that it would be unsafe to complete
any portion of an excursion, or if mechanical problems prevent the completion of
any portion of an excursion, the boat may be allowed to remain dockside.
A gaming license will be issued for not more than three years and is
subject to annual renewals thereafter. The Iowa Commission has broad discretion
with regard to such renewals. The annual license fee to operate an excursion
gambling boat shall be based on the passenger carrying capacity, including crew,
for which the excursion gambling boat is registered. The annual fee shall be
five dollars per person capacity. Licenses issued by the Iowa Commission may not
be transferred to another person or entity. The Company must submit detailed
financial and operating reports to the Iowa Commission.
11
<PAGE>
Iowa statute stipulates that a referendum must be held in 2002 to
reaffirm gaming in each county that has gaming and further stipulates that
similar referenda be held every eight years thereafter. Minimum and maximum
wagers on games are set by the licensee. Wagering may only be conducted with
chips, wagering debit cards or coins. Wagers may only be made by persons 21
years of age and older. A licensee shall not accept a credit card to purchase
coins, tokens or other forms of credit to be wagered on gambling games.
The legislation imposes a graduated tax based on adjusted gross receipts at
a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any
amount over $3 million. The tax is to be paid by the licensee within 10 days
after the close of business of the day when the wagers were made. The
legislation also permits the Iowa Commission to impose an admission fee for each
person embarking on an excursion vessel, and the city or county in which gaming
is conducted is permitted to impose an admission fee of not greater than 50
cents.
Pursuant to its rule making authority, the Iowa Commission requires
officers, directors and certain key employees of the Company to be licensed by
the Iowa Commission. In addition, anyone having a material relationship or
involvement with the Company may be required to be found suitable or to be
licensed, in which case those persons would be required to pay the costs and
fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove
a change in position by such officers or key employees and the power to require
the Company to suspend or dismiss officers, directors or other key employees or
sever relationships with other persons who refuse to file appropriate
applications or whom the Iowa Commission finds unsuitable to act in such
capacities. Any contract in excess of $50,000 must be submitted to and approved
by the Iowa Commission.
The Iowa Commission may also require any individual who has a material
relationship with the Company to be investigated and licensed or found suitable.
Any person who acquires 5% or more of the Company's equity securities must be
approved by the Iowa Commission prior to such acquisition. The applicant
stockholder is required to pay all costs of such investigation.
Iowa Governor Terry Branstad has proposed that the Iowa legislature impose
a five-year moratorium on the expansion of gaming.
LOUISIANA
In July 1991, the Louisiana legislature adopted legislation permitting
certain types of gaming activity on certain rivers and waterways in Louisiana.
The legislation granted authority to supervise riverboat gaming activities to
the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement
Division of the Louisiana State Police (the "Louisiana Enforcement Division").
The Louisiana Riverboat Gaming Commission was authorized to hear and determine
all appeals relative to the granting, suspension, revocation, condition or
renewal of all licenses, permits and applications. In addition, the Louisiana
Riverboat Gaming Commission was to establish rules providing for and
determining, among other things, authorized routes, duration of excursions and
the stops a riverboat may make, minimum levels of insurance, construction of
riverboats, periodic inspections and procedures for negotiable instrument
transactions involving patrons. The Louisiana Enforcement Division was
authorized, among other things, to investigate applicants and issue licenses,
investigate violations of the statute, conduct continuing reviews of gaming
activities and exercise other broad oversight powers.
In an April 1996 special session of the Louisiana legislature, Louisiana
lawmakers passed a measure which established the Louisiana Gaming Control Board
and provides that such board shall be the successor to all prior authorities,
and the sole and exclusive authority, with regard to the regulation and
supervision of gaming operations and activities in Louisiana except for the
regulation of horse racing and offtrack betting and the conducting of charitable
gaming operations. Effective May 1, 1996, the powers, duties, functions, and
responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana
Enforcement Division, including those with respect to riverboat gaming, are
transferred to the Louisiana Gaming Control Board. The Department of Public
Safety and Corrections, Office of State Police, retains certain enforcement
powers and responsibilities relative to investigations, audits, and cruising
procedures.
12
<PAGE>
The transfer of a license or permit or an interest in a license or
permit is prohibited. The sale, purchase, assignment, transfer, pledge or
other hypothecation, lease, disposition or acquisition (a "Transfer") by any
person of securities which represents 5% or more of the total outstanding
shares issued by a corporation that holds a license is subject to Louisiana
Gaming Control Board disapproval. A security issued by a corporation that
holds a license must disclose these restrictions. Prior Louisiana Gaming
Control Board approval is required for the Transfer of any "ownership
interest" of 5% or more in any licensee or for the Transfer of any "economic
interest" of 5% or more in any licensee or Affiliated Gaming Person. No such
prior approval is required for the transfer of any ownership interest of 5%
or more in any corporate licensee. An "economic interest" is defined for
purposes of a Transfer as any interest whereby a person receives or is
entitled to receive, by agreement or otherwise, a profit, gain, thing of
value, loss, credit, security interest, ownership interest or other benefit.
A licensee must notify the Louisiana Gaming Control Board in writing
within five (5) days of the completion of the following transactions:
1. Withdrawal of capital in excess of five percent (5%) of the
licensee's net gaming proceeds for the preceding twelve month period;
2. The granting of a loan or any other extension of credit in excess
of five percent (5%) of the licensee's net gaming proceeds for the preceding
twelve month period;
3. Any advance or other distribution of any type of asset in excess of
five percent (5%) of the licensee's net gaming proceeds for the preceding
twelve month period;
No prior approval of any such withdrawal, loan, advance or distribution is
required, but such transaction is ineffective if subsequently disapproved by the
Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board
may issue an emergency order for not more than 10 days prohibiting payment of
profits, income or accruals by, or investments in, a licensee.
Riverboat gaming licensees and their Affiliated Gaming Persons are
required to notify the Louisiana Gaming Control Board within 30 days after
any such person applies for, receives or accepts a loan, or makes use of any
cash, property, credit, loan or line of credit, or guarantees, or grants
other form of security for a loan (a "Loan") unless such transaction involves
publicly registered debt and securities (in which event such person shall
file the registration statement and other materials with the Louisiana Gaming
Control Board), unless more stringent conditions are imposed by the Louisiana
Gaming Control Board, or the amount of the Loan is below certain specified
thresholds. The Louisiana Gaming Control Board is required to investigate the
reported Loan, and to either approve or disapprove the transaction. If
disapproved, the Loan must be rescinded by the Licensee or Affiliated Gaming
Person.
Fees for conducting gaming activities on a riverboat include (i) $50,000
per riverboat for the first year of operation and $100,000 per year per
riverboat thereafter; (ii) a state franchise fee of 15% of net gaming proceeds;
(iii) a state license fee of 3.5% of net gaming proceeds; and (iv) a local fee
of up to $2.50 per passenger.
In April 1996, the Louisiana legislature approved legislation mandating
local option elections to determine whether to prohibit or continue to permit
three individual types of gaming in Louisiana on a parish-by-parish basis.
The referendum was brought before the Louisiana voters at the time of the
November 1996 presidential election. Voters elected to permit riverboat
gaming in all parishes where it is presently conducted and to allow
land-based casino gaming in Orleans Parish. Voters in 31 parishes elected to
permit video draw poker devices, but in 33 parishes, including East Baton
Rouge Parish, voters elected to prohibit the devices. Current operators of
video poker devices in East Baton Rouge Parish (and the other parishes where
voters elected to prohibit video poker) will be allowed to operate only until
the end of their current license plus two extensions. Typically video poker
licenses have a maximum one year duration.
13
<PAGE>
MISSOURI
Gaming was originally authorized in the State of Missouri on November 3,
1992, although no governmental action was taken to enforce or implement the
original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law
which replaced the original law and established the Missouri Gaming
Commission, which is responsible for the licensing and regulation of
riverboat gaming in Missouri. The number of licenses which may be granted is
not limited by statute or regulation. The Missouri Gaming Law grants specific
powers and duties to the Missouri Gaming Commission to supervise riverboat
gaming and implement the Missouri Gaming Law and take any other action as may
be reasonable or appropriate to enforce the Missouri Gaming Law. The Missouri
Gaming Commission has discretion to approve permanently moored ("dockside")
riverboat casinos if it finds that the best interest of Missouri and the
safety of the public indicate the need for continuous docking of an excursion
gambling boat.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities in Missouri are subject to extensive state and local
regulation. If a company is granted a gaming license in Missouri, such
company, any subsidiaries it may form and its officers, directors,
significant shareholders and employees will be subject to regulations. The
initial license and first subsequent license renewal of an excursion gambling
boat operator shall be for a period of one year. Thereafter, license renewal
periods shall be two years. However, the Missouri Gaming Commission may
reopen license hearings at any time. In addition to the owners license and
operators license for the riverboat, every individual participating in gaming
operations in any capacity is required to have an occupational license from
the Missouri Gaming Commission. Applicants and licensees are responsible to
keep the application and any requested materials current at all times, and
this responsibility shall continue throughout any period of licensure granted
by the Missouri Gaming Commission. In addition, Missouri has extensive
licensing disclosure requirements.
The Missouri Gaming Commission may revoke or suspend gaming licenses and
impose other penalties for violation of the Missouri Gaming Law and the rules
and regulations which may be promulgated thereunder. Penalties include, but
are not limited to, forfeiture of all gaming equipment used in the conduct of
unauthorized gambling games and fines of up to three times a licensee's
highest daily gross receipts derived from wagering on the gambling games,
whether authorized or unauthorized, conducted during the preceding twelve
months. In addition, the Missouri Gaming Commission requires 60 days notice
of, and may disapprove or require delay pending further investigation of,
transactions in excess of the greater of $500,000 or 30% of licensee's net
worth, up to $1,000,000, which transactions involve or relate to the gaming
licensee.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer per
excursion that licensees must pay to the Missouri Gaming Commission, a
minimum payout requirement of 80% for slot machines, a 20% tax on adjusted
gross receipts, prohibitions against providing credit to gaming customers
(except for the use of credit cards and cashing checks) and a requirement
that each licensee reimburse the Missouri Gaming Commission for all costs of
any Missouri Gaming Commission staff necessary to protect the public on the
licensee's riverboat. Licensees must also submit to the Commission on a
quarterly basis an audit of compliance and of the financial transactions and
condition of the licensee's total operations for the calendar quarter and pay
the associated auditing fees. The Missouri Gaming Law provides for a loss
limit of $500 per person per excursion. Although the Missouri Gaming Law
provides no limit on the amount of riverboat space that may be used for
gaming, the Missouri Gaming Commission is empowered to impose such space
limitations through the adoption of rules and regulations. Additionally,
United States Coast Guard safety regulations could affect the amount of
riverboat space that may be devoted to gaming. The Missouri Gaming Law also
includes requirements as to the form of riverboats, which must resemble
Missouri's riverboat history to the extent practicable and include certain
non-gaming amenities.
The licensee may receive wagers only from a person present on a licensed
excursion gambling boat. Wagering shall not be conducted with money or other
negotiable currency. A person under 21 years of age shall not make a wager on
an excursion gambling boat and shall not be allowed in the area of the
excursion boat where gambling is being conducted.
14
<PAGE>
With respect to the availability of dockside gaming, which may be more
profitable than cruise gaming, the Missouri Gaming Commission is empowered to
determine on a site by site basis where such gaming is in the best interest
of Missouri and the safety of the public and shall be permitted.
Pursuant to its rule making authority, the Missouri Gaming Commission
has adopted certain regulations which provide, among other things, that: (i)
riverboat excursions are limited to a duration of four hours, and gaming may
be conducted at any time during the excursion; (ii) no gaming licensee or
occupational licensee may pledge, hypothecate or transfer in any way any
license, or any interest in a license, issued by the Missouri Gaming
Commission; (iii) without first notifying the Missouri Gaming Commission at
least 60 days prior to such consummation of any of the following transactions
(and during such period the Missouri Gaming Commission may disapprove the
transaction or require the transaction to be delayed pending further
investigation) (a) a gaming licensee or a holding company affiliated with a
gaming licensee may not make a public issuance of debt, (b) a publicly held
gaming licensee or a publicly held holding company may not make any issuance
of an ownership interest equaling 5% or greater of the gaming licensee or
holding company or (c) a person or entity may not pledge or hypothecate an
ownership interest in a gaming licensee that is not a publicly held company
or a holding company that is not a publicly held company provided that no
such ownership interest may be transferred voluntarily or involuntarily
pursuant to any pledge without separate notice to the Missouri Gaming
Commission as required by the regulations; (iv) not later than 7 days after
the consummation of any transfer of ownership interest in a publicly held
gaming licensee, if such transfer would result in an entity or group of
entities acting in concert owning, directly or indirectly, a total amount of
ownership interest equaling 5% or greater of the ownership interest in the
gaming licensee, the transferee must report such consummation to the Missouri
Gaming Commission; (v) no withdrawals of capital, loans, advances or
distribution of any type of assets in excess of 5% of accumulated earnings of
a licensee to anyone with an ownership interest in the licensee may occur
without prior Missouri Gaming Commission approval; and (vi) the Missouri
Gaming Commission may take action against a licensee or other person who has
been disciplined in another jurisdiction for gaming related activity.
The Missouri Gaming Commission is authorized to enter the premises of
excursion gambling boats, facilities, or other places of business of a
licensee in Missouri to determine compliance with the Missouri Gaming Law and
to investigate alleged violations of the Missouri Gaming Law or Missouri
Gaming Commission rules, orders or final decisions. A holder of any license
shall be subject to imposition of penalties, suspension or revocation of such
license, or other action for any act or failure to act by himself or his
agents or employees that is injurious to the public health, safety, morals,
good order and general welfare of the people of the state of Missouri, or
that would discredit the Missouri gaming industry or the state of Missouri.
The Missouri Gaming Commission may waive any licensing requirement or
procedure for any type of license if it determines that the waiver is in the
best interests of the public. In addition, a supplier's license is required
of persons who sell or lease gambling equipment, gambling supplies or both to
any licensee. A licensee licensed to conduct gambling games shall acquire all
gambling games or implements of gambling from a licensed supplier.
On August 29, 1996, certain residents of St. Louis County (the "St.
Louis Plaintiffs") filed a lawsuit in Cole County, Missouri seeking
declaratory and injunctive relief generally against the Missouri Gaming
Commission and specifically against the granting of licenses by the Missouri
Gaming Commission to Harrah's Maryland Heights Corp. ("Harrah's") and Players
Maryland Heights, LP ("Players") with respect to their casino development in
Maryland Heights, Missouri. The suit alleged that (i) the Missouri
legislature lacks the constitutional authority to authorize the Missouri
Gaming Commission to license casinos except on excursion gambling boats and
floating facilities "upon" the Mississippi and Missouri Rivers, (ii) the
Missouri Gaming Commission has wrongly construed a statute to permit it to
grant gaming licenses to excursion gambling boats or floating facilities
placed within artificial spaces and (iii) the Missouri Gaming Commission is
not authorized to regulate gaming operations conducted upon floating
facilities. In December 1996, the Missouri court dismissed the St. Louis
Plaintiffs' claim and the St. Louis Plaintiffs appealed the decision to the
Missouri Supreme Court. In December 1997, the Missouri Supreme Court ruled
that the definition of the words "upon the Mississippi and Missouri Rivers"
in the Missouri Constitution required that to be permitted an artificial
basin must be contiguous to the river and that the artificial basin must be
filled with river water and touch the surface stream of the river for
considerable distances.
15
<PAGE>
The Company conducts its gaming operations at the Argosy Casino in
Riverside on a docked, excursion riverboat from a constructed harbor that is
open to the Missouri River. The Company believes that, if necessary, it could
modify its operations in Riverside so as to be in compliance with even the
strictest construction of the St. Louis Plaintiffs' interpretation of
Missouri gaming law. The Company is unable at this time to determine what
effect, if any, this action would have on its business, results of
operations, competitive position in the Kansas City and St. Louis markets or
the merits of the St. Louis Plaintiffs' action.
LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS
KANSAS. Casino gaming is currently illegal in Kansas as a
constitutionally prohibited form of lottery. In order to amend the Kansas
constitution, two-thirds of the members of each house of the Kansas
legislature and a majority of Kansas voters would have to approve a proposed
amendment.
The State of Kansas has approved Class III Indian compacts with four
separate tribes authorizing the tribes to conduct table and keno games, but
not slot machines, on their respective reservation lands. One such casino is
open and is located approximately 60 miles from Kansas City.
KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally
prohibited form of lottery. In order to amend the Kentucky constitution,
three-fifths of the members of each house of the Kentucky legislature and a
majority of Kentucky voters would have to approve a proposed amendment.
Several Kentucky racetracks have publicly lobbied for the right to conduct
casino games.
OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited
form of lottery. In order to amend the Ohio constitution, three-fifths of the
members of each house of the Ohio legislature and a majority of Ohio voters
would have to approve any proposed amendment.
NEBRASKA. A number of efforts to expand gaming in Nebraska failed
during 1996. After an effort to present a statewide referendum on legalizing
casino gaming failed in the Nebraska legislature, three separate voter
petition drives also failed.
FEDERAL AND NON-GAMING REGULATIONS
The Company and its subsidiaries are subject to certain federal, state
and local safety and health laws, regulations and ordinances that apply to
businesses generally, such as the Clean Air Act, Clean Water Act,
Occupational Safety and Health Act, Resource Conservation Recovery Act and
Comprehensive Environmental Response, Compensation and Liability Act. The
Company has not made, and does not anticipate making, material expenditures
with respect to such environmental laws and regulations. However, the
coverage and attendant compliance costs associated with such laws,
regulations and ordinances may result in additional costs to the Company. For
example, in 1990 the U.S. Congress enacted the Oil Pollution Act to
consolidate and reconcile mechanisms under various oil spill response laws.
The Department of Transportation has proposed regulations requiring owners
and operators of certain vessels to establish through the U.S. Coast Guard
evidence of financial responsibility in the amount of $5.5 million for
clean-up of oil pollution. This requirement would be satisfied by either
proof of adequate insurance (including self-insurance) or the posting of a
surety bond or guaranty.
All vessels operated by the Company must comply with U.S. Coast Guard
requirements as to safety and must hold a Certificate of Seaworthiness. These
requirements set limits on the operation of the vessels and require
individual licensing of all personnel involved with the operation of the
vessel. Loss of the Certificate of Seaworthiness of a vessel would preclude
its use as a riverboat. Every five years, vessels must be dry docked for an
inspection of the outside of the hull resulting in a loss of service for a
period of time. The U.S. Coast Guard is developing a pilot program which
would utilize underwater equipment to complete a hull inspection while the
vessel remains in service. This procedure was utilized to inspect the Alton
Gaming Company riverboat casino in February 1998. If the procedure is
disapproved by the U.S. Coast
16
<PAGE>
Guard, Alton Gaming Company would be required to remove its riverboat from
service and seek to lease another riverboat casino or discontinue operations
for the inspection period.
All shipboard employees of the Company employed on U.S. Coast Guard
regulated vessels, including those who have nothing to do with the actual
operation of the vessel, such as dealers, waiters and security personnel, may
be subject to the Jones Act which, among other things, exempts these
employees from state limits on workers' compensation awards.
The Company is subject to the provisions of the Americans With
Disabilities Act but does not anticipate incurring significant expenses to
bring its facilities or procedures into compliance with such Act.
The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires
banks, other financial institutions and casinos to monitor receipts and
disbursements of currency in excess of $10,000 and report them to the United
States Department of the Treasury (the "Treasury"). In management's opinion,
the BSA may have resulted in a reduction in the volume of play by high level
wagerers. The Treasury has proposed tentative amendments to the BSA which
would apply solely to casinos and their reporting of currency transactions.
The most significant proposed change in the BSA is a reduction in the
threshold at which customer identification data must be obtained and
documented by the casino, from $10,000 to $3,000 (which may include the
aggregation of smaller denomination transactions). Additionally, the
amendments would substantially increase the record-keeping requirements
imposed upon casinos relating to customer data, currency and non-currency
transactions. Management believes the proposed amendments, if enacted in
their current form, could result in a further reduction in the volume of play
by upper- and middle-level wagerers while adding operating costs associated
with the more extensive record-keeping requirements. However, the effect on
the Company's operations is not expected to be material.
INSURANCE
The Company carries property and casualty insurance on its land-based
assets and its vessels generally in the amount of their replacement costs
with a nominal deductible with respect to its land-based assets and a
deductible equal to 2% of the replacement value of the vessels. The
Company's land-based assets are not currently covered by flood insurance.
The Company's general liability insurance with respect to land-based
operations has a limit of $1 million per occurrence and $2 million in the
aggregate with a $50,000 deductible. Its general liability insurance with
respect to its marine operations has a $100,000 per occurrence deductible
with per occurrence coverage up to a $75 million limit. With respect to
worker's compensation the Company has a $250,000 per occurrence deductible
with a $1 million per occurrence limit. The Company does not have business
interruption insurance.
17
<PAGE>
ITEM 2. PROPERTIES
The following is a list of the Company's principal properties as of
December 31, 1996. Substantially all of the properties of the Company are
subject to the lien of the Company's senior lenders under its $235 million
First Mortgage Note Indenture dated June 5, 1996.
<TABLE>
<CAPTION>
Interest Function (1) Lease Expiration
-------- ------------------------------------ ----------------
<S> <C> <C> <C>
ALTON, ILLINOIS
Office Building Leased Executive Offices August 1999
Alton Belle II Owned Riverboat Casino
Support Barges Owned Landing, ticketing and office
RIVERSIDE, MISSOURI
Real Property Owned Permanent Landing Site
Real Property Leased Landing rights
Argosy IV Owned Riverboat Casino
BATON ROUGE, LOUISIANA
Real Property Owned Vessel Access
Argosy III Owned Riverboat Casino
Support Barge Owned Staging Barge
LAWRENCEBURG, INDIANA(2)
Real Property Owned Permanent Landing Site
SIOUX CITY, IOWA
Argosy V Owned Riverboat Casino
Support Barge Owned Staging Barge
OTHER
Sprit of America Owned Temporary Lawrenceburg
Staging Vessel
Argosy I Owned Riverboat Casino
</TABLE>
_______________
(1) A significant portion of the Company's land based assets are not covered by
flood insurance for any loss or damage that may result from flooding, and
the Company does not currently have any business interruption insurance.
(2) Owned by a partnership pursuant to which the Company, through a
wholly-owned subsidiary, has a 57.5% partnership interest and serves
as general partner.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings
arising in the ordinary course of business. Other than as disclosed below,
the company is unaware of any legal proceedings which, even if the outcome
were unfavorable to the Company, would have a material adverse impact on
either its financial condition or results of operations.
CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT
On November 29, 1996, Schilling Casino Corporation d/b/a Empire
Casino & Resort ("Empire"), an unsuccessful competing applicant for the
riverboat owner's license in Lawrenceburg, Indiana that was awarded to the
Indiana Partnership by the Indiana Gaming Commission (the "Commission"),
filed with the Commission a purported "Request for Hearing" (the "Request")
on the denial of Empire's application for the Lawrenceburg license. Empire's
Request, which was referred to an Administrative Law Judge (the "ALJ"), did
not seek a stay of the award of the license to the Indiana Partnership or of
the Indiana Partnership's commencement of regular gaming operations from its
temporary gaming facility at Lawrenceburg, which commenced December 10, 1996.
The Company and the Indiana Partnership were granted leave to intervene in
the administrative proceedings on the Empire Request.
The grounds asserted in the Empire Request included claims that (i)
the application process followed by the Commission did not afford Empire due
process and violated Indiana laws; (ii) the Indiana Partnership failed to
comply with conditions in the certificate and failed to open the temporary
gaming facility in a timely fashion, (iii) the Indiana Partnership made
misrepresentations to the Commission during the licensing hearings; (iv) the
Commission could not lawfully have extended the certificate beyond June 30,
1996 (one year after the date of its initial award) without reconsidering all
other applications; and (v) the endorsement of the Indiana Partnership by the
City of Lawrenceburg was without legal authority and was given improper
weight by the Commission.
The Company and the Indiana Partnership filed with the ALJ a motion
or summary judgment to dismiss Empire's Request; the Commission filed with
the ALJ a motion for partial summary judgment on Empire's Request; and Empire
filed with the ALJ its "discovery plan" describing discovery it wished to
pursue in the matter, as to which the Company and the Indiana Partnership
filed a motion for protective order.
After briefing and a hearing before the ALJ, the ALJ issued on June
13, 1997 his findings of fact and conclusions of law and his recommended
orders to the Commission (the "ALJ Entries") on the various matters
presented. The ALJ Entries rejected the claims asserted in Empire's Request;
granted the Commission's motion for partial summary judgment; and denied the
discovery sought by Empire. The ALJ Entries treated the motion for summary
judgment by the Company and the Indiana Partnership as moot (given the
recommendation that the Commission's motion for partial summary judgment be
granted); and denied the Company's and Indiana Partnership's motion to
dismiss, which had been based in part on the claim that Empire's Request did
not timely comply with procedural requirements. Finally, the ALJ Entries
stated Empire would be entitled to an evidentiary hearing only for purposes
of attempting to establish that it should have been awarded the Lawrenceburg
license, an issue on which Commission regulations place the burden of proof
on Empire.
Empire submitted to the Commission exceptions and objections to the
ALJ Entries. (The Company and the Indiana Partnership also filed exceptions
to the ALJ Entries, to preserve for the record at any subsequent hearing or
judicial review proceeding those points on which they disagreed with the ALJ
Entries.) At a meeting on August 19, 1997, at which counsel for Empire and
counsel for the Company and the Indiana Partnership addressed the Commission,
the Commission considered the ALJ Entries and the exceptions and objections
of the parties, and entered an order adopting the ALJ Entries in their
entirety (the "Commission Order").
19
<PAGE>
On August 25, 1997, the Commission formally notified Empire that it
had entered the Commission Order as the "final determination of the
Commission" on Empire's Request, and advised that any person who wished to
seek judicial review of the Commission Order was required to file a petition
for review in an appropriate court within thirty days of service of the
notice. The Commission notice also advised Empire that it could seek a
hearing on the denial of its license application, as contemplated by the ALJ
Entries.
Empire has not filed any petition for judicial review of the
Commission Order, and the time for filing of such a petition expired in late
September 1997. Furthermore, in response to an order issued by the ALJ on
September 3, 1997, Empire's counsel notified the ALJ in writing on September
15, 1997, that it would not seek a hearing before the ALJ on the denial of
its license application.
CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL.
In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol
House") filed a cause of action in the U. S. District Court of the Middle
District of Louisiana against Jazz, the former shareholders of Jazz ("Former
Jazz Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of
Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and
Argosy obtained the gaming license for Baton Rouge based upon false and
fraudulent pretenses and declarations and financial misrepresentations. The
complaint alleges tortious conduct as well as violations of RICO and seeks
damages of $158 million plus court costs and attorneys' fees. The plaintiff
was an applicant for a gaming license in Baton Rouge whose application was
denied by the Louisiana Enforcement Division. The Company believes the
allegations of the plaintiff are without merit and intends to vigorously
defend such cause of action.
On June 7, 1995, the Company consummated its purchase of all of the
outstanding capital stock of Jazz from the Former Jazz Shareholders. The
Company intends to seek indemnification from the Former Jazz Shareholders for
any liability the Company, Argosy Louisiana or Jazz suffers as a result of
such cause of action. As part of the consideration payable by the Company to
the Former Jazz Shareholder for the acquisition of Jazz, the Company agreed
at the time of such acquisition to annual deferred purchase price payments of
$1,350,000 for each of the first ten years after closing and $500,000 for
each of the next ten years. Payments are to be made quarterly by the
Company. The definitive acquisition documents provide the Company with
off-set rights against such deferred purchase price payments for
indemnification claims of the Company against the Former Jazz Shareholders
and for the liabilities that the Former Jazz Shareholder contractually agreed
to retain. There can be no assurance that the Former Jazz Shareholders will
have assets sufficient to satisfy any claim in excess of the Company's
off-set rights.
The defendants filed a Motion to Dismiss, or alternatively to
abstain and stay the action, pending resolution of certain Louisiana state
court claims filed by Capitol House. The trial court decided in favor of the
defendants and dismissed the suit without prejudice to the rights of
plaintiff to revive the suit after the conclusion of the pending state court
matters. The plaintiff appealed this dismissal to the U. S. Fifth Circuit
Court of Appeals. While the appeal was pending, several of the Louisiana
state court claims were resolved. On March 11, 1997, the U. S. Fifth Circuit
Court of Appeals vacated the trial court's dismissal and remanded the case to
the district court for further proceedings. The defendants have re-urged the
previously filed motion to dismiss. On November 17, 1997, the district court
granted the motion and dismissed, with prejudice, all of the federal claims
under RICO. The claims of Capitol House that arose under Louisiana state law
were dismissed, without prejudice. Capitol House filed an appeal of the
district court dismissal on January 9, 1998, and the matter will be appealed
to the U. S. Fifth Circuit Court of Appeals. Additionally, Capitol House
filed an amended petition in the Nineteenth Judicial District Court for East
Baton Rouge Parish, State of Louisiana, Suit Number 418,525 on November 26,
1997, amending its previously filed but unserved suit against Richard
Perryman, the person selected by the Louisiana Gaming Division to evaluate
and rank the applicants seeking a gaming license for East Baton Rouge Parish,
and now adding its state law claims against Jazz, the former shareholders of
Jazz, Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen
Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit
alleges that these parties violated the Louisiana Unfair Trade Practices Act
in connection with obtaining the gaming license which was issued to the
Company. This suit alleges the same, or substantially similar, facts that
formed the basis of the federal claim which was dismissed on November 17,
1997. The defendants have
20
<PAGE>
obtained an extension of time to file their response and intend to file an
Exception and/or a Motion to Dismiss in response to Capitol House's state court
suit. An adverse ruling in this matter could have a material adverse effect on
the Company.
MARION COUNTY, INDIANA GRAND JURY
On or after March 15, 1996, the Company, its partners in the
Lawrenceburg casino project and certain other individuals and entities were
served with document request subpoenas issued by the Office of the
Prosecuting Attorney of Marion County, Indiana in connection with a grand
jury investigation entitled: STATE OF INDIANA V. ORIGINAL
INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law requires that at the time a
target of an investigation is determined, that entity or person must be so
advised by the Office of the Prosecuting Attorney. On March 23, 1996 the
Company was advised by the Marion County prosecutor that no target subpoenas
had been issued by the grand jury in its investigation as of that date. As
described below, the grand jury has since handed up indictments on April 28,
1997 against four persons, but the Company and the partners of the Indiana
Partnership continue not to have been advised by the Marion County Prosecutor
that any of them is a target of the investigation. However, there can be no
assurance that further targets will not be identified as further information
and documents are obtained and considered by the grand jury. Due to the
confidential nature of grand jury proceedings, the Company is not aware of
the specific subject matter or matters of the investigation, other than to
the extent revealed by the April 28, 1997 indictments. The Company believes
it has fully complied with its subpoena, and has been informed by its
partners that they have done the same.
The subpoenas requested information regarding the current or prior
ownership interest in the Company and the partners of the Indiana Partnership
by the individuals or entities described below. The subpoenas also requested
that the Company and its partners produce a broad category of documents
including documents regarding employment and other agreements, gifts,
payments and correspondence between the Company and any of its partners on
the one hand and several business entities and individuals, including a
then-Indiana state legislator (Samuel Turpin), certain Indiana lobbyists, and
certain Lawrenceburg, Indiana city officials and businessmen on the other
hand. The Company has learned that this legislator (Turpin) has served as an
employee of a subsidiary of Conseco, Inc., the parent company of the 29%
limited partner in the Indiana Partnership since September 1995.
Additionally, the Company has learned that Turpin has served since September
1993 as a consultant to American Consulting Engineers, Inc. ("ACE"), a major
Indiana engineering firm that is engaged in many state and local government
funded construction projects. ACE also serves as lead engineer for the
Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative
Ethics Committee voted to reprimand, but take no further action against,
Turpin for failing to properly report the foregoing employment and consulting
arrangements on his 1993, 1994 and 1995 statements of economic interests. On
June 27, 1996, Turpin announced his resignation as chairman of the Indiana
House Ways and Means Committee. Turpin did not seek re-election in 1996 and
is no longer a member of the Indiana House of Representatives.
On April 28, 1997, the grand jury made a "First and Partial Report"
that handed up felony indictments against (1) Willis Conner, co-owner of ACE;
(2) Kenneth Cragen, president of and lobbyist for the Indiana Motor Truck
Association ("IMTA"); (3) Turpin; and (4) James Wurster, co-owner of ACE.
Conner, Wurster and Turpin are each charged with one count of bribery in
connection with payments made by ACE to Turpin while he served in the Indiana
General Assembly, which payments were stated to be for consulting fees for
duties outside the legislative process, but which the indictment charges were
in return for official acts by Turpin that promoted the economic interests of
ACE. The press release by the Marion County prosecutor at the time of the
indictments described those economic interests as including "the promoting of
certain riverboat gaming interests in which ACE had a financial interest, the
diverting of state funds into highway construction and, while Turpin was a
member of the State Budget Committee, the release of state funds that
benefited particular ACE public works projects." Turpin was also charged
with five counts of filing fraudulent campaign finance reports, and one count
of perjury in connection with a sworn statement to the Indiana Bureau of
Motor Vehicles. Wurster was also charged with one count, and Cragen with two
counts, of unlawful lobbying in connection with lobbying activities involving
IMTA and ACE.
21
<PAGE>
The company (including entities controlled by its employees) believes
that it has not engaged in, or been informed by its partners that they have
engaged in, any illegal conduct in the pursuit of or the granting of the
gaming license to the Indiana partnership of Lawrenceburg. Because the grand
jury proceedings were unlikely to be concluded quickly, on March 25, 1996, a
former U.S. Attorney (James Richmond) and his law firm were retained to
conduct, as special independent counsel (the "special independent counsel"),
an internal investigation into the activities and actions of the Company and
the entities controlled by any person employed by the Company with respect to
(i) the hiring by Conseco, Inc. and the Indiana engineering firm of the
then-state legislator, (Turpin) (ii) the endorsement of the Indiana
Partnership by the City of Lawrenceburg and the financial affairs of certain
Lawrenceburg officials with respect to such endorsement and the awarding of
the certificate of suitability by the Indiana Gaming Commission, and (iii)
their lobbying efforts in furtherance of the Indiana legislature's enactment
of legislation authorizing gaming and limiting gaming licenses to one per
county. A special committee of independent directors of the Company was
appointed to supervise and coordinate the special independent counsel's
investigation. The special independent counsel did not investigate Conseco,
Inc. The Company was advised that Conseco, Inc. also retained independent
counsel and such counsel conducted its own internal investigation of matters
that may be the subject of the grand jury proceedings and such investigation
found no wrongdoing by Conseco, Inc. or any person or entity it controls, or
is controlled by.
From March 25 to April 15, 1996, the special independent counsel
conducted its investigation and issued an interim report in which it
concluded that it found no evidence that the Company or any entity controlled
by or person employed by the Company had any involvement in, or knowledge of,
the relationship between the then-state legislator (Turpin) and Conseco, Inc.
or the Indiana engineering firm (ACE), or attempted to improperly influence
any City of Lawrenceburg official, state legislator or Indiana Gaming
Commission member or staff member in connection with the endorsement of the
partnership by the City of Lawrenceburg and the awarding of the certificate
of suitability to the Indiana Partnership with regard to lobbying, including
the lobbying with respect to one gaming license per county legislation. The
special independent counsel found no evidence that the Company or any entity
controlled by or person employed by the Company attempted to unduly influence
any legislator in any way. However, no investigation was made of any
lobbyist's records, activities or expenditures, nor were any outside
lobbyists interviewed. The special independent counsel also audited the
Company's compliance with the lobbying disclosure statute in Indiana and
found only technical errors in the Company's lobbying disclosure statements.
No evidence was found that these technical errors were intentional or
designed to hide any lobbying activity. In conducting its investigation, the
special independent counsel, among other things, reviewed numerous boxes of
documents produced by the executive and Lawrenceburg offices of the Company
and extensively interviewed the nine Company officers and employees most
closely related to the Lawrenceburg Casino project, as well as the principal
of R.J. Investments, Inc., a 4% limited partner of the Indiana Partnership.
Several months after the completion of his investigation, the
special independent counsel (Richmond) was retained as Acting General Counsel
of the Company for the period January 14, 1997 through April 30, 1997.
No assurance can be given, however, that the nature and scope of
the investigation conducted by the special independent counsel for the
Company and Conseco, was sufficient to uncover conduct that might be
considered unlawful. In the event that the Company, any entity controlled by
the Company, any person employed by the Company, the Indiana Partnership or
any of its partners is found by the Marion County prosecutor to have engaged
in unlawful conduct, there is no assurance what effect such action would have
on the Indiana Partnership's gaming license.
In the event that a partner is determined by the Indiana Gaming
Commission to be unsuitable for ownership of a gaming license, the terms of
the Indiana Partnership's partnership agreement provide that the Indiana
Partnership shall redeem 100% of such unsuitable partner's interest for an
amount equal to 90% of the "appraised value" of that partner's interest,
determined in accordance with the terms of the partnership agreement. The
purchase price is payable in five annual installments, only from available
cash flow or sale or financing proceeds of the partnership, and bears
interest at "prime". Also, there can be no assurance that the
22
<PAGE>
Indiana Gaming Commission would not take other actions such as suspending,
revoking or failing to renew the Indiana Partnership's gaming license. There
can be no assurance that the grand jury investigation will not lead to events
having a material adverse effect on the Company.
MATTERS CONCERNING H. STEVEN NORTON
In September, 1993, H. Steven Norton, an employee of the Company at
the time, filed a cause of action against John T. Connors, a significant
shareholder of the Company and a former officer of J. Connors Group Inc., a
predecessor entity of the Company ("JCG"), seeking $50 million in damages.
Mr. Norton alleged that Mr. Connors failed to fulfill his promise made in the
summer of 1991 to establish a partnership with Mr. Norton in which each would
have an equal 50% interest in JCG, which had a 25% partnership interest in
the Company's predecessor entity that owned the Alton Belle casino. As a
result of the reorganization effected immediately prior to its initial public
offering, the Company succeeded to all the rights, properties and assets, and
assumed all the liabilities, of all of its predecessor entities, including
JCG. Subsequent to filing the lawsuit, Mr. Connors advised the Company that
his dealings with Mr. Norton, which are the subject of the litigation, were
in his capacity as an officer of JCG, and that the Company should assume the
defense and reimburse Mr. Connors for the approximately $130,000 spent to
date on legal fees, and that any liability resulting from the litigation was
assumed by the Company as a result of the Company's reorganization. The
Company responded to Mr. Connors that it believed that his actions and
dealings with Mr. Norton were solely in his individual capacity as a
shareholder of JCG, and the Company declined to assume the defense or
reimburse him for previously incurred legal fees, and the Company denied that
it has any liability with respect to such matter. If, however, JCG were to
have been found liable to Mr. Norton as a result of the actions of Mr.
Connors, then the Company could under certain circumstances be liable to Mr.
Norton for any damages awarded against JCG.
In April 1995, Mssrs. Norton and Connors agreed to voluntarily
dismiss the lawsuit without prejudice. However, on May 22, 1996, Mr. Norton
refiled the suit against Mr. Connors and is again seeking $50 million in
damages. The Company believes that Mr. Connors will again seek to cause the
Company to indemnify and reimburse him from liability thereunder. Therefore,
there can be no assurance that the lawsuit will not lead to events having a
material adverse effect on the Company.
Mr. Norton's employment with the Company terminated on February 27,
1998. Prior to the termination of his employment, Mr. Norton asserted that he
was entitled to additional compensation from the Company in the amount of
$1.4 Million for his efforts relating to the Lawrenceburg, Indiana casino.
The Company's position is that it has no obligation to Mr. Norton relating to
the Lawrenceburg, Indiana casino. The Company expects that if no agreement
is reached with respect to Mr. Norton's Lawrenceburg claim and other
severance related claims Mr. Norton will commence a cause of action against
the Company, which the Company will vigorously defend.
GAMING INDUSTRY CLASS ACTIONS
The Company has been named, along with two gaming equipment
suppliers, 41 of the country's largest gaming operators and four gaming
distributors (the "Gaming Industry Defendants") in three class action
lawsuits pending in Las Vegas, Nevada. The suits allege that the Gaming
Industry Defendants violated the Racketeer Influenced and Corrupt
Organizations Act ("RICO") by engaging in a course of fraudulent and
misleading conduct intended to induce people to play their gaming machines
based upon a false belief concerning how those gaming machines actually
operate, as well as to the extend to which there is actually an opportunity
to win on any given play. The suites seek unspecified compensatory and
punitive damages. On January 14, 1997, the Court consolidated all three
actions under the case name WILLIAM H. POULOS, ETC. V. CAESARS WORLD, INC.,
ET AL. On February 13, 1997 the plaintiffs filed a consolidated amended
complaint. The Court subsequently dismissed this complaint, in part, and on
January 8, 1998, the plaintiffs filed a second consolidated amended
complaint. On February 11, 1998, the defendants filed their consolidated
answer. On March 19, 1998, the court split discovery between merit discovery
and class certification discovery and stayed merit discovery pending a
decision on class certification. The Company is unable to determine what
effect, if any, the suit would have on its business or operations.
23
<PAGE>
CONSERVANCY DISTRICT LEASE LITIGATION IN DEARBORN COUNTY, INDIANA
On March 21, 1997, Deborah S. Whitacre filed an action in the Circuit Court
of Dearborn County, Indiana as Cause No. 15CO1-9703-CP-073, challenging the
validity of a lease to the City by the Conservancy District of Lawrenceburg,
Indiana (the "District") of certain land owned by the District, which land
has in turn been subleased by the City to the Company's affiliate Indiana
Gaming and is being used for development and operation of the riverboat
gaming facility in the City for which Indiana Gaming has been awarded a
riverboat owner's license by the Commission. Defendants are the District and
its individual directors. In early 1998, Indiana Gaming petitioned to
intervene to assist in defending the validity of the challenged lease, which
petition is pending before the Court. The District and its directors have
advised that they are contesting the action and intend to continue to do so
vigorously. If permitted to intervene, Indiana Gaming also intends to
contest the action vigorously. An adverse ruling in this matter could have a
material adverse effect on the Company.
PENDING INTERNAL REVENUE SERVICE AUDIT
On November 1, 1994, the Company received a Notice of the beginning
of an Administrative Proceeding from the Internal Revenue Service ("IRS") for
the 1992 and 1993 tax years of Metro Entertainment & Tourism, Inc.
("Metro"). Metro was merged with and into the Company immediately prior to
its initial public offering in February 1993. Metro along with J. Connors
Group, Inc. ("Connors") were the partners of Alton Riverboat Gambling
Partnership ("ARGP") which until the Company's initial public offering owned
and operated the Alton, Illinois riverboat casino. The IRS has proposed
certain adjustments with respect to the Company for its 1993 tax year in a
30-day letter. The IRS has also proposed adjustments for ARGP that flow
through to Metro in a 60-day letter. Finally, on March 16, 1998 the IRS
issued a 60-day letter to Metro for its tax years ending December 1992 and
February 1993. The principal issues raised by the IRS in the Metro 60-day
letter involve the status of Metro as an S Corporation and the deductibility
of the $8.5 million accommodation fee paid to William McEnery in 1992 and
1993. The total Federal tax liability asserted by the IRS against the
Company resulting from these proposed adjustments is approximately $11.0
million including interest through December 31, 1997 but excluding penalties,
if any. The Company intends to protest these proposed adjustments to the
Appeals Office of the IRS and vigorously contest these proposed adjustments.
The required payment by the Company resulting from an adverse ruling of this
matter could have a material effect on the Company's results of operations,
financial condition and cash flows.
24
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except share and per share amounts) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenues $344,083 $244,817 $252,691 $153,045 $67,525
Income (loss) from operations 6,530 (10,751) 27,662 22,994 14,327
Net Income (loss) (40,213) (24,839) 6,953 9,635 10,825
Net Income (loss) per share (1.65) (1.02) 0.29 0.40
Weighted average
common shares outstanding 24,333,333 24,333,333 24,333,333 24,333,333
- ------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME DATA
(UNAUDITED): (1)
Pro forma net income (loss) 5,712 5,393 9,105
Pro forma net income per share 0.23 0.22 0.38
Pro forma, shares outstanding 24,333,333 24,333,333 23,763,513
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets 559,856 530,528 309,882 232,831 94,635
Long-term debt,
including current maturities 449,790 380,208 169,702 115,431 4,332
Total stockholders' equity 32,663 72,701 97,540 90,587 80,952
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) From their inception until a reorganization that was effected on February
25, 1993, certain predecessor entities of the Company elected to be treated
as S-Corporations under the Internal Revenue Code and were not generally
subject to corporate income taxes. The pro forma net income amount for the
year ended December 31, 1993, has been determined assuming the
reorganization had occurred on January 1, 1993, resulting in the Company
being treated as a C-Corporation for tax purposes as of that date and to
reflect the use of a portion of the net proceeds of the Company's initial
public offering to retire debt. In addition, pro forma net income per
share for the years ended December 31, 1995 and 1994, reflects the
Company's June 7, 1995 acquisition of Jazz Enterprises, Inc. (the "Jazz
Acquisition") as if the Jazz Acquisition had occurred on January 1, 1994.
See Note 13 of the Notes to Consolidated Financial Statements.
25
<PAGE>
ITEM 7. MANAGEMENT'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. In addition, revenues were adversely affected by a market decline
in Baton Rouge caused by increased competition from neighboring Native American
casinos and video poker outlets. 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 could 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.
Under the terms of the development agreement with the City of Baton Rouge,
the Company is required to pay a head tax of $2.50 per passenger until such time
as the Company commences construction on a hotel near the Company's Catfish Town
facility. Once construction commences on the hotel, the head tax ceases and the
Company would save approximately $3.5 million annually. The Company is in
negotiations with several developers pertaining to the construction of a hotel.
While the Company believes it will structure an agreement for the development of
a hotel, no assurance can be given as to the timing of construction or as to the
required financial commitment of the Company with respect to the development of
a hotel.
26
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
(In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASINO REVENUES
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>
27
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
(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% and 42.5% 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. EBITDA may not be comparable to
similarly titled measures reported by other companies. 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.
28
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'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 to $61.9 million and
Riverside casino revenues decreased from $82.2 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 AND BEVERAGE--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 offset
somewhat by a $1.1 million decrease in Riverside due to cost control measures.
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 resulting in an
increase of $20.9 million. This amount was offset by decreased costs recognized
through cost containment measures at the Company's other properties and the
corporate office. 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.
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 writedown 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
29
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
extraordinary loss of $0.9 million (net of tax) related to the writeoff 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 complementary 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.
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.
30
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
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 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 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 Rogue. 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.
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 towards 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
31
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
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.
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 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. While the Company believes that its
sources of liquidity are sufficient to meet its cash obligations during the next
12 months, 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 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>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
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. As the Company is
dependent on third party software for all of its major applications the Company
has initiated discussions with its significant software vendors and financial
institutions to ensure that those parties have appropriate plans to remediate
Year 2000 issues. Through these discussions, the Company has determined that
all of the systems that are critical to the Company's operations are either 2000
compliant or that 2000 compliant versions exist that can be implemented by the
Company.
The next phase in the Company's efforts will be to plan for and implement
the Year 2000 versions of the software into the Company's systems. The Company
has a June 1999 target date to complete its implementation efforts.
As of December 31, 1997, the Company has incurred less than $25,000 of
costs related to Year 2000 issues. The Company estimates it will incur less
than $250,000 in future expenses to ensure all systems will function properly
with respect to dates in the Year 2000. These expenses are not expected to have
a material impact on the financial position, cash flow or operations of the
Company.
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) INCREASED COMPETITIVE PRESSURES IN THE MARKETS IN WHICH THE
COMPANY OPERATES, (III) THE EFFECT OF FUTURE LEGISLATION OR REGULATORY CHANGES
ON THE COMPANY'S OPERATIONS, AND (IV) 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>
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth under the
caption "Certain Transactions" in the Proxy Statement and is incorporated herein
by reference.
The Company believes that the disclosed transactions were made on terms as
favorable to the Company as those available in arms length transactions in the
marketplace.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to the Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 1st day of October,
1998.
ARGOSY GAMING COMPANY
By: /s/ DALE R. BLACK
---------------------------------------
Dale R. Black
Vice President and Chief Financial Officer
