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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-21122
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ARGOSY GAMING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1304247
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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:
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NAME OF EACH
EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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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
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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 17, 1999, the aggregate market value of the registrant's Common
Stock held by non-affiliates was $122,201,478. The closing price of the Common
Stock on March 17, 1999 as reported on the New York Stock Exchange, was $6.00.
As of March 17, 1999, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 28,140,324.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1998, 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 22, 1999 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.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE REFERENCE
OR REFERENCE(1)
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PART I
ITEM 1. BUSINESS............................................................................ 1
ITEM 2. PROPERTIES.......................................................................... 20
ITEM 3. LEGAL PROCEEDINGS................................................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)............ 28
ITEM 6. SELECTED FINANCIAL DATA............................................................. 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS(3)..................................................................... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(4)...................................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................................ 98
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(5)............................... 99
ITEM 11. EXECUTIVE COMPENSATION(6)........................................................... 99
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(7)................... 99
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(6)................................... 99
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................... 100
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(1) Certain information is incorporated by reference, as indicated below, from
the Annual Report to Stockholders for the fiscal year ended December 31,
1998 (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 22, 1999, (the "Proxy Statement").
(2) Proxy Statement section entitled "Market for Registrant's Common Equity and
Related Stockholder Matters."
(3) Annual report, pages 30-37, section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(4) Annual report, pages 38-58, sections entitled "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of Cash
Flows, "Consolidated Statements of Stockholders' Equity," "Notes to
Consolidated Financial Statements," and "Report of Independent Auditors."
(5) Proxy Statement sections entitled "Election of Directors" and "Management."
(6) Proxy Statement sections entitled "Executive Compensation" and "Certain
Transactions."
(7) Proxy Statement section entitled "Record Date, Required Vote, Outstanding
Shares and Holdings of Certain Stockholder--Security Ownership of Certain
Beneficial Owners and Management."
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PART I
ITEM 1. BUSINESS
GENERAL
Argosy Gaming Company (the "Company") is a multi-jurisdictional 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, 700 slot machines and 32 table games for
a total of approximately 920 gaming positions. 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 approximately 36,000 gaming square feet, 1,083
slot machines and 45 table games for a total of approximately 1,370 gaming
positions. 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 approximately 28,000
gaming square feet, 752 slot machines and 42 table games for total of
approximately 1,060 gaming positions. 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, 449 slot machines and 23 table games for a total of approximately 610
gaming positions, a bar and gift shop. The casino is complemented by adjacent
barge facilities featuring buffet dining, meeting space and administrative
support offices.
ARGOSY LAWRENCEBURG CASINO--Lawrenceburg, Indiana is located approximately
15 miles west of Cincinnati, Ohio on the Ohio River. Indiana Gaming Company,
L.P., a joint-venture subsidiary of the Company ("Indiana Partnership"),
operates the Lawrenceburg casino. The vessel features approximately 74,300
square feet of gaming space on three levels and has approximately 2,560 gaming
positions consisting of approximately 2,000 slots and 104 table games. The
vessel can accommodate approximately 4,400 passengers and crew members. The
facility also includes a 300 room hotel, which opened in May 1998, and a 120,000
square foot land-based entertainment pavilion and support facility featuring a
350 seat buffet restaurant, two specialty restaurants, an entertainment lounge,
and a 1,750 space parking garage.
The Lawrenceburg casino opened December 10, 1996 and, through September 30,
1997, was operated from 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,
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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. From October 1, 1997 through December
9, 1997, the Company utilized the permanent vessel at the temporary site.
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 hold the remaining 13.5%
limited partnership interests in the Indiana Partnership. The Company manages
the operations of the Lawrenceburg Casino and receives a management fee of 7.5%
of EBITDA, while Conseco receives a financial advisory fee of 5% of EBITDA.
CORPORATE STRATEGY
The Company's operating strategy has been developed with the goal to
position the Company as the premier riverboat casino operator. This strategy
includes capitalizing on management's significant experience and expertise in
gaming industry operations and marketing, developing the Company's 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 corporate management team has been
assembled to lead the company's transformation into one of the premier riverboat
casino operators in the United States. This team, lead by James B. Perry, has in
excess of 70 years of casino industry experience mostly in the competitive
locals/regional market of Atlantic City. In addition, since the third and fourth
quarters of 1997 Argosy has hired several key personnel with significant casino
operations experience at each of its' locations. These hirings are highlighted
by three general managers who each have over 20 years experience in the gaming
industry.
EXPANDED SALES AND MARKETING EFFORTS. The Company's marketing strategy is
designed to attract and reward serious gaming customers through direct
marketing, promotional activities and targeted entertainment events. During
1998, the Company replaced or upgraded the player tracking systems at four of
its properties. These enhancements have enabled the Company to better provide
targeted rewards based upon each customer's playing habits. The Company also 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
strategy that emphasizes prudent capital investment to enhance the Company's
operations. This strategy includes a program to systematically replace older,
less competitive slot machines with newer products. In 1998, over 10% of the
Company's slot machines were replaced with approximately 20% scheduled for 1999.
In addition, Argosy spent approximately $2.0 million in 1998 to replace or
upgrade the player tracking systems at its properties. Finally, the Company
anticipates improving its physical plant, including parking, public areas,
restaurants, etc., as necessary, to accommodate customers' needs and improve
current operating inefficiencies.
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
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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 currently faces competition from three casino
companies in the Kansas City area that offer dockside gaming, two of which offer
two gaming vessels each. Until July 1998, there was an additional competitor in
the Kansas City area. 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. The Indiana
Partnership faces competition from one other riverboat casino in the Cincinnati
market, which opened in October 1996. In addition, a riverboat casino opened in
November 1998 in the Louisville, Kentucky area approximately 100 miles from the
Company's Lawrenceburg facility and a competing riverboat is expected to open
approximately 45 miles from the Company's Lawrenceburg facility in 2000. 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, 1998, the Company had approximately 4,146 full-time and
585 part-time employees. Approximately 2,354 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
1999 and June 2003. Ten employees are represented by the International
Brotherhood of Electrical Workers. In addition, approximately 73 employees are
represented by the United Plant Guard Workers of America and 18 employees are
represented by American Maritime Officers Union. The Company is currently
negotiating collective bargaining agreements with the Seafarers International
Union of North America.
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 is the sole manager of the
partnership pursuant to a management agreement, subject only to certain actions
or major decisions which are described in the partnership agreement and require
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 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.
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
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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. Historically, these distributions have
been made monthly. 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.
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 involving the Indiana
Partnership; (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
(December 10, 1996), 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 accept or 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 the Partnership or all of the assets of the partnership within twelve
months to the highest bidder and the partnership will be dissolved. 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.
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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 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,
1999. 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.
Applicants for and holders of an owner's license are required to obtain
formal approval from the Illinois Gaming Board for changes in: (i) key
personnel, including officers, directors, managing agents, or holders of a 5% or
greater ownership interest in the business entity; (ii) its organizational form;
(iii) the equity and debt capitalization of the entity; (iv) investors and/or
debt holders; (v) sources of funds; (vi) the applicant's economic development
plan; (vii) riverboat capacity or significant design changes; (viii) the number
of gaming positions; (ix) anticipated economic impact; or (x) oral or written
agreements relating to
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the acquisition or disposition of property of a value greater than $1 million. A
holder of an owner's license is allowed to make distributions to its partners,
stockholders or itself only to the extent that such distribution would not
impair the financial viability of the gaming operation. Factors to be considered
by the licensee include, but are not limited to, the following: (i) working
capital requirements, (ii) debt service requirements, (iii) requirements for
repairs and maintenance and (iv) capital expenditure requirements.
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.
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 annual 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 by wire transfer 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 $0.25 admission tax to the City
of Alton for each person admitted to the Alton Belle Casino.
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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 Illinois 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.
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. 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.
The Indiana Riverboat Act requires the owner of a riverboat gaming operation
to hold an owner's license issued by the Indiana Gaming Commission. The Indiana
Gaming Commission is authorized to issue 11 owner's licenses statewide. Each
license granted entitles the licensee to own and operate one riverboat and
gaming equipment as part of the gaming operation. A licensee may own no more
than a 10% interest in any other owner's license under the Indiana Riverboat
Act.
The Indiana Riverboat Act restricts the granting of the 11 owner's licenses
by location. The 11 licenses must be awarded as follow: (i) two licenses for
riverboats operating from Gary; (ii) one license for a riverboat operating in
Hammond; (iii) one license for a riverboat operating in East Chicago; (iv) one
license for a riverboat operating in any city located in LaPorte, Porter or Lake
counties, not including the above-named cities; (v) five licenses for riverboats
that operate upon the Ohio River from counties contiguous thereto and with no
more than one operating in any county; and (vi) one license for a riverboat
operating in Patoka Lake from either DuBois, Crawford or Orange Counties.
Each owner's license runs for a period of five years. Thereafter, the
license is subject to renewal on an annual basis upon a determination by the
Indiana Gaming Commission that the licensee continues to be
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eligible for an owner's license pursuant to the Indiana Riverboat Act and the
rules and regulations adopted thereunder. The Indiana Partnership's license is
up for renewal in 2001. The Company's Indiana gaming license is subject to
renewal in 2001. A licensed owner undergoes a complete investigation every three
years. A licensed owner may apply for and may hold other licenses that are
necessary for the operation of a riverboat, including licenses to sell alcoholic
beverages, a license to prepare and serve food and any other necessary license.
Furthermore, the Indiana Riverboat Act requires that officers, directors and
employees of a gaming operation and suppliers of gaming equipment, devices and
supplies and certain other suppliers be licensed. All Indiana state excise
taxes, use taxes and gross retail taxes apply to sales on a riverboat.
Applicants for licensure must submit comprehensive application and personal
disclosure forms and undergo an exhaustive background investigation prior to the
issuance of a license. The applicant must also disclose the identity of every
shareholder or participant of the applicant and provide specific information
with respect to certain shareholders holding significant interests (5% or
greater) in the applicant. The Indiana Gaming Commission has the authority to
request specific information on any shareholder.
A riverboat owner licensee or any other person may not lease, hypothecate,
borrow money against or loan money against an owner's riverboat gaming license.
An ownership interest in an owner's riverboat gaming license may only be
transferred in accordance with the regulations promulgated under the Indiana
Riverboat 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.
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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.
Riverboats operating in Indiana must (i) have a valid certificate of
inspection from the U.S. Coast Guard to carry at least 500 passengers; and (ii)
be at least 150 feet long. Any riverboat that operates on the Ohio River must
replicate, as nearly as possible, historic Indiana steamboat passenger vessels
of the nineteenth century. Riverboats operating in Lake Michigan or Patoka Lake
need not meet this requirement.
Gaming sessions are generally required to be at least two hours and are
limited to a maximum duration of four hours. No gaming may be conducted while
the boat is docked, except (i) for 30-minute time periods at the beginning and
end of each cruise while the passengers are embarking and disembarking (total
gaming time is limited to four hours, however, including the pre- and
post-docking periods); and (ii) when weather or water conditions prevent the
boat from cruising. The Indiana Gaming Commission may grant extended cruise
hours at its discretion. If the master of the riverboat reasonably determines
and certifies in writing that specific weather conditions or water conditions
present a danger to the riverboat and the riverboat's passengers and crew, the
riverboat may remain docked and gaming may take place until (i) the master
determines that the conditions have sufficiently diminished for the riverboat to
safely proceed; or (ii) the duration of the authorized excursion has expired.
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.
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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.
A riverboat owner licensee may not 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 and services rendered or received. All contracts are subject to
disapproval by the Indiana Gaming Commission. A riverboat owner licensee or an
affiliate may not enter into a debt transaction of $1.0 million or more without
prior approval of the Indiana Gaming Commission. The Indiana Gaming Commission
has a rule requiring the reporting of certain currency transactions, which is
similar to that required by Federal authorities. See "--Other Applicable
Non-Gaming Regulations."
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.
The Indiana Riverboat Act prohibits contributions to a candidate for a
state, legislative, or local office, or to a candidate's committee or to a
regular party committee by the holder of a riverboat owner's license or a
supplier's license, by an officer of a licensee or by an officer of a person
that holds at least a 1% interest in the licensee. The Indiana Gaming Commission
has promulgated a rule requiring quarterly reporting by the holder of a
riverboat owner's license or a supplier's license or officers of the licensee,
officers of persons that hold at least a 1% interest in the licensee, and of
persons who directly or indirectly own a 1% interest in the licensee.
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The Indiana Gaming Commission adopted a rule which prohibits a distribution
by a riverboat licensee to its partners, shareholders, itself, or any affiliated
entity, if the distribution would impair the financial viability of the
riverboat gaming operation. The Indiana Gaming Commission has adopted a rule
which requires riverboat licensees to maintain, on a quarterly basis, a cash
reserve in the amount of the actual payout for three days, and the cash reserve
would include cash in the casino cage, cash in a bank account in Indiana or cash
equivalents not committed or obligated.
The Governor of Indiana has appointed a Gaming Impact Study Commission
chaired by the Attorney General to review the impact of all forms of gaming in
Indiana and to issue its final report by December 31, 1999.
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 Company's Iowa gaming license is subject to
renewal in March 1999 and yearly 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.
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 annual 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
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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.
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.
The laws and regulations of Louisiana seek to (i) prevent unsavory or
unsuitable persons from having any direct or indirect involvement with gaming at
any time or in any capacity, (ii) establish and maintain responsible accounting
practices and procedures; (iii) maintain effective control over the financial
practices of licensees, including establishing procedures for reliable record
keeping and making periodic reports to the Board; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
fees; and (vi) ensure that gaming licensees, to the extent practicable, employ
and contract with Louisiana residents, women and minorities. Initial licenses to
conduct riverboat gaming expire five years from the date the license was
granted. The Company's Louisiana gaming license is subject to renewal in July
1999.
The Louisiana Act specifies certain restrictions and conditions relating to
the operation of riverboat gaming, including but not limited to the following:
(i) in parishes bordering the Red River, gaming may be conducted dockside;
however, in all other authorized locations, gaming is not permitted while a
riverboat is docked, other than for forty-five minutes between excursions,
unless dangerous weather or water conditions exist; (ii) each round trip
riverboat cruise may not be less than three nor more than eight hours in
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duration, subject to specified exceptions; (iii) agents of the Board are
permitted on board at any time during gaming operations; (iv) gaming devices,
equipment and supplies may be purchased or leased from permitted suppliers; (v)
gaming may only take place in the designated river or waterway; (vi) gaming
equipment may not be possessed, maintained, or exhibited by any person on a
riverboat except in the specifically designated gaming area, or a secure area
used for inspection, repair, or storage of such equipment; (vii) wagers may be
received only from a person present on a licensed riverboat; (viii) persons
under 21 are not permitted in designated gaming areas; (ix) except for slot
machine play, wagers may be made only with tokens, chips or electronic cards
purchased from the licensee aboard a riverboat; (x) licensees may only use
docking facilities and routes for which they are licensed and may only board and
discharge passengers at the riverboat's licensed berth; (xi) licensees must have
adequate protection and indemnity insurance; (xii) licensees must have all
necessary federal and state licenses, certificates and other regulatory
approvals prior to operating a riverboat; and (xiii) gaming may only be
conducted in accordance with the terms of the license and the rules and
regulations adopted by the Board.
No person may receive any percentage of the profits from the Company's
operations in Louisiana without first being found suitable. A gaming license is
deemed to be a privilege under Louisiana law and as such may be denied, revoked,
suspended, conditioned or limited at any time by the Louisiana Gaming Control
Board. In issuing a license, the Board must find that the applicant is a person
of good character, honesty and integrity and the applicant is a person whose
prior activities, criminal record, if any, reputation, habits and associations
do not pose a threat to the public interest of the State of Louisiana or to the
effective regulation and control of gaming, or create or enhance the dangers of
unsuitable, unfair or illegal practices, methods, and activities in the conduct
of gaming or the carrying on of business and financial arrangements in
connection therewith. The Louisiana Gaming Control Board will not grant any
licenses unless it finds that: (i) the applicant is capable of conducting gaming
operations, which means that the applicant can demonstrate the capability,
either through training, education, business experience, or a combination of the
above, to operate a gaming casino; (ii) the proposed financing of the riverboat
and the gaming operations is adequate for the nature of the proposed operation
and from a source suitable and acceptable to the Board; (iii) the applicant
demonstrates a proven ability to operate a vessel of comparable size, capacity
and complexity to a riverboat in its application for a license; (iv) the
applicant designates the docking facilities to be used by the riverboat; (v) the
applicant shows adequate financial ability to construct and maintain a
riverboat; (vi) the applicant has a good faith plan to recruit, train and
upgrade minorities in all employment classifications; and (vii) the applicant is
of good moral character.
The Louisiana Gaming Control Board may not award a license to any applicant
who fails to provide information and documentation to reveal any fact material
to qualifications or who supplies information which is untrue or misleading as
to a material fact pertaining to the qualification criteria; who has been
convicted of or pled nolo contendere to an offense punishable by imprisonment of
more than one year; who is currently being prosecuted for or regarding whom
charges are pending in any jurisdiction of an offense punishable by more than
one year imprisonment; if any holder of 5% or more in the profits and losses of
the applicant has been convicted or pled guilty or nolo contendere to an offense
which at the time of conviction is punishable as a felony.
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. Section 2501 of the regulations enacted by the
Louisiana State Police Riverboat Gaming Division pursuant to the Louisiana Act
(the "Regulations") requires prior written approval of the Board of all persons
involved in the sale, purchase, assignment, lease, grant or foreclosure of a
security interest, hypothecation, transfer, conveyance or acquisition of an
ownership interest (other than in a corporation) or economic interest of five
percent (5%) or more in any licensee.
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Section 2523 of the Regulations requires notification to and prior approval
from the Board of the (i) application for, receipt, acceptance or modification
of a loan, or the (ii) use of any cash, property, credit, loan or line of
credit, or the (iii) guarantee or granting of other forms of security for a loan
by a licensee or person acting on a licensee's behalf. Exceptions to prior
written approval apply to any transaction for less than $2.5 million in which
all of the lending institutions are federally regulated, or if the transaction
involves publicly registered debt and securities sold pursuant to a firm
underwriting agreement.
The failure of a licensee to comply with the requirements set forth above
may result in the suspension or revocation of that licensee's gaming license.
Additionally, if the Board finds that the individual owner or holder of a
security of a corporate license or intermediary company or any person with an
economic interest in a licensee is not qualified under the Louisiana Act, the
Board may require, under penalty of suspension or revocation of the license,
that the person not (i) receive dividends or interest on securities of the
corporation, (ii) exercise directly or indirectly a right conferred by
securities of the corporation, (iii) receive remuneration or economic benefit
from the licensee, or (iv) continue in an ownership or economic interest in the
licensee.
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.
A licensee must periodically report the following information to the Board,
which is not confidential and is to be available for public inspection: the
licensee's net gaming proceeds from all authorized games; the amount of tax paid
on net gaming proceeds; and all quarterly and annual financial statements
presenting historical data that are submitted to the Board, including annual
financial statements that have been audited by an independent certified public
accountant.
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The Board has adopted rules governing the method for approval of the area of
operations and the rules and odds of authorized games and devices permitted, and
prescribing grounds and procedures for the revocation, limitation or suspension
of licenses and permits.
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.
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. The company's gaming license will be subject to renewal in June 2000.
However, the Missouri Gaming Commission may reopen license hearings at any time.
As part of the application and licensing process for a gaming license, the
applicant must submit detailed financial, operating and other reports to the
Missouri Gaming Commission. Each applicant has an ongoing duty to update the
information provided to the Missouri Gaming Commission in the application. In
addition to the information required of the applicant, directors, officers and
other key persons must submit Personal Disclosure Forms which include detailed
personal financial information and are subject to thorough investigations. All
gaming employees must obtain an occupational license issued by the Missouri
Gaming Commission. Operators' licenses are issued through application to the
Missouri Gaming Commission, which requires, among other things, (a)
investigations into an applicant's character, financial responsibility and
experience qualifications and (b) that applicants furnish (i) an affirmative
action plan for the hiring and training of minorities and women and (ii) an
economic development or impact report. License fees are a minimum of $50,000 for
the initial application and $25,000 annually thereafter.
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
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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.
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 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. 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. All
licensees currently operating riverboat gaming operations in Missouri are
authorized to conduct all or a portion of their operations on a dockside basis.
The Company began dockside operations in August 1995. Dockside gaming in
Missouri may differ from dockside gaming in other states, such as Mississippi,
because the Missouri Gaming Commission has the ability to require "simulated
cruising." This requirement permits customers to board dockside riverboats only
at specific times and prohibits boarding during a certain portion of each
simulated cruise, which are required to be a
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minimum of two hours and a maximum of four hours. Dockside gaming in Missouri
may not be as profitable as dockside gaming in other states, that allow for
continuous customer ingress and egress.
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.
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.
On November 3, 1998, the citizens of the State of Missouri approved a
Constitutional amendment which was proposed by initiative petition, that
retroactively legalized lotteries, gift enterprises and games of chance aboard
excursion gambling boats and floating facilities located within artificial
spaces containing water that are within 1,000 feet of the closest edge of the
main channel of the Mississippi or Missouri Rivers. This amendment to the
Constitution was certified on November 23, 1998.
LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS
KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally
prohibited form of lottery. A bill currently in the legislature, which would
permit slot machines under lottery regulations at racetracks, requires a simple
majority in the Kansas House and Senate, as well as a majority vote in the
racetrack's county. Kansas legislature is in session through March, and veto
would extend through mid-April.
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.
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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 or must
be approved by the American Bureau of Shipping ("ABS") for stabilization and
flotation, and may also be subject to local zoning and building codes. 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 has developed 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 ever disapproved by the U. S. Coast Guard,
the Company would be required to remove a 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
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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.
UNCERTAIN EFFECT OF NATIONAL GAMBLING IMPACT STUDY COMMISSION
A National Gambling Impact Study Commission has been established by the
United States Congress to conduct a comprehensive study of the social and
economic impact of gaming in the United States. The National Commission is
required to issue a report containing its findings and conclusions, together
with recommendations for legislation and administrative actions, within two
years after its first meeting, which occurred on June 20, 1997. Any
recommendations which may be made by the National Commission could result in the
enactment of new laws and/or the adoption of new regulations which could
adversely impact the gaming industry in general. We are unable at this time to
determine what recommendations, if any, the National Commission will make, or
the ultimate disposition of any recommendations the National Commission may
make.
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 as an annual 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.
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ITEM 2. PROPERTIES
The following is a list of the Company's principal properties as of December
31, 1998. 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
Real Property.................... Leased Landing Rights April 2001(4)
Alton Belle II................... Owned Riverboat Casino
Office Building.................. Owned Offices
Support Barges................... Owned Landing, Ticketing and Office facilities
RIVERSIDE, MISSOURI
Real Property.................... Leased Landing Rights December 1999(4)
Real Property.................... Owned Permanent Landing Site
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
Argosy VI........................ Owned Riverboat Casino
Docking Site..................... Leased Vessel Dock December 2002(4)
SIOUX CITY, IOWA
Argosy V......................... Owned Riverboat Casino
Support Barge.................... Owned Staging Barge
Real Property.................... Leased Landing Rights June 2002
OTHER(3)
Spirit of America................ Owned 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.
(3) Currently not in service.
(4) Renewal options available.
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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.
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, with the U.S. Fifth Circuit Court of Appeals. On November 4,
1998, the Fifth Circuit affirmed the district court's dismissal of Capital
House's RICO claims. This matter is now concluded in federal court.
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
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substantially similar, facts that formed the basis of the federal claim which
was dismissed on November 17, 1997. The defendants have filed a Peremptory
Exception of No Cause of Action, Peremption and Prescription and Exception of
Lis Pendens in response to Capitol House's state court suit. A hearing on these
exceptions was held June 1, 1998, before Judge McDonald. The Court granted the
exception and dismissed the suit as to Argosy Gaming Company, Argosy of
Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of
Baton Rouge Casino. The Court denied the exception as to Jazz and the former
shareholders of Jazz. On behalf of Jazz and its former shareholders, a
supervisory writ has been filed with the First Circuit Court of Appeal, State of
Louisiana, seeking a dismissal of the claims. Capitol House has appealed the
dismissal of the claims as to the other parties. On December 10, 1998, the Court
of Appeal granted a hearing and then denied the supervisory writs of Jazz and
the Former Jazz Shareholders and affirmed the ruling of the trial court. Jazz
and the Former Jazz Shareholders have filed a Motion for Rehearing before the
Court of Appeal. Capitol House's appeal of the trial court's dismissal of Argosy
Gaming Company, Argosy of Louisiana, Inc., and Catfish Queen Partnership in
Commendam is still pending in the First Circuit. If the Court of Appeal should
deny Jazz and the Former Jazz Shareholders' Motion for Rehearing, this suit will
then proceed in the trial court and Jazz will assert its additional defenses
before the trial court. 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
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<PAGE>
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.
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,
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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 Indiana Gaming Commission would not take other actions such
as suspending, revoking or failing to renew the Indiana Partnership's gaming
license.
Since April 1, 1998, the Company has been served with two additional
document subpoenas from the Marion County, Indiana Grand Jury relating to (i)
John Frick & Associates and its principal James A. Perucker and (ii) the Indiana
Gaming Association and its Executive Director John Barnett. The Company has from
time to time retained Mr. Perucker and his firm to act as its lobbyist in the
State of Indiana. The Company is, and has been for years, a member of the
Indiana Gaming Association, an industry trade association which also conducts
lobbying activities in the State of Indiana. Since May 1, 1998, the Partnership
also received a similar document subpoena relating to the Indiana Gaming
Association and its Executive Director John Barnett. The Company is working with
its special independent counsel to comply with the most recent document
subpoenas. 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, who was then the President of the
Company, and is now no longer employed by the Company, filed a cause of action
against John T. Connors, formerly a significant shareholder of the Company and a
former officer, director and shareholder 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
the filing of 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 his 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
24
<PAGE>
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.
On May 21, 1998, Mr. Connors filed a third party complaint directed against
the Company. In the complaint, Connors alleges the Company purchased JCG's
assets and liabilities and that to the extent Mr. Connors is held liable, the
Company must indemnify Mr. Connors for the amount of any judgment obtained by
Mr. Norton together with other unnamed damages. The Company has filed a motion
to dismiss the third party complaint of Mr. Connors. That motion is still
pending.
Mr. Norton's employment with the Company terminated on February 27, 1998.
Mr. Norton has asserted a claim that the Company owes Mr. Norton compensation as
a result of the fact that his interest in the Lawrenceburg partnership has been
diluted from a direct 10% interest in the partnership to a 25% interest in
Centaur, Inc. which effectively means Mr. Norton has a 2.4% interest in the
partnership. The Company denies that it has any obligation to Mr. Norton in
respect of his interest in the Lawrenceburg partnership. Mr. Norton has
threatened to file a cause of action against the Company if no settlement can be
reached. The Company is evaluating whether it desires to enter into settlement
discussions with Mr. Norton. There can be no assurance that these lawsuits will
not lead to events having a material adverse effect on the Company.
GAMEDEV OF SIOUX CITY, INC., F/K/A SIOUX CITY RIVERBOAT CORP., INC. V. ARGOSY
GAMING COMPANY AND IOWA GAMING COMPANY
This suit was filed on June 11, 1998, in the Iowa District Court in Woodbury
County, Iowa. Gamedev of Sioux City, Inc. ("Gamedev"), the limited partner of
the limited partnership, Belle of Sioux City, L.P., seeks monetary damages and
an equitable accounting based on claims of breach of fiduciary duty and
negligent misrepresentation against the defendants. Iowa Gaming Company, a
wholly-owned subsidiary of the Company, is the general partner of the Belle of
Sioux City, L.P. On July 21, 1998, the defendants responded to the Petition by
filing a motion to dismiss on the grounds that Gamedev's claims are derivative
in nature, and that Gamedev has failed to comply with the demand requirements
under Iowa limited partnership law. Also, Gamedev is not entitled to an
equitable accounting because it has an adequate remedy at law. In response, on
August 4, 1998, plaintiff filed a First Amended and Substituted Petition and
added claims for fraudulent misrepresentation, breach of the partnership
agreement, and breach of the management agreement. Defendants filed a motion to
dismiss based on substantially similar grounds and requested a more specific
statement on the claims for breach of contract. On September 25, 1998, the court
denied the motion to dismiss and granted the request for a more specific
statement. Plaintiff subsequently filed a Second Amended Petition on October 14,
1998. The court scheduled November 2, 1999 for the trial date. The discovery
cutoff deadline for the parties is October 1, 1999. Plaintiff must designate its
experts by June 25, 1999, and defendants must designate their experts by August
27, 1999. Dispositive motions shall be filed per statute, and a settlement
conference, if required, is set for October 27, 1999. The parties have exchanged
written discovery and are presently responding to them. Depositions will be
scheduled in the future. There can be no assurance that the lawsuit will not
lead to events having a material adverse effect on the Company.
25
<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
1998, Indiana Gaming was permitted to intervene and is now contesting the
action. The District and its directors have advised that they are contesting the
action and intend to continue to do so. 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 in a 30-day letter and has also proposed adjustments with respect to
certain positions and deductions taken by Metro and ARGP in 60-day letters. 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 Company has
filed a protest to both the 30-day letter and 60-day letters and intends to
vigorously contest these proposed adjustments. The total Federal tax liability
asserted by the IRS against the Company resulting from these proposed
adjustments is approximately $11.3 million including interest through December
31, 1998 but excluding penalties, if any. 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.
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 extent 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.
The parties have fully briefed the Plaintiff's motion for class certification
and are awaiting a decision from the court. The Company is unable to determine
what effect, if any, the suit would have on its business or operations.
STEVEN B. SMALL CASE
A class action lawsuit was filed by plaintiff Stephen B. Small, et al., as
class representative, on November 28, 1997, in the United States District Court
for the Western District of Missouri, naming four gaming operators in Kansas
City, Missouri, including The Missouri Gaming Company. The lawsuit alleged that
the defendants are conducting gaming operations that are not located on the
Missouri River in
26
<PAGE>
violation of certain state and federal statutes. The Missouri Gaming Company was
granted a motion to dismiss the lawsuit. On October 30, 1998, the plaintiff
filed a similar lawsuit in the Circuit Court of Cole County, Missouri. The
plaintiff is seeking a declaratory judgment that the operators are conducting
illegal games of chance, as well as compensatory, special, consequential, and
incidental damages in unspecified amounts. Management believes that the claims
are without merit and does not expect that the lawsuit will have a material
adverse effect on the Company's financial position or results of operations.
27
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on December 4, 1998. At the
meeting, stockholders voted on a proposal to approve the issuance of common
stock in order to comply with provisions of a Securities Purchase Agreement and
Rule 312 of the New York Stock Exchange.
<TABLE>
<CAPTION>
VOTES VOTES WITHHELD/
FOR AGAINST ABSTAIN
- ------------ ---------- -----------
<S> <C> <C>
10,960,656.. 4,226,278 38,859
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Proxy Statement, page 18, section entitled
Market for Registrants Common Equity and Related Stockholder Matters.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net revenues....................... $ 506,668 $ 344,083 $ 244,817 $ 252,691 $ 153,045
Income (loss) from operations...... 87,811 6,530 (10,751) 27,662 22,994
Net income (loss).................. 5,741 (40,213) (24,839) 6,953 9,635
Diluted net income (loss).......... 0.23 (1.65) (1.02) 0.29 0.40
Weighted average diluted common
shares outstanding............. 24,604,485 24,333,333 24,333,333 24,333,333 2,433,333
------------- ------------- ------------- ------------- -------------
PRO FORMA NET INCOME DATA
(UNAUDITED):(1)
Pro forma net income (loss)........ 5,712 5,393
Diluted pro forma net income per
share............................ 0.23 0.22
Pro forma, diluted shares
outstanding...................... 24,333,333 24,333,333
------------- ------------- ------------- ------------- -------------
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets....................... 562,752 559,856 530,528 309,882 232,831
Long-term debt, including current
maturities....................... 424,000 449,790 380,208 169,702 115,431
Total stockholders' equity......... 40,863 32,663 72,701 97,540 90,587
------------- ------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) 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. as if the acquisition had occurred on January 1, 1994.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from the Annual Report, pages 30-37 entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Argosy Gaming Company are
included in this report:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY GAMING COMPANY
Incorporated by reference from the Annual Report, pages 38-58, sections
entitled "Consolidated Balance Sheets", "Consolidated Statements of Operations",
"Consolidated Statements of Cash Flows", "Consolidated Statements of
Stockholders' Equity", "Notes to Consolidated Financial Statements" and "Report
of Independent Auditors".
FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE
NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X.
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF ALTON GAMING COMPANY
Report of Independent Auditors....................................................... 31
Balance Sheets....................................................................... 32
Statements of Income................................................................. 33
Statements of Stockholder's Equity................................................... 34
Statements of Cash Flows............................................................. 35
Notes to Financial Statements........................................................ 36
FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY
Report of Independent Auditors....................................................... 40
Balance Sheets....................................................................... 41
Statements of Operations............................................................. 42
Statements of Stockholder's Equity................................................... 43
Statements of Cash Flows............................................................. 44
Notes to Financial Statements........................................................ 45
CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC.
Report of Independent Auditors....................................................... 49
Consolidated Balance Sheets.......................................................... 50
Consolidated Statements of Operations................................................ 51
Consolidated Statements of Stockholder's Deficit..................................... 52
Consolidated Statements of Cash Flows................................................ 53
Notes to Consolidated Financial Statements........................................... 54
FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM
Report of Independent Auditors....................................................... 59
Balance Sheets....................................................................... 60
Statements of Operations............................................................. 61
Statements of Partners' Equity....................................................... 62
Statements of Cash Flows............................................................. 63
Notes to Financial Statements........................................................ 64
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC.
Report of Independent Auditors....................................................... 68
Balance Sheets....................................................................... 69
Statements of Operations............................................................. 70
Statements of Stockholder's Deficit.................................................. 71
Statements of Cash Flows............................................................. 72
Notes to Financial Statements........................................................ 73
CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY
Report of Independent Auditors....................................................... 77
Consolidated Balance Sheets.......................................................... 78
Consolidated Statements of Operations................................................ 79
Consolidated Statements of Stockholder's Equity...................................... 80
Consolidated Statements of Cash Flows................................................ 81
Notes to Consolidated Financial Statements........................................... 82
FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P.
Report of Independent Auditors....................................................... 88
Balance Sheets....................................................................... 89
Statements of Operations............................................................. 90
Statements of Partners' Equity....................................................... 91
Statements of Cash Flows............................................................. 92
Notes to Financial Statements........................................................ 93
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alton Gaming Company
We have audited the accompanying balance sheets of Alton Gaming Company as
of December 31, 1998 and 1997, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alton Gaming Company at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 29, 1999
31
<PAGE>
ALTON GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
CURRENT ASSETS:
Cash...................................................................................... $ 4,383 $ 3,807
Accounts receivable, net of allowance for doubtful accounts of $255 and $259,
respectively............................................................................ 125 211
Deferred income taxes..................................................................... 616 690
Other current assets...................................................................... 986 549
--------- ---------
Total current assets.................................................................... 6,110 5,257
--------- ---------
Due from affiliates....................................................................... 10,046 10,405
Net property and equipment................................................................ 26,808 27,447
Other assets.............................................................................. 2 6
--------- ---------
TOTAL ASSETS............................................................................ $ 42,966 $ 43,115
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 1,597 $ 799
Accrued payroll and related expenses...................................................... 1,515 1,221
Slot club liability....................................................................... 727 766
Other accrued liabilities................................................................. 1,309 1,515
Accrued insurance......................................................................... 1,073 1,107
--------- ---------
Total current liabilities............................................................... 6,221 5,408
--------- ---------
OTHER LONG-TERM OBLIGATIONS-RELATED PARTY................................................... 201 186
DEFERRED INCOME TAXES....................................................................... 3,201 3,745
STOCKHOLDER'S EQUITY:
Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1
Capital in excess of par.................................................................. 256 256
Retained earnings......................................................................... 33,086 33,519
--------- ---------
Total stockholder's equity.............................................................. 33,343 33,776
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 42,966 $ 43,115
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
ALTON GAMING COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Casino......................................................................... $ 67,798 $ 61,877 $ 72,369
Food, beverage and other....................................................... 6,564 7,433 7,817
--------- --------- ---------
74,362 69,310 80,186
Less promotional allowances.................................................... (2,298) (2,102) (2,253)
--------- --------- ---------
Net revenues..................................................................... 72,064 67,208 77,933
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 31,466 31,672 36,082
Food, beverage and other....................................................... 5,728 7,113 7,473
Other operating expenses....................................................... 5,398 5,623 5,706
Selling, general and administrative............................................ 11,637 10,856 12,226
Allocation of corporate costs-related party.................................... 1,869 2,247 4,193
Depreciation and amortization.................................................. 3,985 4,455 4,206
--------- --------- ---------
60,083 61,966 69,886
--------- --------- ---------
Income from operations........................................................... 11,981 5,242 8,047
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income................................................................ 64 70 50
Interest expense............................................................... (78) (14) (51)
--------- --------- ---------
(14) 56 (1)
--------- --------- ---------
Income before income taxes....................................................... 11,967 5,298 8,046
Income tax expense............................................................... 4,748 2,002 3,198
--------- --------- ---------
Net income....................................................................... $ 7,219 $ 3,296 $ 4,848
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
ALTON GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
------- ------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............. 1,000 $ 1 $ 256 $ 34,025 $ 34,282
Net income............................ 4,848 4,848
Dividends............................. (2,885) (2,885)
--
------- ----- -------- -------
Balance, December 31, 1996.............. 1,000 1 256 35,988 36,245
Net income............................ 3,296 3,296
Dividends............................. (5,765) (5,765)
--
------- ----- -------- -------
Balance, December 31, 1997.............. 1,000 1 256 33,519 33,776
Net income............................ 7,219 7,219
Dividends............................. (7,652) (7,652)
--
------- ----- -------- -------
Balance, December 31, 1998.............. 1,000 $ 1 $ 256 $ 33,086 $ 33,343
--
--
------- ----- -------- -------
------- ----- -------- -------
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
ALTON GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 7,219 $ 3,296 $ 4,848
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................. 3,985 4,455 4,206
Loss on disposal of equipment................................................. 26 90
Deferred income taxes......................................................... (470) 192 597
Changes in operating assets and liabilities:
Accounts receivable......................................................... 86 119 138
Other current assets........................................................ (647) (28) 395
Other assets................................................................ 166
Accounts payable............................................................ 798 (748) 273
Other accrued liabilities................................................... 240 96 (1,503)
Income taxes payable to affiliate........................................... (225) 214 (5,570)
--------- --------- ---------
Net cash provided by operating activities................................. 11,012 7,686 3,550
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (3,158) (1,686) (1,680)
--------- --------- ---------
Net cash used in investing activities..................................... (3,158) (1,686) (1,680)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid................................................................ (7,652) (5,765) (2,885)
Due from affiliate............................................................ 359 (6) 692
Increase in other long term obligations-related party......................... 15 15 13
--------- --------- ---------
Net cash used in financing activities..................................... (7,278) (5,756) (2,180)
--------- --------- ---------
Net increase (decrease) in cash............................................... 576 244 (310)
Cash, beginning of year....................................................... 3,807 3,563 3,873
--------- --------- ---------
Cash, end of year............................................................. $ 4,383 $ 3,807 $ 3,563
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Alton Gaming Company ("Company"), an Illinois
Corporation and wholly-owned subsidiary of Argosy Gaming Company ("Argosy"), is
engaged in the business of providing casino-style gaming and related
entertainment to the public through the operation of the Alton Belle casino in
Alton, Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
5 to 30
Shore improvements............................................ years
5 to 20
Riverboat, dock and improvements.............................. years
5 to 10
Furniture, fixtures and equipment............................. years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of food, beverage and other items
provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
direct cost of providing promotional allowances has been included in costs and
expenses as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Food, beverage and other........................................... $ 916 $ 1,112 $ 1,238
</TABLE>
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $1,499, $2,807,and $3,225 for the years ended December
31, 1998, 1997 and 1996, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
36
<PAGE>
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Leasehold and shore improvements...................................... $ 1,936 $ 1,933
Riverboat, dock and improvements...................................... 30,469 30,497
Furniture, fixtures and equipment..................................... 15,089 12,209
---------- ----------
47,494 44,639
Less accumulated depreciation and amortization........................ (20,686) (17,192)
---------- ----------
Net property and equipment............................................ $ 26,808 $ 27,447
---------- ----------
---------- ----------
</TABLE>
3. INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and 1996,
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................ $ 4,570 $ 1,586 $ 2,273
State.......................................................... 648 224 328
--------- --------- ---------
5,218 1,810 2,601
--------- --------- ---------
Deferred:
Federal........................................................ (411) 155 526
State.......................................................... (59) 37 71
--------- --------- ---------
(470) 192 597
--------- --------- ---------
Income tax expense........................................... $ 4,748 $ 2,002 $ 3,198
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996, differs from that computed at the Federal Statutory tax rate as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate........................................... 34.0% 34.0% 35.0%
State income taxes, net of federal benefit....................... 4.8 4.8 4.7
Other............................................................ 0.9 (1.0)
--- --- ---
39.7% 37.8% 39.7%
--- --- ---
--- --- ---
</TABLE>
37
<PAGE>
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INCOME TAXES (CONTINUED)
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Depreciation............................................................. $ (3,247) $ (3,791)
Start-up costs........................................................... 46 46
Other.................................................................... 616 690
--------- ---------
Net deferred tax liability............................................... $ (2,585) $ (3,055)
--------- ---------
--------- ---------
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $52, $14 and $148 for interest for the years ended December
31, 1998, 1997 and 1996, respectively, and $5,390, $1,597 and $8,170 for income
taxes in 1998, 1997 and 1996 to Argosy.
During 1997, the Company transferred equipment to affiliates with a carrying
value of $278. Amounts due from affiliates increased by this amount as a result
of the transfer.
During 1997, Argosy transferred a barge to the Company with a carrying value
of $432. Amounts due from affiliates decreased by this amount as a result of the
transfer.
5. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement with Argosy based on a
cost allocation model which was approved by the Illinois Gaming Board.
The Company is restricted from making dividends unless approved by the
Illinois Gaming Board.
The Company participates in Argosy's property, general liability, worker's
compensation and other insurance programs. The Company's estimated share of
these costs, which is allocated directly to the Company by Argosy, was $1,104,
$2,023 and $3,309 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Interest expense to related parties amounted to $77, $14 and $32 for the
years ended December 31, 1998, 1997 and 1996, respectively.
In January 1996, the Company entered into a 5 year operating lease agreement
with Argosy for certain office space. The lease carries annual rentals of
approximately $126 throughout the lease term.
During 1994, the Company transferred the original Alton Belle along with
other barge facilities having a total cost of approximately $11,300 and
accumulated depreciation of approximately $3,300 to an affiliate. This amount is
included in due from affiliates in the accompanying balance sheets. No interest
is charged on this advance.
6. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the
38
<PAGE>
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. EMPLOYEES BENEFIT PLAN (CONTINUED)
Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expenses
recognized by the Company under the Plan were $223, $530 and $461 for the years
ended December 31, 1998, 1997 and 1996, respectively.
7. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1999.................................................................................. $ 202
2000.................................................................................. 170
2001.................................................................................. 5
2002.................................................................................. 5
2003.................................................................................. 5
Thereafter............................................................................ 5
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996, was $466,
$532 and $565, respectively.
A predecessor entity to the Company ("Predecessor"), as a result of a
certain shareholder loan transaction, could be subject to federal and certain
state income taxes (plus interest and penalties, if any) if it is determined
that it failed to satisfy all of the requirements of the S-Corporation
provisions of the Internal Revenue Code relating to the prohibition concerning a
second class of stock. An audit is currently being conducted by the Internal
Revenue Service ("IRS") of the Company's federal income tax returns for the 1992
and 1993 tax years, and the IRS has asserted the S-Corporation status as one of
the issues although the IRS has yet to make a formal claim of deficiency. If the
IRS successfully challenges the Predecessor's S-Corporation status, the Company
would be required to pay federal and certain state income taxes on the
Predecessor's taxable income from the commencement of its operations until
February 25, 1993 (plus interest and penalties, if any, thereon until the date
of payment). If the Predecessor was required to pay federal and certain state
income taxes on its taxable earnings through February 25, 1993, such payments
could amount to approximately $13,500, including interest through December 31,
1998, but excluding penalties, if any. While the Company believes the
Predecessor has legal authority for its position that it is not subject to
federal and certain state income taxes because it met the S-Corporation
requirements, no assurances can be given that the Predecessor's position will be
upheld. This contingent liability could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. No
provision has been made for this contingency in the accompanying financial
statements.
Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004
("Mortgage Notes"). The assets of the Company are pledged as collateral, and the
Company is a guarantor, under the terms of the Mortgage Notes.
39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Missouri Gaming Company
We have audited the accompanying balance sheets of The Missouri Gaming
Company as of December 31, 1998 and 1997, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Missouri Gaming Company
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 29, 1999
40
<PAGE>
THE MISSOURI GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash.................................................................... $ 3,905 $ 3,629
Accounts receivable, net of allowance for doubtful accounts of $55 and
$25, respectively..................................................... 34 269
Prepaid rent............................................................ 960 1,041
Other current assets.................................................... 365 311
Deferred income taxes................................................... 312 370
--------- ---------
Total current assets.................................................. 5,576 5,620
--------- ---------
NET PROPERTY AND EQUIPMENT................................................ 66,819 70,878
OTHER ASSETS:
Deposits................................................................ 221 221
Prepaid rent............................................................ 917
Other................................................................... 913 1,060
--------- ---------
Total other assets.................................................... 1,134 2,198
--------- ---------
TOTAL ASSETS.............................................................. $ 73,529 $ 78,696
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 1,405 $ 1,352
Accrued payroll and related expenses.................................... 1,383 1,181
Slot club liability..................................................... 924 674
Accrued insurance....................................................... 752 917
Installment contracts payable........................................... 500
Other current liabilities............................................... 855 920
--------- ---------
Total current liabilities............................................. 5,819 5,044
--------- ---------
DUE TO AFFILIATES......................................................... 49,056 56,007
DEFERRED INCOME TAXES..................................................... 2,260 1,851
STOCKHOLDER'S EQUITY:
Common stock-$.01 par value, 1,000 shares authorized, issued and
outstanding
Capital in excess of par................................................ 5,000 5,000
Retained earnings....................................................... 11,394 10,794
--------- ---------
Total stockholder's equity............................................ 16,394 15,794
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................ $ 73,529 $ 78,696
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
THE MISSOURI GAMING COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Casino......................................................... $ 71,955 $ 61,750 $ 82,247
Food, beverage and other....................................... 11,163 10,050 13,048
--------- --------- ---------
83,118 71,800 95,295
Less promotional allowances.................................... (6,157) (5,252) (6,822)
--------- --------- ---------
Net revenues................................................... 76,961 66,548 88,473
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................... 38,144 33,568 43,733
Food, beverage and other....................................... 8,602 8,583 9,552
Selling, general and administrative............................ 14,201 11,871 13,399
Other operating expenses....................................... 4,722 4,098 5,263
Depreciation and amortization.................................. 5,924 5,947 6,724
Preopening..................................................... 392
Lease termination.............................................. 3,508
--------- --------- ---------
71,593 64,067 82,571
--------- --------- ---------
Income from operations........................................... 5,368 2,481 5,902
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income................................................ 56 231 40
Interest expense............................................... (4,381) (5,162) (6,048)
--------- --------- ---------
(4,325) (4,931) (6,008)
--------- --------- ---------
Income (loss) before income taxes................................ 1,043 (2,450) (106)
Income tax (expense) benefit..................................... (443) 929 42
--------- --------- ---------
Net income (loss)................................................ $ 600 $ (1,521) $ (64)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
THE MISSOURI GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
----------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995............................... 1,000 $ $ 5,000 $ 12,379 $ 17,379
Net loss............................................... (64) (64)
----- ----------- ----------- --------- -------------
Balance, December 31, 1996............................... 1,000 5,000 12,315 17,315
Net loss............................................... (1,521) (1,521)
----- ----------- ----------- --------- -------------
Balance, December 31, 1997............................... 1,000 5,000 10,794 15,794
Net income............................................. 600 600
----- ----------- ----------- --------- -------------
Balance, December 31, 1998............................... 1,000 $ $ 5,000 $ 11,394 $ 16,394
----- ----------- ----------- --------- -------------
----- ----------- ----------- --------- -------------
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
THE MISSOURI GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 600 $ (1,521) $ (64)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of fixed assets................ 5,777 5,740 6,484
Amortization of other assets................................. 147 207 240
Deferred income taxes........................................ 467 455 1,320
Lease termination costs...................................... 1,941
Changes in operating assets and liabilities:
Accounts receivable........................................ 235 (49) (91)
Other current assets....................................... (148) 85 505
Accounts payable........................................... 96 (2,153) 947
Accrued liabilities........................................ 316 (4,868) (775)
Other assets............................................... 998 1,000 1,000
--------- --------- ---------
Net cash provided by (used in) operating activities...... 8,488 (1,104) 11,507
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (1,339) (998) (19,192)
--------- --------- ---------
Net cash used in investing activities.................... (1,339) (998) (19,192)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on installment contracts.............................. (207) (94) (797)
Due (from) to affiliate........................................ (6,666) (185) 10,294
(Increase) decrease in deposits................................ (133) 200
--------- --------- ---------
Net cash (used in) provided by financing activities...... (6,873) (412) 9,697
--------- --------- ---------
Net increase (decrease) in cash................................ 276 (2,514) 2,012
Cash, beginning of year........................................ 3,629 6,143 4,131
--------- --------- ---------
Cash, end of year.............................................. $ 3,905 $ 3,629 $ 6,143
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The Missouri Gaming Company ("Company") (a Missouri
company and a wholly owned subsidiary of Argosy Gaming Company, ("Argosy")) owns
and operates a riverboat casino and related facilities in Riverside, Missouri.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts in 1997 and 1996 have been reclassified to conform to the
1998 presentation.
CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and shore improvements.............................. 5 to 30
years
Riverboat, dock and improvements.............................. 5 to 20
years
Furniture, fixtures and equipment............................. 5 to 10
years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food and beverage and
other items which were provided to customers without charge, has been included
in revenues, and a corresponding amount has been deducted as promotional
allowances. The estimated direct cost of providing promotional allowances has
been included in operating costs and expenses as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Food, beverage and other......................................... $ 2,954 $ 2,419 $ 2,217
</TABLE>
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense for the years ended December 31, 1998, 1997 and 1996 was
$1,148, $2,548 and $3,214, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
45
<PAGE>
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Land and improvements........................................................... $ 14,657 $ 14,658
Buildings and improvements...................................................... 29,152 29,107
Riverboat, dock and improvements................................................ 23,372 23,810
Furniture, fixtures and equipment............................................... 19,740 18,501
---------- ----------
86,921 86,076
Accumulated depreciation and amortization....................................... (20,102) (15,198)
---------- ----------
Net property and equipment...................................................... $ 66,819 $ 70,878
---------- ----------
---------- ----------
</TABLE>
3. RIVERSIDE AGREEMENT
The Company entered into a Lease and Development Agreement ("Agreement")
with the City of Riverside, Missouri. The Agreement, as amended, required the
Company to pay $1,600 for the construction of a city park and for the
development of a golf course. These payments were capitalized, are included as
an intangible asset in the accompanying balance sheet, and are being amortized
over ten years using the straight-line method. The unamortized portion of these
payments is included in other assets in the accompanying balance sheets.
Under the terms of the Agreement, the Company leases a portion of its site
from the City of Riverside. The $5,000 minimum rent due for the initial
five-year term of the lease was paid in advance as required by the Agreement. In
addition to minimum rent, during the initial five-year lease term, percentage
rent is payable at 3% of revenues, as defined, over $100 million annually. The
Company has the option to extend the Agreement for three successive five-year
terms. The initial term expires in November, 1999 and the Company intends to
extend the agreement. In all extension periods, there will be no minimum rent
and percentage rent will be payable as follows: (i) 3% on the first $50 million
of revenues; (ii) 4% on revenues between $50 million and $100 million; and (iii)
5% on revenues in excess of $100 million.
The Agreement requires the Company to maintain a net worth of $5,000 at all
times, unless approved by the City of Riverside.
46
<PAGE>
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
Income tax benefit (expense) for years ended December 31, 1998, 1997 and
1996, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................................. $ 21 $ 1,240 $ 1,200
State................................................................... 3 144 162
--------- --------- ---------
24 1,384 1,362
--------- --------- ---------
Deferred:
Federal................................................................. (417) (417) (1,162)
State................................................................... (50) (38) (158)
--------- --------- ---------
(467) (455) (1,320)
--------- --------- ---------
Income tax (expense) benefit.............................................. $ (443) $ 929 $ 42
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996 differs from that computed at the Federal Statutory corporate tax rate
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................. 34.0% (34.0)% (35.0)%
State income taxes, net of federal benefit............................. 4.1 (4.1) (4.8)
Other.................................................................. 4.3 0.2
--------- --------- ---------
42.4% (37.9)% (39.8)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Start-up costs..................................................................... $ 105 $ 323
Depreciation....................................................................... (2,365) (2,174)
Other, net......................................................................... 312 370
--------- ---------
Net deferred tax liability......................................................... $ (1,948) $ (1,481)
--------- ---------
--------- ---------
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment of $707 in 1998 and $135 in 1996, which was
financed through installment contracts.
The Company paid $6,752, $5,393 and $8,043 for interest and $114, $3,518 and
$225 for income taxes in 1998, 1997 and 1996, respectively.
47
<PAGE>
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS
The Company participates in Argosy's property, general liability, worker's
compensation and other insurance programs. The Company's estimated share of
these costs, which is allocated directly to the Company by Argosy, was $994,
$2,603 and $2,853 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Company has outstanding long-term debt with Argosy in the amounts of
$49,056 and $56,007 at December 31, 1998 and 1997, respectively. These amounts
represent funds received in connection with the construction of the permanent
facility. The Company accrues interest on the long-term debt at a rate of 12%
annually. There are no stated repayment terms on the long-term debt and payments
are made from available cash flow.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was $203, $422 and $441 for the years
ended December 31, 1998, 1997 and 1996, respectively.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1999.................................................................................. $ 177
2000.................................................................................. 35
2001.................................................................................. 26
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$1,483, $1,539, and $1,874, respectively.
The Company is restricted from making certain distributions to Argosy and
other affiliates unless approved by state gaming authorities.
Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004
("Mortgage Notes"). The assets of the Company are pledged as collateral, and the
Company is a guarantor, under the terms of the Mortgage Notes.
9. LEASE TERMINATION
In the second quarter of 1996 the Company determined that it no longer had a
use for the temporary restaurant and entertainment barge. Accordingly, the
Company expensed the remaining lease costs and any termination costs associated
with the lease.
48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Argosy of Louisiana, Inc.
We have audited the accompanying consolidated balance sheets of Argosy of
Louisiana, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholder's deficit and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Argosy of
Louisiana, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New Orleans, Louisiana
January 29, 1999
49
<PAGE>
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 3,025 $ 3,429
Accounts receivable, net of allowance for doubtful accounts of $708 and
$838, respectively.................................................... 301 484
Income taxes receivable from related party.............................. 717 742
Other current assets.................................................... 577 429
--------- ---------
Total current assets.................................................. 4,620 5,084
--------- ---------
NET PROPERTY AND EQUIPMENT................................................ 39,670 43,896
OTHER ASSETS:
Deferred lease acquisition cost, net.................................... 1,700 1,808
Other................................................................... 13 13
--------- ---------
Total other assets.................................................... 1,713 1,821
--------- ---------
TOTAL ASSETS.............................................................. $ 46,003 $ 50,801
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 595 $ 771
Accrued payroll and related expenses.................................... 966 919
Accrued gaming taxes.................................................... 558 501
Other accrued liabilities............................................... 1,963 1,445
Due to affiliates....................................................... 3,149 1,795
Accrued interest-related party.......................................... 2,304 902
Accrued insurance....................................................... 1,166 1,246
Notes payable and current maturities of long-term debt-related party.... 13,349 10,268
--------- ---------
Total current liabilities............................................. 24,050 17,847
--------- ---------
LONG-TERM DEBT-RELATED PARTY.............................................. 34,709 37,842
DEFERRED INCOME TAXES..................................................... 432 432
MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................. 1,484 2,240
STOCKHOLDER'S DEFICIT:
Common stock-$1 par value, 1,000 shares authorized, issued and
outstanding........................................................... 1 1
Accumulated deficit..................................................... (14,673) (7,561)
--------- ---------
(14,672) (7,560)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................... $ 46,003 $ 50,801
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Casino......................................................... $ 46,828 $ 47,628 $ 51,007
Food, beverage and other....................................... 6,108 7,046 7,641
--------- --------- ---------
52,936 54,674 58,648
Less promotional allowances...................................... (3,882) (4,238) (5,228)
--------- --------- ---------
Net revenues..................................................... 49,054 50,436 53,420
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................... 28,869 27,887 26,923
Food, beverage and other....................................... 5,612 6,799 4,894
Other operating expenses....................................... 4,798 5,147 4,757
Selling, general and administrative............................ 11,036 12,346 10,939
Depreciation and amortization.................................. 5,272 5,468 6,379
Referendum expenses............................................ 1,347
--------- --------- ---------
55,587 57,647 55,239
--------- --------- ---------
Loss from operations............................................. (6,533) (7,211) (1,819)
INTEREST EXPENSE (INCOME):
Interest to related party...................................... 1,395 1,402 1,603
Interest, net.................................................. (60) (89) (119)
--------- --------- ---------
Loss before income taxes and minority interest................... (7,868) (8,524) (3,303)
Income tax benefit............................................... 420 965
Minority interest................................................ 756 838 241
--------- --------- ---------
Net loss......................................................... $ (7,112) $ (7,266) $ (2,097)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON EARNINGS
SHARES STOCK (DEFICIT) TOTAL
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............................................. 1,000 $ 1 $ 1,802 $ 1,803
Net loss............................................................. (2,097) (2,097)
----- ----------- ---------- ----------
Balance, December 31, 1996............................................. 1,000 1 (295) (294)
Net loss............................................................. (7,266) (7,266)
----- ----------- ---------- ----------
Balance, December 31, 1997............................................. 1,000 1 (7,561) (7,560)
Net loss............................................................. (7,112) (7,112)
----- ----------- ---------- ----------
Balance, December 31, 1998............................................. 1,000 $ 1 $ (14,673) $ (14,672)
----- ----------- ---------- ----------
----- ----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (7,112) $ (7,266) $ (2,097)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation.................................................................. 5,164 5,083 5,780
Amortization.................................................................. 108 385 599
Loss on writedown of asset.................................................... 317
Minority interest............................................................. (756) (838) (241)
Deferred income taxes......................................................... (420) (965)
Changes in operating assets and liabilities:
Accounts receivable......................................................... 183 127 185
Income tax receivable from related party.................................... 25 137
Accrued interest to related party........................................... 1,402 902
Other current assets........................................................ (148) 430 (166)
Accounts payable............................................................ (176) (356) (191)
Accrued payroll and related expenses........................................ 47 170 138
Other accrued liabilities................................................... 342 467 1,047
--------- --------- ---------
Net cash (used in) provided by operating activities....................... (604) (1,179) 4,089
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (919) (444) (713)
Proceeds from sale of equipment to affiliates..................................... 486
--------- --------- ---------
Net cash (used in) provided by investing activities....................... (919) 42 (713)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amounts due to affiliates............................................. 1,354 1,795
Payments on notes payable and long-term debt...................................... (52) (280) (5,595)
Payments on installment contracts................................................. (183)
Decrease in other assets.......................................................... 69
--------- --------- ---------
Net cash provided by (used in) financing activities....................... 1,119 1,515 (5,526)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (404) 378 (2,150)
Cash and cash equivalents, beginning of year...................................... 3,429 3,051 5,201
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 3,025 $ 3,429 $ 3,051
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
53
<PAGE>
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Argosy of Louisiana, Inc. (collectively with its
controlled partnership Catfish Queen Partnership in Commendam ("Partnership")
"the Company") was formed on July 29, 1993. The Company entered a partnership
agreement with Jazz Enterprises, Inc. ("Jazz") to form the Partnership to
provide riverboat gaming and related entertainment in Baton Rouge, Louisiana.
The Company is the 90% general partner of the Partnership, along with the 10%
partner in commendam Jazz. Both the Company and Jazz are wholly owned
subsidiaries of Argosy Gaming Company ("Argosy").
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. These
consolidated financial statements include the accounts of the Company and the
Partnership. All significant intercompany accounts and transactions have been
eliminated.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the estimated useful
lives or lease period as follows:
<TABLE>
<S> <C>
Riverboat, dock and improvements........................ 15 to 20 years
Furniture, fixtures and equipment....................... 5 to 7 years
</TABLE>
DEFERRED LEASE ACQUISITION COSTS--Deferred lease acquisition costs resulted
from the contribution of certain leases by Jazz to the Partnership. This cost is
amortized on the straight-line method over 20 years. Accumulated amortization
was $458 and $350 at December 31, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of food, beverage and other items which
were provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances.
54
<PAGE>
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The estimated direct cost of providing promotional allowances for food and
beverages and other items was $2,333, $2,493 and $2,534 in 1998, 1997 and 1996,
respectively, and has been included in food and beverage and other items costs
and expenses.
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $1,552, $1,656 and $1,527 in 1998, 1997 and 1996,
respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated tax returns of Argosy. The Company computes federal and state taxes
on a separate return basis. Taxes due are settled between the Company and Argosy
in accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Leasehold and shore improvements.......................................................... $ 6,970 $ 6,967
Riverboat, docks and improvements......................................................... 36,077 36,072
Furniture, fixtures and equipment......................................................... 18,065 16,825
Construction in progress.................................................................. 317
---------- ----------
61,112 60,181
Less accumulated depreciation and amortization............................................ (21,442) (16,285)
---------- ----------
Net property and equipment................................................................ $ 39,670 $ 43,896
---------- ----------
---------- ----------
</TABLE>
3. LONG-TERM DEBT-RELATED PARTY
Notes payable and long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
8% unsecured note payable to Argosy in quarterly installments of $931 including interest,
through July 2001........................................................................ $ 17,527 $ 17,527
Noninterest-bearing unsecured note payable to Argosy due 1999............................. 1,844 1,844
Noninterest-bearing advances from Argosy, no stated maturity.............................. 28,687 28,739
---------- ----------
48,058 48,110
Less current maturities................................................................... (13,349) (10,268)
---------- ----------
$ 34,709 $ 37,842
---------- ----------
---------- ----------
</TABLE>
During 1996, the right to a note payable from the Partnership to the Company
was assigned to Argosy.
The carrying value of long term debt approximates fair value at December 31,
1998 and 1997. During 1998 and 1997, the Company did not make scheduled debt
payments to Argosy. Argosy has agreed to provide operating support to the
Company and to the extent necessary will not demand payment on the
55
<PAGE>
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT-RELATED PARTY (CONTINUED)
current portion of the long-term debt during 1999 and has agreed to not demand
payment on the noninterest bearing advances prior to January 1, 2000.
Maturities of long term debt, excluding the noninterest bearing advances,
but including scheduled payments under the notes payable to Argosy which were
due prior to December 31, 1998 and which have not yet been paid are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 13,349
2000............................................................ 3,337
2001............................................................ 2,685
</TABLE>
4. INCOME TAXES
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Deferred:
Federal........................................................................... $ $ 384 $ 849
State............................................................................. 36 116
--------- --------- ----------
Total deferred...................................................................... 420 965
--------- --------- ----------
Income tax benefit.................................................................. $ $ 420 $ 965
--------- --------- ----------
--------- --------- ----------
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Tax over book depreciation................................................................... $ (4,374) $ (4,551)
Net operating loss carryforward.............................................................. 8,654 5,981
Pre-opening.................................................................................. 116 270
Other, net................................................................................... 407 409
Minority Interest............................................................................ (432) (432)
--------- ---------
4,371 1,677
Valuation allowance.......................................................................... (4,803) (2,109)
--------- ---------
Net deferred tax assets (liabilities)........................................................ $ (432) $ (432)
--------- ---------
--------- ---------
</TABLE>
56
<PAGE>
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES (CONTINUED)
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U. S. statutory rates.................................................... (34.0)% (35.0)% (35.0)%
State income tax, net of federal tax benefit.................................... (5.3) (5.3) (3.9)
Nondeductible referendum expenses............................................... 16.4
Prior year taxes................................................................ (4.6)
Valuation allowance............................................................. 37.7 28.6
Minority interest............................................................... 4.0 2.9
Other, net...................................................................... 1.6 2.8 (5.0)
----- ----- -----
(4.9)% (29.2)%
----- ----- -----
----- ----- -----
</TABLE>
The Company has not recorded any income tax benefit on its operating losses
in 1998 and has recorded a valuation allowance against its net deferred tax
assets in 1998 and 1997 due to the uncertainty of realization. The Company has
tax net operating loss carryforwards of approximately $22,000 which expire from
2010 to 2018.
5. RELATED PARTY TRANSACTIONS
The Company leases, for a minimum of five years with six five-year renewal
options, a docking site, office and warehouse space from Jazz. Rent under terms
of the lease ranges from 6% to 10% of adjusted gross receipts.
Rent expense was approximately $3,354, $3,398 and $3,539 in 1998, 1997 and
1996, respectively. Approximately $2,834, $2,920 and $3,091 in 1998, 1997 and
1996, respectively resulted from the above mentioned lease with Jazz.
The Company participates in Argosy's property, general liability, workers
compensation and other insurance programs. The Company's share of these costs
was approximately $1,474, $2,511 and $1,989 in 1998, 1997 and 1996,
respectively.
6. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was approximately $169, $392 and $320
in 1998, 1997 and 1996, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amount of $336 in 1998 which was
financed through installment contracts.
57
<PAGE>
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
The Company paid interest of $3, $500 and $2,811 in 1998, 1997 and 1996,
respectively.
During 1996, Argosy transferred property and equipment to the Company with a
fair value of $1,844, subject to an unsecured note payable.
During 1996, the Company transferred property and equipment to Jazz with a
fair value of $12,471 and recorded a receivable from Jazz in the same amount.
The rights to this receivable was assigned to Argosy and reduced the amounts due
to Argosy from non-interest bearing advances.
8. COMMITMENTS AND CONTINGENCIES
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to pay to the City-Parish $2.50
per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional
passenger fee, which is now $2.50 per passenger, until actual construction of a
hotel commences by Jazz or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1998, the Company has paid all admission
payments due under the above agreements.
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
<S> <C>
1999........................................................................ $ 631
2000........................................................................ 651
2001........................................................................ 597
2002........................................................................ 243
2003........................................................................ 121
</TABLE>
Argosy has issued $235 million of 13.25% First Mortgage Notes, due 2004
("Mortgage Notes"). The assets of the Company are pledged as collateral, and the
Company is a guarantor, under the terms of the Mortgage Notes.
58
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Catfish Queen Partnership in Commendam
We have audited the accompanying balance sheets of Catfish Queen Partnership
in Commendam as of December 31, 1998 and 1997, and the related statements of
operations, partners' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Catfish Queen Partnership in
Commendam at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
New Orleans, Louisiana
January 29, 1999
59
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,025 $ 3,429
Accounts receivable, net of allowance for doubtful accounts of $708 and $838.............. 301 484
Inventories............................................................................... 209 145
Other current assets...................................................................... 254 173
--------- ---------
Total current assets.................................................................... 3,789 4,231
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 39,670 43,579
OTHER ASSETS:
Deferred lease acquisition costs, net..................................................... 1,700 1,808
Other..................................................................................... 13 13
--------- ---------
Total other assets...................................................................... 1,713 1,821
--------- ---------
TOTAL ASSETS................................................................................ $ 45,172 $ 49,631
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 595 $ 771
Accrued payroll and related expenses...................................................... 966 919
Accrued insurance......................................................................... 1,166 1,246
Accrued gaming taxes...................................................................... 558 501
Other accrued liabilities................................................................. 1,901 1,405
Accrued interest-related party............................................................ 2,304 902
Due to affiliates......................................................................... 3,149 1,795
Notes payable and current maturities of long-term debt-related party...................... 13,349 10,268
--------- ---------
Total current liabilities............................................................... 23,988 17,807
--------- ---------
LONG-TERM DEBT--RELATED PARTY............................................................... 6,022 9,103
PARTNERS' EQUITY............................................................................ 15,162 22,721
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 45,172 $ 49,631
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
60
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 46,828 $ 47,628 $ 51,007
Food, beverage and other....................................................... 6,108 7,046 7,641
--------- --------- ---------
52,936 54,674 58,648
Less promotional allowances.................................................... (3,882) (4,238) (5,228)
--------- --------- ---------
Net revenues..................................................................... 49,054 50,436 53,420
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 28,869 27,887 26,923
Food, beverage and other....................................................... 5,612 6,799 4,894
Other operating expenses....................................................... 4,798 5,147 4,757
Selling, general and administrative............................................ 10,716 12,201 10,786
Depreciation and amortization.................................................. 5,272 5,468 5,644
Referendum expenses............................................................ 1,347
--------- --------- ---------
55,267 57,502 54,351
--------- --------- ---------
Loss from operations............................................................. (6,213) (7,066) (931)
INTEREST EXPENSE (INCOME):
Related parties................................................................ 1,405 1,402 1,603
Other, net..................................................................... (59) (89) (119)
--------- --------- ---------
(1,346) (1,313) (1,484)
--------- --------- ---------
NET LOSS......................................................................... $ (7,559) $ (8,379) $ (2,415)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ARGOSY OF JAZZ TOTAL
LOUISIANA, ENTERPRISES, PARTNERS'
INC. INC. EQUITY
----------- ----------- ---------
<S> <C> <C> <C>
Partners' equity at December 31, 1995.......................................... $ 30,163 $ 3,352 $ 33,515
Net loss..................................................................... (2,173) (242) (2,415)
----------- ----------- ---------
Partners' equity at December 31, 1996.......................................... 27,990 3,110 31,100
Net loss..................................................................... (7,541) (838) (8,379)
----------- ----------- ---------
Partners' equity at December 31, 1997.......................................... 20,449 2,272 22,721
Net loss..................................................................... (6,803) (756) (7,559)
----------- ----------- ---------
Partners' equity at December 31, 1998.......................................... $ 13,646 $ 1,516 $ 15,162
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (7,559) $ (8,379) $ (2,415)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation.................................................................. 5,164 5,083 5,045
Amortization.................................................................. 108 385 599
Changes in operating assets and liabilities:
Accounts receivable......................................................... 183 127 185
Other current assets........................................................ (145) 205 353
Accounts payable............................................................ (176) (356) (167)
Accrued payroll and related expenses........................................ 47 170 138
Accrued interest to related parties......................................... 1,402 902 (1,195)
Other accrued liabilities................................................... 320 404 889
--------- --------- ---------
Net cash (used in) provided by operating activities........................... (656) (1,459) 3,432
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (919) (444) (713)
Proceeds from sale of equipment to affiliates..................................... 486
--------- --------- ---------
Net cash (used in) provided by financing activities........................... (919) 42 (713)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in advances from affiliates.............................................. 1,354 1,795
Payment on notes payable and long-term debt-related parties....................... (4,938)
Payments on installment contracts................................................. (183)
Decrease in other assets.......................................................... 69
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 1,171 1,795 (4,869)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (404) 378 (2,150)
Cash and cash equivalents, beginning of period.................................... 3,429 3,051 5,201
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 3,025 $ 3,429 $ 3,051
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Catfish Queen Partnership in Commendam
("Partnership") provides riverboat gaming and related entertainment in Baton
Rouge, Louisiana. The Partnership is comprised of a 90% general partner, Argosy
of Louisiana, Inc. ("General Partner") and a 10% partner in commendam, Jazz
Enterprises, Inc. ("Jazz"), both wholly owned subsidiaries of Argosy Gaming
Company ("Argosy").
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
Net loss is allocated to the partners based on their respective ownership
interests.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents. The carrying value of cash and cash equivalents approximates fair
value at December 31, 1998 and 1997.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation and amortization is computed on the straight-line method over the
estimated useful lives or lease period as follows:
<TABLE>
<S> <C>
15 to 20
Riverboat, dock and improvements..................... years
Furniture, fixtures and equipment.................... 5 to 7 years
</TABLE>
DEFERRED LEASE ACQUISITION COSTS--Deferred lease acquisition costs resulted
from the contribution of certain leases by Jazz to the Partnership. These costs
are amortized on the straight-line method over 20 years. Accumulated
amortization was $458 and $350 at December 31, 1998 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as
casino revenues the net win from gaming activities, which is the difference
between gaming wins and losses. The retail value of food, beverage and other
items which were provided to customers without charge has been included in
revenues, and a corresponding amount has been deducted as promotional
allowances.
The estimated direct cost of providing promotional allowances for food and
beverages and other items was $2,333, $2,493 and $2,534 in 1998, 1997 and 1996,
respectively, and has been included in food and beverage costs and expenses.
64
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred.
Advertising expense was $1,552, $1,656 and $1,527 in 1998, 1997 and 1996,
respectively.
INCOME TAXES--No provision (credit) for federal or state income taxes is
recorded in the financial statements, as income taxes are the responsibility of
the individual partners.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Leasehold and shore improvements................................................ $ 6,970 $ 6,967
Riverboat, docks and improvements............................................... 36,077 36,072
Furniture, fixtures and equipment............................................... 18,065 16,825
---------- ----------
61,112 59,864
Less accumulated depreciation and amortization.................................. (21,442) (16,285)
---------- ----------
Net property and equipment...................................................... $ 39,670 $ 43,579
---------- ----------
---------- ----------
</TABLE>
3. LONG-TERM DEBT
Notes payable and long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
8% unsecured note payable to Argosy in quarterly installments of $931, including
interest, through July 2001................................................... $ 17,527 $ 17,527
Noninterest-bearing unsecured note payable to Argosy due 1999................... 1,844 1,844
---------- ----------
19,371 19,371
Less current maturities......................................................... (13,349) (10,268)
---------- ----------
$ 6,022 $ 9,103
---------- ----------
---------- ----------
</TABLE>
During 1994, the General Partner transferred property and equipment to the
Partnership with a fair value of $20,039, subject to an unsecured note payable
of $20,039 to the General Partner. In 1996, the General Partner assigned its
rights to this note to Argosy.
The carrying value of long term debt approximates fair value at December 31,
1998 and 1997. During 1998 and 1997, the Partnership did not make scheduled debt
payments to Argosy. Argosy has agreed to provide operating support to the
Partnership and, to the extent necessary, will not demand payment on the current
portion of the long-term debt during 1999.
65
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT (CONTINUED)
Maturities of long term debt, including scheduled payments under the notes
payable to Argosy, which were due prior to December 31, 1998 and which have not
yet been paid are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 13,349
2000............................................................ 3,337
2001............................................................ 2,685
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Partnership leases, for a minimum of five years with six five-year
renewal options, a docking site, office and warehouse space from Jazz. Rent
under terms of the lease ranges from 6% to 10% of adjusted gross receipts.
Rent expense was $3,354, $3,398 and $3,539 in 1998, 1997 and 1996,
respectively. Approximately $2,834, $2,920 and $3,091 in 1998, 1997 and 1996,
respectively, resulted from the above mentioned lease with Jazz.
The Partnership participates in Argosy's property, general liability,
workers compensation and other insurance programs. The Partnership's estimated
share of these costs, which is allocated directly to the Partnership by Argosy,
was approximately $1,474, $2,511 and $1,989 for the years ended December 31,
1998, 1997 and 1996, respectively.
Indirect costs incurred by Argosy, on behalf of the Partnership are not
allocated as they are immaterial.
5. EMPLOYEES BENEFIT PLAN
The Partnership participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Partnership will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized by the Partnership under the Plan was approximately $169, $392 and
$320 in 1998, 1997 and 1996, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
The Partnership acquired equipment in the amount of $336 in 1998 which was
financed through installment contracts.
The Partnership paid interest of $3, $500 and $2,811 in 1998, 1997 and 1996,
respectively.
During 1996, Argosy transferred property and equipment with a fair value of
$1,844, subject to an unsecured note payable to Argosy.
7. COMMITMENTS AND CONTINGENCIES
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to
66
<PAGE>
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to
the City-Parish an additional passenger fee, which is now $2.50 per passenger,
until actual construction of a hotel commences by Jazz or another Argosy
affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1998, the Partnership has paid all
admission payments due under the above agreements.
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------------------
<S> <C>
1999........................................................................ $ 631
2000........................................................................ 651
2001........................................................................ 597
2002........................................................................ 243
2003........................................................................ 121
</TABLE>
Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004
("Mortgage Notes"). The assets of the Partnership are pledged as collateral, and
the Partnership is a guarantor, under the terms of the Mortgage Notes.
67
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Jazz Enterprises, Inc.
We have audited the accompanying balance sheets of Jazz Enterprises, Inc. as
of December 31, 1998 and 1997, and the related statements of operations,
stockholder's deficit and cash flows for the each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jazz Enterprises, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 29, 1999
68
<PAGE>
JAZZ ENTERPRISES, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 20
Prepaid insurance..................................................................... 110 109
Other current assets.................................................................. 28
--------- ---------
Total current assets................................................................ 110 157
--------- ---------
NET PROPERTY AND EQUIPMENT.............................................................. 52,733 54,593
GOODWILL, NET........................................................................... 19,325 19,922
NOTE RECEIVABLE......................................................................... 1,892 1,892
OTHER ASSETS............................................................................ 1,636 3,390
--------- ---------
TOTAL ASSETS............................................................................ $ 75,696 $ 79,954
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............................................. $ 2,843 $ 3,000
Current maturities of long-term debt.................................................. 545 491
--------- ---------
Total current liabilities........................................................... 3,388 3,491
--------- ---------
LONG-TERM DEBT.......................................................................... 6,552 7,165
LONG-TERM DEBT--RELATED PARTY........................................................... 75,625 74,072
STOCKHOLDER'S DEFICIT:
Common stock, no par value, 100,000 shares authorized, 200 shares issued and
outstanding
Accumulated deficit................................................................... (9,869) (4,774)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................................. $ 75,696 $ 79,954
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
69
<PAGE>
JAZZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
REVENUES:
Lease revenue--related party.................................................... $ 2,833 $ 2,920 $ 3,091
Rent revenue.................................................................... 349 378 354
--------- --------- ---------
3,182 3,298 3,445
--------- --------- ---------
COSTS AND EXPENSES:
Operating expenses.............................................................. 1,100 1,071 593
Selling, general and administrative............................................. 2,882 1,608 1,714
Depreciation and amortization................................................... 2,679 2,354 1,382
Preopening costs................................................................ 100
--------- --------- ---------
6,661 5,033 3,789
--------- --------- ---------
Loss from operations.............................................................. (3,479) (1,735) (344)
OTHER EXPENSE (INCOME):
Interest expense................................................................ 860 909 951
Equity in loss of unconsolidated partnership.................................... 756 838 242
Interest income................................................................. (200)
--------- --------- ---------
Loss before income taxes.......................................................... (5,095) (3,282) (1,537)
Income tax expense................................................................
--------- --------- ---------
Net loss.......................................................................... $ (5,095) $ (3,282) $ (1,537)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
70
<PAGE>
JAZZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
SHARES STOCK DEFICIT TOTAL
----------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995........................ 200 $ 45 $ 45
Net loss........................................ (1,537) (1,537)
--- --- ------------ ---------
Balance, December 31, 1996........................ 200 (1,492) (1,492)
Net loss........................................ (3,282) (3,282)
--- --- ------------ ---------
Balance, December 31, 1997........................ 200 (4,774) (4,774)
Net loss........................................ (5,095) (5,095)
--- --- ------------ ---------
Balance, December 31, 1998........................ 200 $ (9,869) $ (9,869)
--- --- ------------ ---------
--- --- ------------ ---------
</TABLE>
See accompanying notes to financial statements.
71
<PAGE>
JAZZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $ (5,095) $ (3,282) $ (1,537)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization............................................... 2,679 2,354 1,382
Write off of deferred lease costs........................................... 1,200
Equity in losses of unconsolidated partnership.............................. 756 838 242
Other current assets........................................................ 28 (27) 90
Prepaid expenses............................................................ (1) (32)
Accounts payable and accrued liabilities.................................... (238) (478) 24
--------- --------- ----------
Net cash (used in) provided by operating activities....................... (671) (627) 201
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................ (231) (897) (22,988)
--------- --------- ----------
Net cash used in investing activities..................................... (231) (897) (22,988)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt...................................................... 760
Principal payments on long-term debt............................................ (491) (115) (2,191)
Advances from affiliate......................................................... 1,553 1,442 25,414
Increase in other assets........................................................ (180) (543) (468)
--------- --------- ----------
Net cash provided by financing activities................................. 882 1,544 22,755
--------- --------- ----------
Net (decrease) increase in cash and cash equivalents............................ (20) 20 (32)
Cash and cash equivalents at beginning of year.................................. 20 32
--------- --------- ----------
Cash and cash equivalents at end of year........................................ $ $ 20 $
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes to financial statements.
72
<PAGE>
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Jazz Enterprises, Inc., ("Jazz" or "the Company") a
Louisiana corporation and a wholly owned subsidiary of Argosy Gaming Company
("Argosy") was incorporated on June 10, 1992 for the purpose of developing a
riverboat gaming operation and an entertainment complex, known as "Catfish Town"
in Baton Rouge, Louisiana.
The Company entered into a partnership ("Partnership") with Argosy of
Louisiana, Inc., also a wholly owned subsidiary of Argosy ("ALI") in which the
Company owns 10% and ALI owns 90%, to operate a riverboat casino in Baton Rouge,
Louisiana.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
CASH AND CASH EQUIVALENTS--The Company considers cash and all liquid
investments with an original maturity of three months or less to be cash
equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1997.
GOODWILL--Goodwill represents the cost in excess of fair value of net assets
acquired, at the date of acquisition, and is amortized over 40 years.
Accumulated amortization is $2,138 and $1,541 at December 31, 1998 and 1997,
respectively.
DEFERRED LEASE COSTS--The Company records tenant buildout allowances as an
intangible asset. The deferred lease costs are amortized over the respected life
of the lease. During 1998, the Company wrote off $1.2 million of deferred lease
costs related to tenants whose businesses failed. This write off is included in
selling, general and administrative expenses in the 1998 statement of
operations.
INVESTMENT IN PARTNERSHIP--The Company records its investment in the
Partnership under the equity method as it believes that it has significant
influence over the Partnership since the Partnership's parent and Jazz are
wholly-owned subsidiaries of Argosy.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the shorter of the
estimated useful lives or lease period as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 31 years
5 to 7
Furniture, fixtures and equipment...................... years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition. The
evaluation of the impairment of Jazz's long-lived assets is performed on a
combined basis with the long-lived assets of the Partnership, since the assets
of Jazz and the Partnership are used together to generate joint cash flows.
73
<PAGE>
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RENTAL INCOME--Rental income is recognized over the life of the associated
lease. Minimum future rents to be received under operating leases are:
<TABLE>
<S> <C>
1999......................................................... $ 364
2000......................................................... 341
2001......................................................... 341
2002......................................................... 341
2003......................................................... 85
</TABLE>
PREOPENING COSTS--Preopening costs, which consist primarily of labor,
training and marketing costs are expensed as incurred.
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $0, $0 and $53 for 1998, 1997 and 1996, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated tax returns of Argosy. The Company computes federal and state taxes
on a separate return basis. Taxes due are settled between the Company and Argosy
in accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land........................................................................................ $ 8,300 $ 8,187
Buildings and improvements.................................................................. 47,023 47,012
Furniture, fixtures and equipment........................................................... 2,453 2,444
--------- ---------
57,776 57,643
Less accumulated depreciation and amortization.............................................. (5,043) (3,050)
--------- ---------
Net property and equipment.................................................................. $ 52,733 $ 54,593
--------- ---------
--------- ---------
</TABLE>
3. LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Notes payable to former owner, principal and interest due quarterly through September 2015,
discounted at 10.5%........................................................................ $ 7,097 $ 7,656
Noninterest bearing advances from Argosy, no stated maturity................................ 75,625 74,072
--------- ---------
82,722 81,728
Less current maturities..................................................................... (545) (491)
--------- ---------
$ 82,177 $ 81,237
--------- ---------
--------- ---------
</TABLE>
74
<PAGE>
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT (CONTINUED)
The carrying value of long-term debt approximates fair value at December 31,
1998. Maturities of long term debt, excluding the noninterest bearing advances
from Argosy, are as follows:
<TABLE>
<S> <C>
1999....................................................... $ 545
2000....................................................... 604
2001....................................................... 670
2002....................................................... 743
2003....................................................... 825
Thereafter................................................. 3,710
</TABLE>
Argosy has indicated that it will not demand payment on the noninterest
bearing advances prior to January 1, 2000 and has agreed to provide operating
support to the Company during 1999.
4. INCOME TAXES
The tax effects of significant temporary differences of the Company
representing deferred tax assets and liabilities at December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Tax over book depreciation................................................. $ (887) $ (828)
Preopening................................................................. 824 824
Net operating loss carryforwards........................................... 4,289 2,287
Other, net................................................................. (325) 20
--------- ---------
3,901 2,303
Valuation allowance........................................................ (3,901) (2,303)
--------- ---------
Net deferred tax assets.................................................... $ $
--------- ---------
--------- ---------
</TABLE>
The Company has not recorded any income tax benefit on its operating losses
and has recorded a valuation allowance against its net deferred tax assets due
to the uncertainty of realization. The Company has tax net operating loss
carryforwards of approximately $10,918 which expire from 2008 through 2018.
5. RELATED PARTY TRANSACTIONS
The Company leases, for a minimum of five years with six five-year renewal
options, a docking site, office and warehouse space to the Partnership. Rent
under terms of the lease ranges from 6% to 10% of adjusted gross receipts, as
defined. Revenue of $2,833, $2,920 and $3,091 in 1998, 1997 and 1996,
respectively, resulted from this lease with the Partnership.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, the Company received property and equipment with a carrying
value of $12,471 from Argosy and this amount increased the noninterest bearing
advances from related parties.
The Company paid interest of $860, $909 and $951 in 1998, 1997 and 1996,
respectively.
75
<PAGE>
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. COMMITMENTS AND CONTINGENCIES
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and the Company entered into
an agreement which required the Company and the Partnership to pay to the
City-Parish $2.50 per passenger. Additionally, the Company agreed to pay to the
City-Parish an additional passenger fee, which is now $2.50 per passenger, until
actual construction of a hotel commences by the Company or another Argosy
affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1998, the Partnership has paid all
admission payments due under the above agreements.
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------
<S> <C>
1999..................................................................... $ 214
2000..................................................................... 202
2001..................................................................... 202
2002..................................................................... 202
2003..................................................................... 202
Thereafter............................................................... 14,942
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was $240,
$244 and $283, respectively.
Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004
("Mortgage Notes"). The assets of the Company are pledged as collateral, and the
Company is a guarantor, under the terms of the Mortgage Notes.
76
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Indiana Gaming Company
We have audited the accompanying consolidated balance sheets of The Indiana
Gaming Company as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Indiana
Gaming Company at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Indianapolis, Indiana
January 29, 1999
77
<PAGE>
THE INDIANA GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 25,491 $ 41,257
Accounts receivable, net of allowance for doubtful accounts of $701 and $347,
respectively.......................................................................... 707 382
Deferred income taxes................................................................... 254 74
Other current assets.................................................................... 642 1,179
---------- ----------
Total current assets.............................................................. 27,094 42,892
---------- ----------
NET PROPERTY AND EQUIPMENT................................................................ 194,731 176,407
OTHER ASSETS:
Deposits................................................................................ 530
Restricted cash and cash equivalents.................................................... 13,114
Intangible assets, net of accumulated amortization of $2,675 and $1,292, respectively... 29,566 30,844
Deferred income taxes................................................................... 722 2,785
---------- ----------
Total other assets................................................................ 30,288 47,273
---------- ----------
TOTAL ASSETS.............................................................................. $ 252,113 $ 266,572
---------- ----------
---------- ----------
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 1,974 $ 5,936
Accrued payroll and related expenses.................................................... 4,195 2,924
Accrued interest and dividends payable-related parties.................................. 2,183 5,260
Installment contracts payable........................................................... 1,961 3,288
Accrued admission and gaming taxes...................................................... 10,835 900
Other accrued liabilities............................................................... 9,402 4,924
Income taxes payable.................................................................... 24,534 5,915
Current maturities of long-term debt.................................................... 11,095 12,856
Current maturities of other long-term obligations....................................... 4,583
---------- ----------
Total current liabilities......................................................... 66,179 46,586
---------- ----------
LONG-TERM DEBT............................................................................ 118,933 195,405
OTHER LONG-TERM OBLIGATIONS............................................................... 2,000
MINORITY INTERESTS........................................................................ 30,516 17,656
STOCKHOLDER'S EQUITY
Common stock--$.01 par value, 1,000 shares authorized, issued and outstanding...........
Retained earnings....................................................................... 36,485 4,925
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................ $ 252,113 $ 266,572
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
78
<PAGE>
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
REVENUES:
Casino....................................................................... $ 264,352 $ 127,908 $ 3,930
Admissions................................................................... 16,025 7,895 776
Food, beverage, hotel and other.............................................. 24,922 7,005 167
---------- ---------- ---------
305,299 142,808 4,873
Less promotional allowances.................................................. (20,578) (5,784) (462)
---------- ---------- ---------
Net revenues................................................................... 284,721 137,024 4,411
---------- ---------- ---------
COSTS AND EXPENSES:
Casino....................................................................... 110,330 58,081 2,116
Food, beverage, hotel and other.............................................. 18,879 5,746 149
Other operating expenses..................................................... 8,222 13,119 711
Selling, general and administrative.......................................... 41,615 21,606 783
Management fees-related parties.............................................. 5,201 1,924 38
Depreciation and amortization................................................ 12,622 10,922 378
Preopening................................................................... 11,036
---------- ---------- ---------
196,869 111,398 15,211
---------- ---------- ---------
Income (loss) from operations.................................................. 87,852 25,626 (10,800)
---------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 1,205 1,400 127
Interest expense............................................................. (10,254) (3,588) (192)
---------- ---------- ---------
(9,049) (2,188) (65)
---------- ---------- ---------
Income (loss) before minority interests and income taxes....................... 78,803 23,438 (10,865)
Minority interests............................................................. (26,023) (6,989) 4,721
Income tax expense............................................................. (21,220) (3,259)
---------- ---------- ---------
Net income (loss).............................................................. $ 31,560 $ 13,190 $ (6,144)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
79
<PAGE>
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDER'S
COMMON (DEFICIT) (DEFICIT)
SHARES STOCK EARNINGS EQUITY
--------- --------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................................ 1,000 $ (2,121) $ (2,121)
Net loss................................................ (6,144) (6,144)
--------- --------- ------- -------
Balance, December 31, 1996................................ 1,000 (8,265) (8,265)
Net income.............................................. 13,190 13,190
--------- --------- ------- -------
Balance, December 31, 1997................................ 1,000 4,925 4,925
Net income.............................................. 31,560 31,560
--------- --------- ------- -------
Balance, December 31, 1998................................ 1,000 $ 36,485 $ 36,485
--------- --------- ------- -------
--------- --------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
80
<PAGE>
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)............................................ $ 31,560 $ 13,190 $ (6,144)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 12,622 10,922 453
Deferred taxes........................................... 1,883 (2,859)
Loss on disposal of equipment............................ 391
Minority interests....................................... 26,023 6,989 (4,721)
Changes in operating assets and liabilities:
Accounts receivable...................................... (325) (244) (138)
Other current assets..................................... 537 527 (941)
Accounts payable......................................... (3,962) 2,821 1,630
Accrued interest payable................................. (1,744) 1,917 656
Income taxes payable..................................... 18,619 5,915
Accrued liabilities...................................... 15,684 6,381 2,289
--------- --------- ---------
Net cash provided by (used in) operating activities........ 101,288 45,559 (6,916)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow............................. 13,114 1,805 (14,919)
Purchases of property and equipment........................ (27,676) (113,141) (52,879)
Payments under development agreement....................... (6,583) (13,586) (6,946)
--------- --------- ---------
Net cash used in investing activities...................... (21,145) (124,922) (74,744)
--------- --------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
(Decrease) increase in advances from affiliates............ (52,953) 49,812 50,438
Payments on installment contracts.......................... (3,125) (4,116) (1,805)
Repayment of long-term debt................................ (21,939) (2,710)
Payment of preferred equity return to partner.............. (3,688) (1,163)
Partnership equity distributions........................... (10,808) (1,514)
Proceeds from contributed capital.......................... 19,044
(Payments on) proceeds from long-term debt................. (3,292) 71,648 23,197
Other...................................................... (104) (553)
--------- --------- ---------
Net cash (used in) provided by financing activities.......... (95,909) 111,404 90,874
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents......... (15,766) 32,041 9,214
Cash and cash equivalents, beginning of year................. 41,257 9,216 2
--------- --------- ---------
Cash and cash equivalents, end of year....................... $ 25,491 $ 41,257 $ 9,216
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
81
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The Indiana Gaming Company, a wholly owned subsidiary
of Argosy Gaming Company ("Argosy") (collectively with its controlled
partnership Indiana Gaming Company L.P. ("Partnership") "the Company") was
formed effective April 11, 1994 to provide riverboat gaming and related
entertainment in Lawrenceburg, Indiana. The Company is a 57.5% general partner
in the Partnership, together with three limited partners including, Conseco
Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5%
limited partner and RJ Investments, Inc., a 4% limited partner. On December 10,
1996, the Company commenced operations at a temporary site and ceased being in
the development stage. The Partnership opened its permanent pavilion on December
10, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. These
consolidated financial statements include the accounts of the Company and the
Partnership. All significant intercompany transactions have been eliminated.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Building and leasehold and shore improvements................. 5 to 33
years
Riverboat, docks and improvements............................. 5 to 20
years
Furniture, fixtures and equipment............................. 5 to 10
years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
represented funds placed into an escrow account which were used to fund progress
payments related to the construction of the Company's permanent landing
facility.
LICENSE APPLICATION FEES--License application fees associated with obtaining
a gaming license have been capitalized and are a part of intangible assets at
December 31, 1998 and 1997. These costs are being amortized over the life of the
gaming license, which is five years. Accumulated amortization was $271 and $141
at December 31, 1998 and 1997, respectively.
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, hotel rooms, food,
beverage and other items provided to customers without charge has been included
in
82
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenues, and a corresponding amount has been deducted as promotional
allowances. The estimated direct cost of providing promotional allowances has
been included in costs and expenses as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Admissions....................................................... $ 11,278 $ 6,935 $ 190
Hotel rooms...................................................... 757
Food, beverage and other......................................... 4,898 1,200 4
</TABLE>
PREOPENING COSTS--Preopening costs, which consisted primarily of labor,
vessel rent, training and marketing costs incurred prior to the commencement of
gaming operations, were expensed as incurred.
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $5,245, $4,877 and $503 for the years ended December 31,
1998, 1997 and 1996, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land............................................................ $ 16,045 $ 16,045
Building and leasehold and shore improvements................... 128,923 103,427
Riverboat, docks and improvements............................... 40,191 40,815
Furniture, fixtures and equipment............................... 31,134 21,809
Construction in progress........................................ 4,753
--------- ---------
216,293 186,849
Less accumulated depreciation and amortization.................. (21,562) (10,442)
--------- ---------
Net property and equipment...................................... $ 194,731 $ 176,407
--------- ---------
--------- ---------
</TABLE>
83
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Capital loans payable to Argosy, noninterest bearing, no stated due date.................. $ 63,125 $ 116,127
Capital loans payable to Conseco, interest at prime plus 6% (13.75% at
December 31, 1998) principal paid in annual installments through 2004................... 45,196 67,134
Notes payable, principal and interest payments due monthly through
December 2001, interest payable at prime plus 1% (8.75% at December 31, 1998)........... 21,707 25,000
---------- ----------
130,028 208,261
Less current maturities................................................................... (11,095) (12,856)
---------- ----------
$ 118,933 $ 195,405
---------- ----------
---------- ----------
</TABLE>
Interest expense on the capital loans from Conseco compounds quarterly to
the extent unpaid. The Company is obligated to pay contemporaneously with
distributions of Cash Flow, as defined, current and accrued interest and then
principal on the capital loans to the Partners, pro rata, in relation to their
principal balance of the respective capital loans then outstanding.
Capital loans payable to Argosy are paid with distributions of Cash Flow
from the Partnership.
Interest expense amounted to $10,254 (net of $1,086 capitalized), $3,588
(net of $8,391 capitalized) and $192 (net of $1,680 capitalized) in the years
ended December 31, 1998, 1997 and 1996, respectively.
Maturities of long-term debt, excluding the capital loans payable to Argosy,
at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 11,095
2000............................................................... 11,475
2001............................................................... 21,736
2002............................................................... 7,533
2003............................................................... 7,533
Thereafter......................................................... 7,531
</TABLE>
84
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
Income tax expense for years ended December 31, 1998, 1997 and 1996 consists
of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal................................................ $ 16,863 $ 5,337
State.................................................. 2,474 781
--------- --------- ---------
Total current............................................ 19,337 6,118
--------- --------- ---------
Deferred:
Federal................................................ 1,642 (2,466)
State.................................................. 241 (393)
--------- --------- ---------
Total deferred........................................... 1,883 (2,859)
--------- --------- ---------
Income tax expense....................................... $ 21,220 $ 3,259
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes for the year ended December 31, 1998, 1997
and 1996 differs from that computed at the Federal Statutory tax rate as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate................................................. 35.0% 35.0% (35.0)%
State income taxes, net of federal benefit............................. 5.1 5.1 (5.1)
Valuation allowance.................................................... (20.0) 39.1
Other.................................................................. 0.1 (0.3) 1.0
--- --------- ---------
40.2% 19.8% %
--- --------- ---------
--- --------- ---------
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets at December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Depreciation............................................................. $ (1,384) $ -- $ --
Preopening............................................................... 2,106 2,785 3,239
Net operating loss carryforward.......................................... 60
Other, net............................................................... 254 74 5
--------- --------- ---------
976 2,859 3,304
Valuation allowance...................................................... (3,304)
--------- --------- ---------
$ 976 $ 2,859
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1996, the Company recorded a valuation allowance against all of its
deferred tax assets due to the uncertainty of realization. The Company utilized
a net operating loss carryforward for income tax purposes of approximately $260
during 1997.
85
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amount of $1,798, $4,154 and $5,056 in
1998, 1997 and 1996, respectively, which was financed through installment
contracts.
The Company paid $12,467 (including $9,908 to related parties), $5,300
(including $5,007 to related parties) and $207 in interest for the years ended
December 31, 1998, 1997 and 1996.
The Company paid $778 and $143 in taxes for the year ended December 31, 1998
and 1997, respectively. No taxes were paid in 1996.
6. RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the Company, as the sole and exclusive manager of
all operations of the Partnership. The term of the Management Agreement is
twenty years, however, the term may be extended in the event that the term of
the Partnership is extended beyond the year 2014. The Partnership will pay to
the Company a Management Fee in the amount of 12.5% of the operating profit of
the Partnership, as defined. Under a separate financial advisory agreement the
Company has agreed to pay Conseco a financial advisory fee equal to 40% of the
management fee.
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Company entered into lease agreements with Argosy for the temporary
riverboat casino and related landing facility. Aggregate monthly rentals were
approximately $500 for these facilities. Total expense recognized under the
leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases
expired in 1997.
Argosy provides certain services for the Company which consist primarily of
centralized reservations and insurance. Reimbursement for these expenses has
been included in the income statement in the appropriate cost categories.
The Company has entered into leases with shareholders of a limited partner
for parking lots and outdoor advertising. Total expense recognized under these
leases was $106, $107 and $133 in 1998, 1997 and 1996, respectively.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized under the Plan was $410, $517 and $52 for the years ended December
31, 1998, 1997 and 1996, respectively.
86
<PAGE>
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1998, are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1999.................................................................................. $ 503
2000.................................................................................. 262
2001.................................................................................. 16
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, 1996 was $745,
$6,459 and $2,837, respectively.
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with
the terms of a development agreement, the Company entered into a lease with the
City of Lawrenceburg for docking privileges for the riverboat casino. The
initial term of the lease is for six years and thereafter automatically extends
for up to nine renewal term periods of five years each, unless terminated by the
Company. Under the terms of the development agreement, the Company pays an
annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross
Receipts, as defined, with a minimum of $6 million per year.
The Company paid the City of Lawrenceburg approximately $33,848 in
reimbursements for infrastructure improvements and unrestricted grants. These
have been recorded as an intangible asset in the balance sheet at December 31,
1998 and 1997. The reimbursement for infrastructure improvements and
unrestricted city grants are being amortized over the 28 year term, including
extensions, of the development agreement. Accumulated amortization was $2,256
and $1,151 for the years ended December 31, 1998 and 1997, respectively.
BONDING OBLIGATION--The Company is required, by Indiana Gaming Statute, to
post a bond in favor of the Indiana Gaming Commission to collateralize certain
obligations to the City of Lawrenceburg under the Development Agreement, and to
the State of Indiana. This bond is collateralized by certain real estate of the
Company.
TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the partnership
agreement, after December 10, 1999, each limited partner has the right to sell
its interest to the other partners (pro rata in accordance with their respective
percentage interests). In the event of this occurrence, if the partners cannot
agree on a selling price, the Partnership will be sold in its entirety.
GUARANTY OF PARENT OBLIGATIONS--Argosy has issued $235 million of 13 1/4%
First Mortgage Notes, due 2004 ("Mortgage Notes"). The Company has pledged its
interest in the Partnership, and its rights to certain payments from the
Partnership, as collateral, under the terms of the Mortgage Notes. Additionally,
the Company is a guarantor of the Mortgage Notes.
87
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Partners
Indiana Gaming Company, L.P.
We have audited the accompanying balance sheets of Indiana Gaming Company,
L.P. as of December 31, 1998 and 1997, and the related statements of operations,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indiana Gaming Company, L.P.
at December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Indianapolis, Indiana
January 29, 1999
88
<PAGE>
INDIANA GAMING COMPANY, L.P.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 25,491 $ 41,257
Accounts receivable, net of allowance for doubtful accounts of $701
and $347, respectively.............................................. 707 382
Other current assets.................................................. 642 1,179
--------- ---------
Total current assets................................................ 26,840 42,818
--------- ---------
NET PROPERTY AND EQUIPMENT.............................................. 193,469 175,030
OTHER ASSETS:
Deposits.............................................................. 589
Restricted cash and cash equivalents.................................. 13,114
Intangible assets, net of accumulated amortization of $2,675 and
$1,292, respectively................................................ 29,566 30,844
--------- ---------
Total other assets.................................................. 29,566 44,547
--------- ---------
TOTAL ASSETS............................................................ $ 249,875 $ 262,395
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable...................................................... $ 2,744 $ 5,936
Accrued payroll and related expenses.................................. 4,195 2,924
Accrued interest and preferred equity return.......................... 4,574 12,571
Installment contracts payable......................................... 1,961 3,288
Accrued admission and gaming taxes.................................... 10,835 900
Other accrued liabilities............................................. 8,360 4,603
Due to affiliates..................................................... 945 1,182
Current maturities of other long-term obligations..................... 4,583
Current maturities of long-term debt.................................. 21,478 25,832
--------- ---------
Total current liabilities........................................... 55,092 61,819
--------- ---------
LONG-TERM DEBT.......................................................... 107,722 143,570
OTHER LONG-TERM OBLIGATIONS............................................. 2,000
PARTNERS' EQUITY:
General partner....................................................... 56,592 37,395
Limited partners...................................................... 30,469 17,611
--------- ---------
Total partners' equity.............................................. 87,061 55,006
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY.................................. $ 249,875 $ 262,395
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to financial statements.
89
<PAGE>
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Casino...................................................... $ 264,352 $ 127,908 $ 3,930
Admissions.................................................. 16,025 7,895 776
Food, beverage, hotel and other............................. 24,922 7,005 167
--------- --------- ---------
305,299 142,808 4,873
Less promotional allowances................................. (20,578) (5,784) (462)
--------- --------- ---------
Net revenues.................................................. 284,721 137,024 4,411
--------- --------- ---------
COSTS AND EXPENSES:
Casino...................................................... 110,330 58,081 2,116
Food, beverage, hotel and other............................. 18,879 5,746 149
Other operating expenses.................................... 8,222 13,119 711
Selling, general and administrative......................... 41,615 21,607 685
Management fees-related parties............................. 13,209 4,809 94
Depreciation and amortization............................... 12,567 10,922 378
Preopening.................................................. 10,979
--------- --------- ---------
204,822 114,284 15,112
--------- --------- ---------
Income (loss) from operations................................. 79,899 22,740 (10,701)
OTHER INCOME (EXPENSE):
Interest income............................................. 1,205 1,400 127
Interest expense............................................ (19,874) (7,694) (534)
--------- --------- ---------
(18,669) (6,294) (407)
--------- --------- ---------
Net income (loss) prior to preferred equity return............ 61,230 16,446 (11,108)
Preferred equity return....................................... (5,554) (5,443) (3,726)
--------- --------- ---------
Net income (loss) attributable to common equity partners...... $ 55,676 $ 11,003 $ (14,834)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
90
<PAGE>
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON EQUITY (DEFICIT) PREFERRED EQUITY
--------------------------------- ----------------------------------- TOTAL
GENERAL LIMITED GENERAL LIMITED PARTNERS'
PARTNER PARTNERS TOTAL PARTNER PARTNERS TOTAL EQUITY
--------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................. $ 7,522 $ 1,709 $ 9,231 $ 5,336 $ 5,336 $ 14,567
Capital contributions.................... 3,850 3,850 15,220 15,194 30,414 34,264
Net loss prior to preferred equity
return................................. (6,387) (4,721) (11,108) (11,108)
Preferred equity return.................. (2,142) (1,584) (3,726) 2,184 1,542 3,726
Accrued preferred equity distribution.... (2,184) (1,542) (3,726) (3,726)
--------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1996................. (1,007) (746) (1,753) 20,556 15,194 35,750 33,997
Net income prior to preferred equity
return................................. 9,456 6,990 16,446 16,446
Preferred equity return.................. (3,130) (2,313) (5,443) 3,136 2,307 5,443
Accrued preferred equity distribution.... (3,136) (2,307) (5,443) (5,443)
Common equity distributions.............. (2,049) (1,514) (3,563) (3,563)
Capital contributions.................... 13,569 13,569 13,569
--------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1997................. 16,839 2,417 19,256 20,556 15,194 35,750 55,006
Net income prior to preferred equity..... 35,207 26,023 61,230 61,230
Preferred equity return.................. (3,199) (2,355) (5,554) 3,194 2,360 5,554
Accrued preferred equity distribution.... (3,194) (2,360) (5,554) (5,554)
Common equity distributions.............. (14,625) (10,810) (25,435) (25,435)
Capital contributions.................... 1,814 1,814 1,814
--------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1998................. $ 36,036 $ 15,275 $ 51,311 $ 20,556 $ 15,194 $ 35,750 $ 87,061
--------- ----------- --------- ----------- ----------- --------- -----------
--------- ----------- --------- ----------- ----------- --------- -----------
</TABLE>
See accompanying notes to financial statements.
91
<PAGE>
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) attributable to common equity partners.................... $ 55,676 $ 11,003 $ (14,834)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................. 12,567 10,922 453
Accrued preferred equity dividends........................................ 5,554 5,443 3,726
Loss on disposal of equipment............................................. 391
Changes in operating assets and liabilities:
Accounts receivable....................................................... (325) (244) (138)
Other current assets...................................................... 537 527 (941)
Accounts payable.......................................................... (3,192) 3,502 1,977
Accrued interest payable.................................................. (8,010) 4,625 1,514
Accrued liabilities....................................................... 17,914 5,436 2,289
---------- ---------- ----------
Net cash provided by (used in) operating activities..................... 81,112 41,214 (5,954)
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow.............................................. 13,114 1,805 (14,919)
Purchases of property and equipment......................................... (27,676) (112,867) (51,955)
Payments under development agreement........................................ (6,583) (13,586) (6,946)
---------- ---------- ----------
Net cash used in investing activities................................... (21,145) (124,648) (73,820)
---------- ---------- ----------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Payments on installment contracts........................................... (3,125) (4,116) (1,805)
Payment of preferred return to partners..................................... (8,680) (2,736)
Proceeds from contributed capital........................................... 1,814 13,569 34,264
Repayment of long-term debt-related party................................... (36,911) (6,369)
Repayment of long-term debt-outside party................................... (3,292)
Proceeds from long-term debt................................................ 119,243 56,529
Partnership equity distributions............................................ (25,435) (3,563)
Other....................................................................... (104) (553)
---------- ---------- ----------
Net cash (used in) provided by financing activities..................... (75,733) 115,475 88,988
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents.......................... (15,766) 32,041 9,214
Cash and cash equivalents, beginning of year.................................. 41,257 9,216 2
---------- ---------- ----------
Cash and cash equivalents, end of year........................................ $ 25,491 $ 41,257 $ 9,216
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
92
<PAGE>
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Indiana Gaming Company, L.P. ("Partnership"), an
Indiana limited partnership, was formed to provide riverboat gaming and related
entertainment in Lawrenceburg, Indiana. The Partnership is comprised of a 57.5%
general partner, The Indiana Gaming Company ("General Partner"), a wholly owned
subsidiary of Argosy Gaming Company, ("Argosy"), and three limited partners
including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner,
Centaur, Inc., a 9.5% limited partner and RJ Investments, Inc., a 4% limited
partner. Net income (loss) is allocated to the partners based on their
respective ownership interests. On December 10, 1996, the Partnership commenced
operations at a temporary site and ceased being in the development stage. The
Partnership opened its permanent pavilion on December 10, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation. Partnership loans of $13,569 were reclassified as Partner's equity
because the Partnership contribution cap, as defined by the Partnership
agreement, was exceeded.
CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Building and leasehold and shore improvements................. 5 to 33
years
Riverboat, docks and improvements............................. 5 to 20
years
Furniture, fixtures and equipment............................. 5 to 10
years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that
the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
represented funds placed into an escrow account which were used to fund progress
payments related to the construction of the Partnership's permanent landing
facility.
LICENSE APPLICATION FEES--License application fees associated with obtaining
a gaming license have been capitalized and included in the balance sheet as a
part of intangible assets at December 31, 1998 and 1997. These costs are being
amortized over the life of the gaming license, which is five years. Accumulated
amortization was $271 and $141 at December 31, 1998 and 1997, respectively.
REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of
93
<PAGE>
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
admissions, hotel rooms, food, beverage and other items provided to customers
without charge has been included in revenues, and a corresponding amount has
been deducted as promotional allowances. The estimated direct cost of providing
promotional allowances has been included in costs and expenses as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Admissions....................................................... $ 11,278 $ 6,935 $ 190
Hotel rooms...................................................... 757
Food, beverage and other......................................... 4,898 1,200 4
</TABLE>
PREOPENING COSTS--Preopening costs, which consisted primarily of labor,
vessel rent, training and marketing costs incurred prior to the commencement of
gaming operations, were expensed as incurred.
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred.
Advertising expense was $5,245, $4,877 and $503 for the years ended December 31,
1998, 1997 and 1996, respectively.
INCOME TAXES--No provision (credit) for federal or state income taxes is
recorded in the financial statements, as income taxes are the responsibility of
the individual partners.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land............................................................ $ 16,045 $ 16,045
Building and leasehold and shore improvements................... 127,605 102,050
Riverboat, docks and improvements............................... 40,191 40,815
Furniture, fixtures and equipment............................... 31,135 21,809
Construction in progress........................................ 4,753
--------- ---------
214,976 185,472
Less accumulated depreciation and amortization.................. (21,507) (10,442)
--------- ---------
Net property and equipment...................................... $ 193,469 $ 175,030
--------- ---------
--------- ---------
</TABLE>
94
<PAGE>
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Capital loans payable to partners, interest at prime plus 6%
(13.75% at December 31, 1998), principal paid in annual
installments through 2004...................................... $ 107,493 $ 144,402
Notes payable, principal and interest payments due monthly
through December 2001, interest payable at prime plus 1% (8.75%
at December 31, 1998).......................................... 21,707 25,000
--------- ---------
129,200 169,402
Less current maturities......................................... (21,478) (25,832)
--------- ---------
$ 107,722 $ 143,570
--------- ---------
--------- ---------
</TABLE>
Interest expense on the capital loans from the partners compounds quarterly
to the extent unpaid. The Partnership is obligated to pay contemporaneously with
distributions of Cash Flow, as defined, current and accrued interest, first, and
then principal, on the Capital Loans to the Partners, pro rata, in relation to
the principal balances of their respective Capital Loans then outstanding.
The Notes payable are collateralized by the vessel and certain equipment.
Interest expense to related parties amounted to $18,444 (net of $1,146
capitalized), $7,320 (net of $8,321 capitalized), and $636 (net of $874
capitalized) for the years ended December 31, 1998, 1997, and 1996,
respectively.
Maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 21,478
2000............................................................... 21,856
2001............................................................... 32,119
2002............................................................... 17,915
2003............................................................... 17,916
Thereafter......................................................... 17,916
</TABLE>
4. PREFERRED EQUITY
Under the terms of the partnership agreement governing the Partnership,
preferred equity of $35,750 has been contributed to the Partnership. Of this
amount $20,556 was contributed by the General Partner and $15,194 was
contributed by Conseco.
The preferred equity carries a 14% dividend rate which is cumulative and is
compounded annually. The preferred equity return is to be paid from available
cash flow, as defined, in accordance with the terms of the partnership
agreement.
95
<PAGE>
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Partnership acquired equipment in the amount of $1,798, $4,154 and
$5,056 in 1998, 1997, and 1996, respectively, which was financed through
installment contracts.
The Partnership paid $25,889 ($23,329 to related parties), $12,004 ($11,712
to related parties) and $207 in interest for the years ended December 31, 1998,
1997 and 1996, respectively.
6. OTHER RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the General Partner, as the sole and exclusive
manager of all operations of the Partnership. The term of the Management
Agreement is twenty years, however, the term may be extended in the event that
the term of the Partnership is extended beyond the year 2014. The Partnership
will pay to the General Partner a Management Fee in the amount of 12.5% of the
operating profit of the Partnership, as defined. Under a separate financial
advisory agreement the General Partner has agreed to pay Conseco a financial
advisory fee equal to 40% of the Management Fee.
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Partnership entered into lease agreements with Argosy for the temporary
riverboat casino and related landing facility. Aggregate monthly rentals were
approximately $500 for these facilities. Total expense recognized under the
leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases
expired in 1997.
Argosy provides certain services for the Partnership which consist primarily
of centralized reservations and insurance. Reimbursement for these expenses has
been included in the income statement in the appropriate cost categories.
The Partnership has entered into leases with shareholders of a limited
partner for parking lots and outdoor advertising. Total expense recognized under
these leases was $106, $107 and $133 in 1998, 1997, and 1996, respectively.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was $410, $517 and $52 for the years
ended December 31, 1998, 1997 and 1996, respectively.
96
<PAGE>
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1998, are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C>
1999.................................................................................. $ 503
2000.................................................................................. 262
2001.................................................................................. 16
</TABLE>
Rent expense, including related party leases, for the years ended December
31, 1998, 1997 and 1996 was $745, $6,459 and $2,837, respectively.
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with
the terms of a development agreement, the Partnership entered into a lease with
the City of Lawrenceburg for docking privileges for its riverboat casino. The
initial term of the lease is for six years and thereafter automatically extends
for up to nine renewal term periods of five years each, unless terminated by the
Partnership. Under the terms of the development agreement, the Partnership pays
an annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross
Receipts, as defined, with a minimum of $6 million per year.
The Partnership paid the City of Lawrenceburg $33,848 in reimbursements for
infrastructure improvements and unrestricted grants. Subsequent to the
commencement of operations at the temporary site, these have been recorded as an
intangible asset in the balance sheet at December 31, 1998 and 1997. The
reimbursement for infrastructure improvements and unrestricted city grants are
being amortized over the 28 year term, including extensions, of the development
agreement. Accumulated amortization was $2,256 and $1,151 at December 31, 1998
and 1997, respectively.
BONDING OBLIGATION--The Partnership is required, by Indiana Gaming Statute,
to post a bond in favor of the Indiana Gaming Commission to collateralize
certain obligations to the City of Lawrenceburg under the Development Agreement,
and to the State of Indiana. This bond is collateralized by certain real estate
of the Partnership.
TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership
Agreement, after December 10, 1999, each limited partner has the right to sell
its interest to the other partners (pro rata in accordance with their respective
percentage interests). In the event of this occurrence, if the partners cannot
agree on a selling price, the Partnership will be sold in its entirety.
97
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
98
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth under the
captions "Election of Directors" and "Management" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth under the
caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is set forth under the
caption "Record Date, Required Vote, Outstanding Shares and Holdings of Certain
Stockholders--Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement and is incorporated herein by reference.
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.
99
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. The following consolidated financial statements of the Company and
independent auditors' report thereon, included in the Annual Report, are
incorporated by reference in Item 8. The remaining information appearing in
the Annual Report is not deemed to be filed as part of this report, except
as expressly provided herein.
Consolidated Balance Sheets--December 31, 1998 and 1997.
Consolidated Statements of Operations--years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Cash Flows--years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Stockholders' Equity--years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. The following consolidated financial schedules of Argosy Gaming
Company are included in response to Item 14 (a):
I. Condensed Financial Information of Registrant S-1.
All other schedules specified under Regulation S-X for Argosy Gaming Company
have been omitted because they are either non-applicable, not required or
because the information required is included in the financial statements or
notes thereto.
3. The exhibits listed on the "Index to Exhibits" on page 101 are filed
with this Form 10-K or incorporated by reference as set forth below.
100
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Certification of Incorporation of the Company (previously filed with the
Securities and Exchange Commission ("SEC") as an Exhibit to the Company's Registration Statement on
Form S-1 (File No. 33-55878) and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
4.1 Form of the Company's 13 1/4% First Mortgage Notes due 2004 issued on June 5, 1996 in the aggregate
principal amount of $235,000,000 (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.2 Form of Guarantee issued on June 5, 1996 by Alton Gaming Company, Argosy of Louisiana, Inc., Catfish
Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises,
Inc., The Missouri Gaming Company and The St. Louis Gaming Company (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated
herein by reference).
4.3 Indenture dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as
Trustee, and the Guarantors named therein, for the Company's $235,000,000 of 13 1/4% First Mortgage
Notes due 2004 (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.4 Registration Rights Agreement dated as of June 5, 1996 by and among the Company, the Guarantors named
therein and the Initial Purchasers named therein (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by
reference).
4.5 Cash Collateral and Disbursement Agreement dated June 5, 1996 by and among the Company, First National
Bank of Commerce, as Trustee, and LaSalle National Trust, N.A., as disbursement agent (previously
filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No.
333-7299) and incorporated herein by reference).
4.6 Form of Security Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Grantor (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.7 Form of Subsidiary Security Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Grantor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Pledgor (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National
Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle
Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The
Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the
Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996
by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance
Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-4 (File No. 333-7299) and incorporated herein by reference).
4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure
Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of
June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with
the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and
incorporated herein by reference).
4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the
Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated
herein by reference).
4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by
reference).
4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference).
4.17 Form of Securities Purchase Agreement dated May 29, 1998 between the Company and the Buyers named
therein (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference).
</TABLE>
102
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
4.18 Form of Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of
Argosy Gaming Company (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference).
4.19 Form of Warrant to Purchase Common Stock (previously filed with the SEC as an Exhibit to the Company's
Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference).
4.20 Form of Registration Rights Agreement dated May 29, 1998 between the Company and the Buyers named
therein (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference).
9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie
Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-55878) and incorporated herein by reference).
10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference).
10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling
Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997. (previously filed with the SEC
as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference).
10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as
an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.8 Employment Agreement between the Company and Virginia M. McDowell (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference).
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.9 Letter Agreement dated as of January 28, 1993 by and between L. Thomas Lakin and the Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.10 Letter Agreement dated as of January 28, 1993 by and between the Alton Riverboat Gambling Partnership
and H. Steven Norton (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference.)
10.11 Letter Agreement dated March 29, 1995 by and between Floyd C. Warmann and the Company (previously filed
with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 dated
March 31, 1995 and incorporated herein by reference).
10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and
the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company
and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the
Company's Form 8-K dated March 10, 1994 and incorporated herein by reference).
10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming
Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana
Gaming Company as amended by Amendment No. 1 to Management Agreement dated February 21, 1996
(previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana
Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the
Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company
L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming
Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development
Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of
December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference).
10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of
Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino-New York, Inc. and
The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K
dated March 31, 1995 and incorporated herein by reference).
10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as
obligee with USF&G, as surety. (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.22 Employment Agreement between the Company and James B. Perry (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference).
10.23 Employment Agreement between the Company and James G. Gulbrandsen. (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by
reference).
13 Portions of the 1998 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of
Contents.
21 List of Significant Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
- ------------------------
(b) The following Reports on Form 8-K were filed by the Registrant with the
Securities and Exchange Commission during the quarter ended December 31,
1998:
1. Report on Form 8-K dated December 1, 1998, filed with the Securities and
Exchange Commission containing the press release regarding an amendment
to the Company's Series A Convertible Preferred Stock Agreement.
(c) The Exhibits filed herewith, if any, are identified on the Exhibit index
105
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 19th day of March, 1999.
<TABLE>
<S> <C> <C>
ARGOSY GAMING COMPANY
By: /s/ JAMES B. PERRY
-----------------------------------------
James B. Perry
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JAMES B. PERRY
- ------------------------------ President and Chief
James B. Perry Executive Officer
Vice President--Chief
/s/ DALE R. BLACK Financial Officer
- ------------------------------ (Principal Accounting
Dale R. Black Officer)
/s/ EDWARD F. BRENNAN
- ------------------------------ Director
Edward F. Brennan
/s/ FELIX LANCE CALLIS
- ------------------------------ Director
Felix Lance Callis
/s/ WILLIAM F. CELLINI
- ------------------------------ Director
William F. Cellini
/s/ JIMMY F. GALLAGHER
- ------------------------------ Director
Jimmy F. Gallagher
/s/ JOHN BIGGS PRATT, SR.
- ------------------------------ Director
John Biggs Pratt, Sr.
/s/ WILLIAM MCENERY
- ------------------------------ Director
William McEnery
*BY: /s/ DALE R. BLACK
-------------------------
Dale R. Black
ATTORNEY-IN-FACT
March 19, 1999
106
<PAGE>
ARGOSY GAMING COMPANY
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1998 AND 1997
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 50,818 $ 5,787
Income taxes receivable............................................... 747 1,176
Receivables........................................................... 796 698
Deferred income taxes................................................. 183 768
Other current assets.................................................. 1,047 1,677
--------- ---------
Total current assets................................................ 53,591 10,106
Net property and equipment............................................ 644 1,153
Restricted cash and cash equivalents.................................. 12,431
Investment in and advances to consolidated subsidiaries............... 332,528 351,356
Other assets.......................................................... 13,028 14,907
Deferred taxes........................................................ 3,546 1,521
--------- ---------
TOTAL ASSETS........................................................ $ 403,337 $ 391,474
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............................ $ 7,134 $ 8,811
Long-term debt.......................................................... 350,000 350,000
Series A Convertible Preferred Stock, $.01 par value, 10,000,000 shares
authorized, 800 shares issued and 547 shares outstanding.............. 5,340
STOCKHOLDERS' EQUITY:
Common stock, $.01 par; 60,000,000 shares authorized; 25,830,313 shares
issued and outstanding in 1998, and 24,498,333 issued and outstanding
in 1997............................................................... 258 245
Capital in excess of par................................................ 74,484 72,038
Accumulated deficit..................................................... (33,879) (39,620)
--------- ---------
40,863 32,663
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 403,337 $ 391,474
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed financial statements.
107
<PAGE>
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
DECEMBER 31, 1998, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Management fees and other...................................... $ 1,988 $ 5,795 $ 4,875
COSTS AND EXPENSES
General and administrative..................................... 9,475 23,035 15,208
Development and preopening costs............................... 509 595 835
--------- --------- ---------
9,984 23,630 16,043
--------- --------- ---------
Loss from operations........................................... (7,996) (17,835) (11,168)
Net interest expense........................................... (38,356) (32,145) (22,177)
Equity in net income (loss) of consolidated subsidiaries....... 27,488 7,287 (6,769)
--------- --------- ---------
Loss before income taxes and extraordinary item................ (18,864) (42,693) (40,114)
Income tax benefit............................................. 25,425 2,480 16,165
--------- --------- ---------
Net income (loss) before extraordinary item.................... 6,561 (40,213) (23,949)
Extraordinary loss on extinguishment of debt (net of income tax
benefit of $594)............................................. (890)
--------- --------- ---------
Net income (loss).............................................. 6,561 (40,213) (24,839)
Preferred stock dividend and accretion......................... (820)
--------- --------- ---------
Net income (loss) attributable to common shareholders.......... $ 5,741 $ (40,213) $ (24,839)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to condensed financial statements.
108
<PAGE>
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
DECEMBER 31, 1998, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................. $ 6,561 $ (40,213) $ (24,839)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation.................................................. 554 2,100 1,671
Amortization.................................................. 1,904 1,933 1,761
Extraordinary item............................................ 890
Writedown of assets held for sale............................. 9,600
Compensation expense recognized on issuance of stock.......... 239 175
Deferred income taxes......................................... (1,440) 6,454 (8,596)
Changes in operating assets and liabilities:
Other current assets........................................ 1,808 11,254 (11,741)
Accounts payable and accrued liabilities.................... (1,677) (1,714) 2,866
--------- --------- ---------
Net cash provided by (used in) operating activities....... 7,949 (10,411) (37,988)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities................................ 1,952
Purchases of marketable securities............................ (126)
Investment in and advances to subsidiaries.................... 17,969 (53,350) (52,719)
Restricted cash held by trustee............................... 12,431 57,201 (69,632)
Purchases of property and equipment........................... (58) (2,084) (7,641)
--------- --------- ---------
Net cash provided by (used in) investing activties.......... 30,342 1,767 (128,166)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit.................................. 44,500
Retirement of line of credit.................................. (90,000)
Proceeds from the issuance of long term debt.................. 235,000
Issuance of preferred stock................................... 7,365
Increase in deferred finance costs............................ (85) (9,716)
Other......................................................... (625)
--------- --------- ---------
Net cash provided by (used in) financing activities......... 6,740 (85) 179,784
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............ 45,031 (8,729) 13,630
Cash and cash equivalents, beginning of year.................... 5,787 14,516 886
--------- --------- ---------
Cash and cash equivalents, end of year.......................... $ 50,818 $ 5,787 $ 14,516
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to condensed financial statements.
109
<PAGE>
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
DECEMBER 31, 1998, 1997 AND 1996
BASIS OF PRESENTATION
The accompanying condensed financial information of Argosy Gaming Company
("Argosy") includes the accounts of Argosy, and on an equity basis, the
subsidiaries which it controls. The accompanying condensed financial information
should be read in conjunction with the consolidated financial statements of
Argosy.
110
<PAGE>
Exhibit 13
- --------------------------------------------------------------------------------
ANNUAL REPORT
1998
- --------------------------------------------------------------------------------
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries or joint ventures, owns and
operates the Alton Belle Casino, in Alton, Illinois; the Argosy Casino in
Riverside, Missouri; the Belle of Baton Rouge in Baton Rouge, Louisiana;
the Belle of Sioux City in Sioux City, Iowa; and the Argosy Casino and
Hotel in Lawrenceburg, Indiana. The Lawrenceburg casino opened at a
temporary site in Lawrenceburg, Indiana on December 10, 1996, moved to
and opened the permanent pavilion on December 10, 1997, and opened a
hotel in May 1998.
The Company's results of operations for the year ended December 31,
1998 were favorably impacted by improved performance at Lawrenceburg due
to the opening of the permanent pavilion in December of 1997, and by
improved performance in Alton, Baton Rouge, Riverside and Sioux City due
to focused marketing efforts and operating efficiencies.
The results of operations of the Company's Baton Rouge casino are
significantly impacted by the imposition of a head tax. Under the terms
of an 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 of a hotel. Once construction commences, the head
tax ceases and the Company would save approximately $3.0 million to $3.5
million annually. The Company is in negotiations with several developers
pertaining to the construction of a hotel; however, no assurances can be
given as to the timing of the development of a
hotel or as to the required financial commitment of the Company. The
Company's ability to recover the carrying amount of its long-lived assets
in Baton Rouge is dependent on several factors including achieving
anticipated operating results, the competitive environment, and the hotel
development. If the Company is unable to develop the hotel or if the
Company's operating results do not improve through cost efficiencies or
following the elimination of video poker at competing outlets,
management's evaluation of recoverability could change and the Company
could record an impairment loss amounting to a substantial portion of its
$115 million Baton Rouge investment.
The Company has not recorded any federal tax expense on its 1998 net
income or any federal tax benefit on its 1997 net loss, as the Company
was in an operating loss carryforward position at December 31, 1998 and
1997.
<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,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASINO REVENUES
Alton Belle Casino $ 67,798 $ 61,877 $ 72,369
Argosy Casino Riverside 71,955 61,750 82,247
Belle of Baton Rouge Casino 46,828 47,628 51,007
Belle of Sioux City Casino 22,572 20,667 18,835
Argosy Casino Lawrenceburg 264,352 127,908 3,930
---------- ---------- -----------
Total $ 473,505 $ 319,830 $ 228,388
---------- ---------- -----------
---------- ---------- -----------
NET REVENUES
Alton Belle Casino $ 72,064 $ 67,208 $ 77,933
Argosy Casino Riverside 76,960 66,548 88,473
Belle of Baton Rouge Casino 49,054 50,436 53,420
Belle of Sioux City Casino 23,526 21,672 19,887
Argosy Casino Lawrenceburg 284,721 137,024 4,412
Other 343 1,195 692
---------- ---------- -----------
Total $ 506,668 $ 344,083 $ 244,817
---------- ---------- -----------
---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS(1)
Alton Belle Casino $ 13,850 $ 7,489 $ 12,240
Argosy Casino Riverside(3) 5,369 2,481 9,410
Belle of Baton Rouge Casino(4) (3,381) (4,146) 3,507
Belle of Sioux City Casino 1,919 848 295
Argosy Casino Lawrenceburg (5) 87,907 25,625 334
Jazz (6,312) (4,655) (3,435)
Corporate (6) (9,990) (11,432) (14,207)
Other (1,551) 1,701 (1,012)
---------- ---------- -----------
Total $ 87,811 $ 17,911 $ 7,132
---------- ---------- -----------
---------- ---------- -----------
EBITDA(1)(2)
Alton Belle Casino $ 17,835 $ 11,944 $ 16,446
Argosy Casino Riverside (3) 11,293 8,428 16,134
Belle of Baton Rouge Casino (4) 1,891 1,322 9,151
Belle of Sioux City Casino 3,016 1,861 1,141
Argosy Casino Lawrenceburg (5) 100,474 36,547 712
Jazz (3,633) (2,301) (2,053)
Corporate (6) (9,436) (9,324) (12,520)
Other (193) 2,726 537
---------- ---------- -----------
Total $ 121,247 $ 51,203 $ 29,548
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
<PAGE>
(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 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 debt service 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.
(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 and a charge of $1,500 in connection with the
termination of a private debt placement for the year ended December 31,
1996.
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CASINO--Casino revenues for the year ended December 31, 1998, increased
by 48.1% to $473.5 million from $319.8 million for the year ended December 31,
1997, due primarily to a $136.4 million increase in casino revenues at the
Lawrenceburg casino, which generated total casino revenues of $264.4 million for
the year ended December 31, 1998. The Company's other properties reported an
aggregate 9.0% increase in casino revenues from $191.9 to $209.2 million.
Specifically, Alton casino revenues increased from $61.9 to $67.8 million;
Riverside casino revenues increased from $61.8 to $72.0 million; Sioux City
casino revenues increased from $20.7 to $22.6 million, offset by a decrease in
Baton Rouge casino revenues from $47.6 to $46.8 million.
Casino expenses increased 35.3% to $221.7 million for the year ended
December 31, 1998, from $163.9 million for the year ended December 31, 1997.
This is primarily due to a $52.2 million increase in Lawrenceburg casino
expenses associated with the overall increase in Lawrenceburg casino revenues.
Casino expenses increased $4.6 million at Riverside in connection with the
increase in casino revenues. Alton casino expenses decreased slightly while
casino revenues increased 10%. This decrease in casino expenses in Alton is
attributable to improved operating efficiencies and the implementation of cost
reduction programs.
ADMISSIONS--Admissions revenues (net of complimentary admissions)
increased from $4.6 million in 1997 to $7.2 million in 1998 due to an increased
number of customers at the Lawrenceburg casino.
FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased
from $34.8 million to $51.1 million for the year ended December 31, 1998, due to
the expanded food and beverage facilities in Lawrenceburg. Food, beverage and
other net profit improved $5.6 million to $10.5 million for the year ended
December 31, 1998, due primarily to this increase in sales.
The Lawrenceburg hotel, which opened in May 1998, contributed $2.5
million in net revenues and $0.7 million of operating profit. The hotel
occupancy percentage was 73.5% and the average daily room rate was $79.
OTHER OPERATING EXPENSES--Other operating expenses decreased from $28.7
million to $26.6 million for the year ended December 31, 1998, due primarily to
a decrease at Lawrenceburg of $2.3 million related to renting the temporary
vessel in 1997.
SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and
administrative expenses increased 37.7% to $96.0 million for the year ended
December 31, 1998, due primarily to an increase of $20.0 million at Lawrenceburg
related to expanded marketing and operating costs of the larger facility, an
increase of $2.3 million at Riverside due to expanded marketing efforts and a
$1.4 million charge related to a writeoff of deferred lease costs at the Catfish
Town real estate project in Baton Rouge. The increase in selling, general and
administrative expenses was offset by a $1.5 million decrease at Baton Rouge
related primarily to insurance costs.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
slightly to $33.4 million for the year ended December 31, 1998, from $33.3
million in 1997.
INTEREST EXPENSE--Net interest expense increased $12.7 million to $53.9
million for the year ended December 31, 1998. The increase in interest expense
is primarily attributable to a decrease of $7.3 million in the amount of
capitalized interest due to the completion of the final phase of the
Lawrenceburg project in June 1998, a weighted average increase of $11.0 million
in the balance of partner loans related to the Lawrenceburg casino, and an
equipment loan at the Indiana Partnership which was outstanding for the entire
year of 1998.
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS--The Company
reported net income attributable to common stockholders of $5.7 million for the
year ended December 31, 1998 as opposed to a net loss of $40.2 million for the
year ended December 31, 1997, due primarily to the factors discussed above. In
addition, in 1998, the Company recorded $0.8 million in preferred dividends and
accretion related to the sale of Preferred Stock and Warrants in June 1998. In
1997, the Company recorded pretax charges of $9.6 million relating to the
write-down of assets held for sale and approximately $1.8 million in severance
expenses. Due to its net operating loss position, the Company's effective tax
rate for 1998 was 3.4%.
<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 to $47.6 million due primarily to an overall decline in the Baton Rouge
market.
Casino expenses increased to $163.9 million for the year ended December
31, 1997, from $121.0 million for the year ended December 31, 1996, due
primarily to the opening of the Lawrenceburg casino. Casino expenses decreased
in Alton, Riverside and Baton Rouge in connection with the decline in revenues.
ADMISSIONS--Admissions revenues (net of complimentary admissions)
increased from $0.6 million in 1996 to $4.6 million in 1997 due to net admission
fees in Lawrenceburg.
FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased
$5.6 million to $34.8 million for the year ended December 31, 1997, due
primarily to the opening of the Lawrenceburg casino. Food, beverage and other
expenses increased from $23.8 million in 1996 to $30.0 million in 1997 due
primarily to the opening of the Lawrenceburg casino.
OTHER OPERATING EXPENSES--Other operating expenses increased $9.6
million to $28.7 million for the year ended December 31, 1997. This increase is
due primarily to costs associated with operating the Lawrenceburg casino 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 savings initiatives implemented at the Company's
other properties and the corporate office, the absence 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 largely
attributable 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
borrowings on the Company's $235 million First Mortgage Notes that 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 write-down of assets
held for sale and $1.8 million for severance expenses. In 1996 the Company
recorded a pretax charge of $3.5 million related to lease termination costs
related to assets formerly used at its temporary facility in Riverside. Also,
the Company recorded an extraordinary loss of $0.9 million (net of tax) related
to the 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.
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company generated cash flows from operating activities
of $81.7 million compared to $31.6 million for 1997. Cash flows from operating
activities increased by $59.5 million for the year ended December 31, 1998 over
1997 after eliminating the effects of income tax refunds in both years. This
increase is attributable to substantial cash flow increases from the
Lawrenceburg facility as well as improved cash flows from the Company's Alton,
Riverside, Baton Rouge and Sioux City properties.
During 1998, the Company used cash flows for investing activities of
$14.2 million versus $72.6 million for 1997. The primary use of funds in both
years was capital investment in the Company's properties including the
construction of the Lawrenceburg facility. Overall capital expenditures have
decreased between periods reflecting the completion of the Lawrenceburg casino.
During 1998, the Company used $37.0 million in cash flows for financing
activities compared to generating $62.0 million of cash flows from financing
activities for the same period in 1997. The uses of cash flows in 1998 were to
repay loans related to the Company's Lawrenceburg casino, partnership equity
distributions at the Indiana Partnership, and for payments on installment
contracts and other long-term debt, offset by net proceeds of $7.4 million from
the sale of Convertible Preferred Stock and Warrants in June 1998. The primary
sources of cash flows from financing activities 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.
The Company has outstanding $235 million of First Mortgage Notes, which
were issued in June 1996, and are due June 2004 ("Mortgage Notes"). The Mortgage
Notes indenture requires the Company to make annual cash offers to purchase
Mortgage Notes at 101% of their original issue value in an amount equal to 50%
of certain distributions from Indiana Gaming L.P. to the Company when an
aggregate of $20 million of these distributions are reached. The Company is
expecting to reach the $20 million amount in the first quarter of 1999 and will
make the required tender offer to purchase the Mortgage Notes. To the extent the
tender offer is not accepted, the funds made available to meet the tender
obligation will again be available for general corporate purposes. Additionally,
the Company has outstanding $115 million of Convertible Subordinated Notes which
were issued in June 1994 and are due June 2001.
As of December 31, 1998, the Company had approximately $89.9 million of
cash and cash equivalents, including approximately $25.5 million held at the
Indiana Partnership.
During an ongoing audit, the Internal Revenue Service (IRS) has challenged
the S-corporation status of a predecessor entity of the Company. If the IRS
challenge is successful, the Company currently estimates that it would require
up to approximately $13.5 million (excluding penalties) to fund the potential
federal and any state income tax liability. The Company believes it has
substantial legal grounds for its tax position related to this matter and is
vigorously contesting the IRS challenge; however, no assurance can be given that
the Company will not be required to pay some or all of the disputed amount.
The Company has made a significant investment in property and equipment and
plans to make significant additional investments at certain of its existing
properties. In 1999, the Company expects to spend approximately $25 million to
fund its capital expenditures program principally related to upgrading its
gaming facilities and purchasing gaming equipment.
The Company believes that cash on hand and operating cash flows will be
sufficient to fund its current operating, capital expenditure and debt service
obligations. 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 Lawrenceburg casino. If the
operating results of the Lawrenceburg casino would deteriorate significantly or
there are any other events that materially impact its sources or uses of cash,
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.
<PAGE>
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
MARKET RISK - INTEREST RATE SENSITIVITY
The market risk inherent in the Company's financial instruments is the
potential loss in fair value arising from adverse changes in interest rates.
Currently, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes as the vast majority of the Company's
indebtedness is financed at fixed rates.
The following table provides information about the Company's debt
obligations that are sensitive to changes in interest rates. The following table
presents principal cash flows and related weighted-average interest rates by
expected maturity dates and estimated fair value of the Company's debt
obligations.
<TABLE>
<CAPTION>
FAIR
VALUE
(dollars in thousands) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98
- ---------------------- ---- ---- ---- ---- ---- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $ 545 $ 604 $ 115,670 $ 743 $ 825 $ 238,710 $357,097 $379,022
Average Interest Rate 10.5% 10.5% 12.0% 10.5% 10.5% 13.3%
Variable Rate Debt 11,095 11,474 21,736 7,532 7,533 7,533 66,903 66,903
Average Interest Rate 12.0% 12.0% 10.0% 13.8% 13.8% 13.8%
</TABLE>
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 Year
2000 compliant or that Year 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, 1998, the Company has incurred less than $100,000 of
costs related to Year 2000 issues. The Company estimates it will incur less than
$400,000 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.
<PAGE>
ARGOSY GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 89,857 $ 59,354
Accounts receivable, net of allowance for doubtful
accounts of $1,936 and $1,624, respectively 2,375 2,139
Income taxes receivable 747 1,176
Deferred income taxes 1,471 2,011
Other current assets 4,806 5,303
--------- ---------
Total current assets 99,256 69,983
--------- ---------
Net property and equipment 395,920 390,343
--------- ---------
OTHER ASSETS:
Restricted cash and cash equivalents 25,545
Deferred finance costs, net of accumulated
amortization of $6,363 and $4,312, respectively 8,758 10,809
Goodwill and other intangible assets, net of accumulated
amortization of $5,353 and $3,360, respectively 51,817 54,689
Other 7,001 8,487
--------- ---------
Total other assets 67,576 99,530
--------- ---------
Total assets $562,752 $559,856
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ARGOSY GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,500 $ 12,570
Accrued payroll and related expenses 9,857 8,912
Other accrued liabilities 34,898 27,870
Accrued interest 4,490 6,299
Current maturities of long-term debt 11,640 13,348
----------- -----------
Total current liabilities 71,385 68,999
----------- -----------
LONG-TERM DEBT 412,360 436,442
DEFERRED INCOME TAXES 1,943 1,947
OTHER LONG-TERM OBLIGATIONS 201 2,186
MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES 30,660 17,619
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 17)
SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES
AUTHORIZED, 547 SHARES ISSUED AND OUTSTANDING 5,340
STOCKHOLDERS' EQUITY:
Common stock, $.01 par; 60,000,000 shares
authorized; 25,830,313 and 24,498,333 shares issued and
outstanding at December 31, 1998 and 1997, respectively 258 245
Capital in excess of par 74,484 72,038
Retained (deficit) earnings (33,879) (39,620)
----------- -----------
Total stockholders' equity 40,863 32,663
----------- -----------
Total liabilities and stockholders' equity $ 562,752 $ 559,856
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Casino $ 473,505 $ 319,830 $ 228,388
Admissions 16,025 7,895 2,759
Food, beverage and other 51,057 34,836 29,212
---------- ---------- -----------
540,587 362,561 260,359
Less promotional allowances (33,919) (18,478) (15,542)
---------- ---------- -----------
Net revenues 506,668 344,083 244,817
---------- ---------- -----------
COSTS AND EXPENSES:
Casino 221,682 163,935 121,004
Food, beverage and other 40,550 29,962 23,769
Other operating expenses 26,639 28,695 19,111
Selling, general and administrative 96,041 69,725 52,048
Depreciation and amortization 33,436 33,292 22,416
Development and preopening costs 509 594 12,365
Lease termination costs 3,508
Referendum expenses 1,347
Severance expenses 1,750
Write-down of assets held for sale 9,600
---------- ---------- -----------
418,857 337,553 255,568
---------- ---------- -----------
Income (loss) from operations 87,811 6,530 (10,751)
---------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income 3,582 5,937 4,235
Interest expense (57,487) (47,116) (34,842)
---------- ---------- -----------
(53,905) (41,179) (30,607)
---------- ---------- -----------
Income (loss) before minority interests, income taxes
and extraordinary item 33,906 (34,649) (41,358)
Minority interests (26,205) (6,916) 4,879
Income tax (expense) benefit (1,140) 1,352 12,530
---------- ---------- -----------
Net income (loss) before extraordinary item 6,561 (40,213) (23,949)
Extraordinary loss on extinguishment of debt (net of
income tax benefit of $594) (890)
---------- ---------- -----------
Net income (loss) 6,561 (40,213) (24,839)
Preferred stock dividends and accretion (820)
---------- ---------- -----------
Net income (loss) attributable to common stockholders $ 5,741 $ (40,213) $ (24,839)
---------- ---------- -----------
---------- ---------- -----------
Basic net income (loss) per share $ 0.23 $ (1.65) $ (1.02)
---------- ---------- -----------
---------- ---------- -----------
Diluted net income (loss) per share $ 0.23 $ (1.65) $ (1.02)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,561 $ (40,213) $ (24,839)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 31,011 31,250 21,501
Amortization 4,329 3,968 2,660
Deferred income taxes 536 (753) (3,538)
Compensation expense recognized on issuance of stock 239 175
Loss (gain) on the disposal of equipment 789 (153)
Minority interests 26,205 6,916 (4,879)
Lease termination costs 1,941
Extraordinary item 890
Write-down of assets held for sale 9,600
Changes in operating assets and liabilities:
Accounts receivable (236) (221) 1,279
Other current assets 1,184 3,057 (2,033)
Accounts payable (2,070) (2,723) 3,011
Accrued liabilities 12,686 10,637 5,614
Income taxes receivable 429 9,935 (8,914)
---------- ---------- -----------
Net cash provided by (used in) operating activities 81,663 31,628 (7,460)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities 1,826
Proceeds from sales of property and equipment 153
Long-term obligations (6,583) (13,586)
Purchases of property and equipment (34,051) (117,444) (97,409)
Other long-term assets 908 (543) 171
Restricted cash held by trustees 25,545 59,006 (84,551)
---------- ---------- -----------
Net cash used in investing activities (14,181) (72,567) (179,810)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 25,000 235,000
Proceeds (net of issuance costs) from sale of
Convertible Preferred Stock and Warrants 7,365
Repayment of line of credit (45,500)
Payments on installment contracts (3,514) (4,211) (2,991)
Payments on long-term debt (3,785) (115) (2,191)
Increase in deferred finance costs (638) (9,716)
Proceeds from (repayment of) partner loans (21,939) 43,938 23,197
Capital contributions from partner 19,044
Partnership equity distributions (10,808) (1,514)
Payment of preferred equity return to partner (3,688) (1,163)
Other (610) 712 (7,448)
---------- ---------- -----------
Net cash (used in) provided by financing activities (36,979) 62,009 209,395
---------- ---------- -----------
Net increase in cash and cash equivalents 30,503 21,070 22,125
Cash and cash equivalents, beginning of year 59,354 38,284 16,159
---------- ---------- -----------
Cash and cash equivalents, end of year $ 89,857 $ 59,354 $ 38,284
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share and per share data)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON CAPITAL IN EARNINGS STOCKHOLDERS'
SHARES STOCK EXCESS OF PAR (DEFICIT) EQUITY
------ ----- ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 24,333,333 $ 243 $ 71,865 $ 25,432 $ 97,540
Net loss (24,839) (24,839)
------------ ------------ ----------- ----------- -------------
Balance, December 31, 1996 24,333,333 243 71,865 593 72,701
Restricted Stock issued 165,000 2 173 175
Net loss (40,213) (40,213)
------------ ------------ ----------- ----------- -------------
Balance, December 31, 1997 24,498,333 245 72,038 (39,620) 32,663
Restricted Stock
compensation expense 239 239
Issuance of Convertible Preferred
Stock and Warrants (235) (235)
Preferred Stock conversion 1,331,980 13 2,442 2,455
Net income 6,561 6,561
Preferred Stock dividends and accretion (820) (820)
------------ ------------ ----------- ----------- -------------
Balance, December 31, 1998 25,830,313 $ 258 $ 74,484 $ (33,879) $ 40,863
------------ ------------ ----------- ----------- -------------
------------ ------------ ----------- ----------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ARGOSY GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Argosy Gaming Company (collectively with its
subsidiaries, "Argosy" or "Company") is engaged in the business of providing
casino style gaming and related entertainment to the public and, through its
subsidiaries or joint ventures, operates riverboat casinos in Alton, Illinois;
Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana; and Sioux
City, Iowa. Indiana Gaming Company, L.P. ("Indiana Partnership"), a limited
partnership in which the Company is general partner and holds a 57.5%
partnership interest, opened a riverboat casino and related entertainment and
support facilities at a temporary site in Lawrenceburg, Indiana on December 10,
1996. The Partnership opened its permanent pavilion on December 10, 1997, and
its hotel in May 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
consolidated financial statements include the accounts of Argosy and its
controlled subsidiaries and partnerships. All significant intercompany
transactions have been eliminated. Under certain conditions, subsidiaries are
required to obtain approval from state gaming authorities before making
distributions to Argosy.
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
CASH AND CASH EQUIVALENTS -- The Company considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Buildings and shore improvements 5 to 33 years
Riverboats, docks and improvements 5 to 20 years
Furniture, fixtures and equipment 5 to 10 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate
that the carrying amount of long-lived assets to be held and used might not be
recoverable, the expected future undiscounted cash flows from the assets is
estimated and compared with the carrying amount of the assets. If the sum of the
estimated undiscounted cash flows is less than the carrying amount of the
assets, an impairment loss is recorded. The impairment loss is measured by
comparing the fair value of the assets with their carrying amount. Long-lived
assets that are held for disposal are reported at the lower of the assets'
carrying amount or fair value less costs related to the assets' disposition.
DEFERRED FINANCE COSTS -- Deferred finance costs are amortized over the
life of the respective loans using the effective interest method.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill represents the cost in
excess of fair value of net assets acquired, and is amortized over 40 years.
Other intangible assets, primarily payments to cities, are amortized over the
lives of the respective leases or development agreements including extensions.
<PAGE>
CASINO REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as
casino revenues the net win from gaming activities, which is the difference
between gaming wins and losses. The retail value of admissions, hotel rooms,
food, beverage and other items which were provided to customers without charge
has been included in revenues, and a corresponding amount has been deducted as
promotional allowances. The estimated direct cost of providing promotional
allowances has been included in costs and expenses as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Admissions $11,278 $ 6,935 $ 505
Hotel rooms 757
Food, beverage and other 11,505 7,626 4,054
</TABLE>
ADMISSIONS REVENUE -- Admissions revenue is recognized at the time the
related service is performed.
ADVERTISING COSTS -- The Company expenses advertising costs as incurred.
Advertising expense was $9,833, $12,475 and $9,192 in 1998, 1997 and 1996,
respectively.
DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an
effort to identify and develop new gaming locations are expensed as incurred, as
there can be no assurance that such costs, if capitalized, would be realizable.
Preopening costs are expensed as incurred.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
--------- ---------
<S> <C> <C>
Land $ 39,002 $ 38,890
Buildings, leasehold and shore improvements 216,067 189,058
Riverboats, docks and improvements 148,162 149,318
Furniture, fixtures and equipment 93,868 78,168
Construction in progress 217 6,695
--------- ---------
497,316 462,129
Less accumulated depreciation and amortization (101,396) (71,786)
--------- ---------
Net property and equipment $ 395,920 $ 390,343
--------- ---------
--------- ---------
</TABLE>
3. ASSETS HELD FOR SALE
The Company recorded a charge of $9,600 to adjust the carrying value of
certain assets held for sale to their estimated fair value in 1997. These assets
include the original riverboat casino the Company utilized in Alton, Illinois
from September 1991 until May 1993 and a barge utilized as a temporary landing
facility in Lawrenceburg, Indiana until December 10, 1997. The estimated fair
value of the assets was determined through discussions with a broker and
comparison to other riverboats and barges currently available for sale.
The adjusted carrying value of the boat and barge of approximately $4,300
is included in other assets in the accompanying balance sheets at December 31,
1998 and 1997.
<PAGE>
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Accrued gaming and admission taxes $ 12,020 $ 2,386
Installment contracts payable 2,614 3,288
Slot club liability 3,667 2,475
Accrued insurance 4,529 4,400
Current portion of long-term obligations 4,583
Other 12,068 10,738
-------------- --------------
$ 34,898 $ 27,870
-------------- --------------
-------------- --------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
-------- --------
<S> <C> <C>
First mortgage notes due June 1, 2004,
interest payable semi-annually at 13.25% $235,000 $235,000
Convertible subordinated notes due
June 1, 2001, convertible into common
stock at $17.70 per share, interest payable
semi-annually at 12% 115,000 115,000
Notes payable, principal and interest
payments due quarterly through
September 2015, discounted at 10.5% 7,097 7,656
Notes payable, principal and interest payments due
monthly through December 2001, interest
payable at prime + 1% (8.75% at
December 31, 1998), secured by gaming vessel
and certain equipment 21,707 25,000
Loans from partner, principal due
in annual installments through 2004,
interest payable at prime + 6% (13.75% at
December 31, 1998) 45,196 67,134
-------- --------
424,000 449,790
Less: current maturities 11,640 13,348
-------- --------
Long-term debt, less current maturities $412,360 $436,442
-------- --------
-------- --------
</TABLE>
On June 5, 1996, the Company issued $235,000 of First Mortgage Notes due
2004 ("Mortgage Notes"). The Mortgage Notes are senior obligations of the
Company secured by substantially all of its assets, except the assets of the
Indiana Partnership, and are guaranteed by substantially all of the Company's
subsidiaries, other than the Indiana and Sioux City partnerships.
<PAGE>
The Mortgage Notes contain certain restrictions on the payment of
dividends on the Company's common stock and the occurrence of additional
indebtedness, as well as other covenants customary in senior secured financings.
Under terms of the indenture governing the Mortgage Notes, Argosy is required to
make cash offers to purchase Mortgage Notes, at 101% of their principal amount,
at an amount equal to 50% of the proceeds from certain distributions, above
specified levels, received from the Indiana Partnership.
The Company used a portion of the proceeds from the issuance of the
Mortgage Notes to repay and terminate its senior secured line of credit ("Line
of Credit"). In connection with this early termination of the Line of Credit,
the Company expensed approximately $1,484 of deferred finance costs ($890 net of
tax).
The convertible subordinated notes ("Notes") are convertible into common
stock at any time and may be redeemed by the Company in whole or in part, at
specified percentages of principal plus accrued and unpaid interest to the date
of redemption. The Notes are subordinated to prior payment in full of all senior
indebtedness as defined, including such indebtedness incurred in the future.
Interest expense for the years ended December 31, 1998, 1997, and 1996,
was $57,487 (net of $1,086 capitalized), $47,116 (net of $8,391 capitalized),
and $34,842 (net of $3,033 capitalized), respectively.
Maturities of long-term debt at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 11,640
2000 12,078
2001 137,406
2002 8,275
2003 8,358
Thereafter 246,243
</TABLE>
6. CONVERTIBLE PREFERRED STOCK AND WARRANTS
On June 16, 1998, the Company issued $8,000 of Series A Convertible
Preferred Stock ("Preferred Shares"), together with warrants to purchase an
additional 292,612 shares of Common Stock at $3.89 per share. The Preferred
Shares mature in 2005, and the Company has the right to force conversion and/or
redemption at maturity. A portion of the proceeds was allocated to the warrants
and this discount will be accreted over seven years. The warrants expire in
2003.
The Preferred Shares provide for a 4% dividend per annum, payable in cash
and/or in kind, at the time of conversion or maturity, at the Company's option.
The Preferred Shares are convertible at the lower of the fixed initial
strike price ($3.89 per share) or a floating price. The fixed strike price may
be reset downward on March 11, 1999, depending on the then current market price
and is subject to adjustment upon the occurrence of certain events. The floating
price is based on the market price of the Company's common stock. The Preferred
Shares are convertible in increments and become fully convertible on January 10,
1999. The warrants may be exercised at the fixed strike price subject to the
same adjustment provisions.
This transaction provided for put and call options which, subject to
certain restrictions and limitations, allowed for up to an additional $8,000 of
Preferred Shares and Warrants to be issued. In December 1998, the Company
amended its agreement with the holders of the Preferred Shares to terminate both
the holders' right to purchase, and the Company's right to require such holders
to purchase, the additional $8 million tranche of Preferred Shares and related
warrants. The Company paid $625 to amend the agreement, and this amount is
included in preferred stock dividends and accretion in the accompanying
statement of operations for 1998. Through December 31, 1998, 253 Preferred
Shares had been converted into 1,331,980 shares of common stock. Through January
29, 1999, 443 Preferred Shares had been converted into 2,208,201 shares of
common stock.
<PAGE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 6,561 $ (40,213) $ (24,839)
Preferred stock dividends and accretion (820)
----------------- ----------------- -----------------
Numerator for basic and diluted earnings per share
Net income (loss) attributable to common stockholders $ 5,741 $ (40,213) $ (24,839)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
DENOMINATOR:
Denominator for basic earnings per share -
Weighted-average shares outstanding 24,498,905 24,333,333 24,333,333
Effect of dilutive securities:
Restricted stock 105,580
----------------- ----------------- -----------------
Denominator for diluted earnings per share - adjusted
Weighted-average shares and assumed conversions 24,604,485 24,333,333 24,333,333
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Basic net income (loss) per share $ 0.23 $ (1.65) $ (1.02)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
Diluted net income (loss) per share $ 0.23 $ (1.65) $ (1.02)
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
Employee and directors stock options to purchase 1,592,179 shares of
common stock at prices ranging from $3.13 to $16.75 were not included in the
computation of diluted earnings per share because the options exercise price was
greater than the average market price of the common shares and, therefore, the
effect would be anti-dilutive.
Warrants to purchase 292,612 shares of common stock at $3.89 per share
were outstanding at December 31, 1998, but were not included in the computation
of diluted earnings per share because the exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
anti-dilutive.
Convertible preferred stock (convertible into 1,528,081 weighted-average
shares of common stock at December 31, 1998) was not included in the computation
of diluted earnings as the amount of dividend and accretion recognized during
the year per weighted-average common share obtainable on conversion exceeded
basic earnings per share; thus the effect would be anti-dilutive.
Twelve percent convertible debentures (convertible into 6,497,175 shares
of common stock at $17.70 per share) were outstanding at December 31, 1998, but
were not included in the computation of diluted earnings per share as the net
interest expense per common share obtainable on conversion exceeded basic
earnings per share; thus the effect would be anti-dilutive.
<PAGE>
8. INCOME TAXES
Income tax benefit (expense) for the years ended December 31, 1998, 1997 and
1996, consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal $ $ $ 7,877
State (604) 866 1,117
------------- ------------- -------------
(604) 866 8,994
------------- ------------- -------------
Deferred:
Federal 2,521
State (536) 486 1,015
------------- ------------- -------------
(536) 486 3,536
------------- ------------- -------------
Income tax benefit (expense) $ (1,140) $ 1,352 $ 12,530
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The provision for income taxes for the years ended December 31, 1998, 1997
and 1996, differs from that computed at the federal statutory corporate tax rate
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Federal statutory rate 35.0 % (35.0)% (35.0)%
State income taxes, net of federal benefit 2.2 (2.6) (2.5)
Valuation allowance (7.8) 38.7
Goodwill amortization 0.6 0.4 0.5
Minority interest in partnership income (27.0) (6.7) 4.6
Other, net 0.4 1.3 2.1
-------------- ------------- --------------
3.4 % (3.9)% (30.3)%
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Basis of assets held for sale $ 3,739 $ 3,727
Depreciation (14,241) (13,392)
Preopening 3,709 4,755
Benefit of net operating loss carryforward 18,357 17,986
Other, net 575 1,320
----------- ------------
12,139 14,396
Valuation allowance (12,611) (14,332)
----------- ------------
Net deferred tax asset (liability) $ (472) $ 64
----------- ------------
----------- ------------
</TABLE>
The valuation allowance relates to deferred tax assets established under SFAS
109 for net operating loss carryforwards of approximately $42,800 and $46,600 at
December 31, 1998 and 1997, respectively. These loss carryforwards, which will
expire through 2012, will be carried forward to future years for possible
utilization.
<PAGE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amounts of $2,841, $4,154 and $5,191
in 1998, 1997 and 1996, respectively, which was financed through installment
contracts.
The Company paid $58,356, $51,185 and $33,302 for interest, and $784, $143
and $332 for income taxes in 1998, 1997 and 1996, respectively.
The Company issued 1,331,980 shares of additional common stock upon the
conversion of 253 shares of Preferred Stock.
10. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
1999 $ 1,702
2000 1,231
2001 864
2002 450
2003 328
Thereafter 14,948
</TABLE>
Rent expense for the years ended December 31, 1998, 1997 and 1996, was
$4,137, $7,205 and $6,204, respectively.
11. STOCK OPTION PLANS
The Company adopted the Argosy Gaming Company Stock Option Plan, as
amended, ("Stock Option Plan"), which provides for the grant of non-qualified
stock options for up to 2,500,000 shares of common stock to key employees of the
Company. These options expire 10 years after their respective grant dates and
become exercisable over a specified vesting period. At December 31, 1998,
options for 843,241 shares are exercisable under the Stock Option Plan. The
weighted average life of outstanding options at December 31, 1998 is
approximately five years.
On November 7, 1997 ("Grant Date"), the Company's board of directors
approved a plan that allowed certain employees to exchange their existing stock
options for an amount of options equal to the number of options to be exchanged
multiplied by a fraction: the numerator of which is $4.25 (closing price on
Grant Date) and the denominator of which is the prior option price. This
exchange of options was finalized during 1998, and options for 625,373 shares of
stock were exchanged for options for 157,524 shares of stock.
The Company also has adopted the Argosy Gaming Company 1993 Directors
Stock Option Plan ("Directors Option Plan"), which provides for a total of
50,000 shares of common stock to be authorized and reserved for issuance. The
Directors Option Plan provides for the grant of non-qualified stock options at
fair market value to non-employee directors of the Company as of the date such
individuals become directors of the Company. These options expire five years
after their respective grant dates and become exercisable over a specified
vesting period. At December 31, 1998 options for 6,000 shares are exercisable
under the Directors' Option Plan.
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of employee stock options equals or exceeds the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
<PAGE>
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based
Compensation." Accordingly, no compensation expense has been recognized for
either stock plan. Had the valuation methods under SFAS 123 been used for the
Company's stock option grants, the fiscal 1998 pro forma net income attributable
to common shareholders would have been $5,579 and the pro forma income per share
would have been $0.23. The fair value of each option was estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of zero; expected volatility 52.7%; risk-free
interest rate of 6% and expected option life of three years. The fiscal 1997 pro
forma net loss would have been $40,336 and the pro forma loss per share would
have been $1.66. The fair value of each option was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions: dividend yield of zero; expected volatility 36.5%; risk-free
interest rate of 6% and expected option life of five years. There was no pro
forma compensation expense in 1996. These pro forma amounts may not be
representative of future disclosures because the estimated fair value of the
options is amortized to expense over the vesting period and additional options
may be granted in the future.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
STOCK OPTION PLAN DIRECTORS OPTION PLAN
EXERCISE EXERCISE
PRICE PRICE
SHARES PER SHARE SHARES PER SHARE
----------------- ---------------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Outstanding,
December 31, 1995 2,415,253 $ 16.75 - $ 19.38 21,000 $11.50 - $19.00
Forfeited (10,000) 16.75
----------------- ---------------------------- ------------ -----------------------
Outstanding,
December 31, 1996 2,405,253 16.75 - 19.38 21,000 11.50 - 19.00
Granted 406,000 3.13 - 3.44
Forfeited (744,343) 16.75 - 19.38
----------------- ---------------------------- ------------ -----------------------
Outstanding,
December 31, 1997 2,066,910 3.13 - 19.38 21,000 11.50 - 19.00
Exchange of options (467,849) 4.25 - 19.38
Granted 232,156 3.31 - 3.44
Forfeited (239,038) 4.25 - 19.38 (15,000) 19.00
----------------- -------------- ------------ ------------ -----------------------
Outstanding,
December 31, 1998 1,592,179 $ 3.13 - $ 16.75 6,000 $ 11.50
----------------- -------------- ------------ ------------ -----------------------
----------------- -------------- ------------ ------------ -----------------------
</TABLE>
<PAGE>
12. RESTRICTED STOCK
The Company issued 165,000 shares of restricted common stock to certain
new employees in 1997. The value of these shares at their respective grant
dates ranged from $ 3.13 to $3.63. In 1998, 66,000 shares of the restricted
stock vested, and in 2000, 99,000 shares will vest.
Compensation expense of $566 is being amortized over the period from
the date of grant until the respective vesting dates. Compensation expense of
$239 and $175 was recognized in 1998 and 1997, respectively.
13. EMPLOYEES BENEFIT PLAN
The Company established a 401(k) defined-contribution plan which covers
substantially all of its full-time employees. Participants can contribute a
portion of their eligible salaries (as defined) subject to maximum limits, as
determined by provisions of the Internal Revenue Code. The Company will match a
portion of participants' contributions in an amount determined annually by the
Company. Expense recognized under the Plan was approximately $1,134, $2,168 and
$1,546 in 1998, 1997 and 1996, respectively.
14. SUBSIDIARY GUARANTORS
On June 5, 1996, the Company issued the Mortgage Notes in a private
placement transaction. In October 1996, the Company exchanged all of the
outstanding privately placed Mortgage Notes for a like amount of identical
Mortgage Notes registered with the Securities and Exchange Commission. The
Mortgage Notes rank senior in right of payment to all existing and future
indebtedness of the Company.
The Mortgage Notes are unconditionally guaranteed, on a joint and several
basis, by the following wholly owned subsidiaries of the Company: Alton Gaming
Company; The Missouri Gaming Company; The St. Louis Gaming Company; Iowa Gaming
Company; Jazz Enterprises, Inc.; Argosy of Louisiana, Inc.; Catfish Queen
Partnership in Commendam; and The Indiana Gaming Company (the "Guarantors"). The
Mortgage Notes are secured, subject to certain prior liens, by a first lien on
(i) substantially all of the assets of the Company including the assets used in
the Company's Alton, Riverside, Baton Rouge and Sioux City operations, (ii) a
pledge of all the capital stock of, and partnership interests in, the Company's
subsidiaries, excluding the Company's partnership interest in its Sioux City
property, (iii) a pledge of the intercompany notes payable to the Company from
its subsidiaries and (iv) an assignment of the proceeds of the management
agreement relating to the Lawrenceburg casino project. The collateral for the
Mortgage Notes does not include assets of the Indiana Partnership.
The following tables present summarized balance sheet information of the
Company as of December 31, 1998 and 1997, and summarized operating statement
information for the years ended December 31, 1998, 1997 and 1996. The column
labeled "Parent Company" represents the holding company for each of the
Company's direct subsidiaries; the column labeled "Guarantors" represents each
of the Company's direct subsidiaries; all of which are wholly owned by the
parent company; and the column labeled "Non-Guarantors" represents the
partnerships which operate the Company's casinos in Sioux City and in
Lawrenceburg. The Company believes that separate financial statements and other
disclosures regarding the Guarantors, except as otherwise required under
Regulation S-X, are not material to investors.
<PAGE>
Summarized balance sheet information as of December 31, 1998 and 1997,
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 55,896 $ 22,236 $ 29,585 $ (8,461) $ 99,256
Non-current assets 347,441 360,354 227,439 (471,738) 463,496
-------- -------- -------- ---------- --------
$403,337 $382,590 $257,024 $(480,199) $562,752
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
LIABILITIES AND EQUITY:
Current $ 7,134 $ 47,507 $ 59,116 $ (42,372) $ 71,385
Non-current liabilities 350,000 269,878 111,208 (285,922) 445,164
Convertible preferred
stocks 5,340 5,340
Stockholders' equity 40,863 65,205 86,700 (151,905) 40,863
-------- -------- -------- ---------- --------
$403,337 $382,590 $257,024 $(480,199) $562,752
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
DECEMBER 31, 1997
---------------------------------------------------------------
PARENT NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets $ 10,106 $ 27,874 $ 44,581 $ (12,578) $ 69,983
Non-current assets 381,368 387,009 222,577 (501,081) 489,873
-------- -------- -------- ---------- --------
$391,474 $414,883 $267,158 $(513,659) $559,856
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
LIABILITIES AND EQUITY:
Current $ 8,811 $ 20,595 $ 57,088 $ (17,495) $ 68,999
Non-current liabilities 350,000 348,504 169,605 (409,915) 458,194
Stockholders' equity 32,663 45,784 40,465 ( 86,249) 32,663
-------- -------- -------- ---------- --------
$391,474 $414,883 $267,158 $(513,659) $559,856
-------- -------- -------- ---------- --------
-------- -------- -------- ---------- --------
</TABLE>
<PAGE>
Summarized operating statement information for the years ended
December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,988 $ 230,867 $ 308,246 $ (34,433) $ 506,668
Costs and expenses 9,984 183,735 227,451 (2,313) 418,857
Net interest (expense) income (38,356) 4,067 (18,957) (659) (53,905)
Net income (loss) attributable
to common stockholders 5,741 27,832 56,285 (84,117) 5,741
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 5,795 $ 189,388 $ 158,696 $ (9,796) $ 344,083
Costs and expenses 23,630 184,818 136,039 (6,934) 337,553
Net interest (expense) income (32,145) 2,366 (6,616) (4,784) (41,179)
Net (loss) income (40,213) 8,696 10,599 (19,295) (40,213)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 4,875 $ 211,319 $ 24,299 $ 4,324 $ 244,817
Costs and expenses 16,043 209,955 35,552 (5,982) 255,568
Net interest expense (22,177) (7,176) (738) (516) (30,607)
Net (loss) income (24,839) (2,297) (15,718) 18,015 (24,839)
</TABLE>
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 89,857 $ 89,857
First mortgage notes 235,000 258,794
Convertible subordinated notes 115,000 113,131
Other long-term debt 74,000 74,000
</TABLE>
The fair value of the first mortgage notes and the convertible
subordinated notes are based on quoted market prices. The Company estimates that
the fair value of the remainder of the Company's long-term debt approximates
carrying value.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
1998:
Net revenues $ 115,700 $ 124,457 $ 133,533 $ 132,978
Income from operations 15,651 19,390 25,697 27,073
Other expense, net 13,482 13,363 13,694 13,366
Net income (loss) attributable to common stockholders (2,537) 244 4,016 4,018
Net income (loss) per share
Basic (0.10) 0.01 0.17 0.16
Diluted (0.10) 0.01 0.15 0.14
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
1997:
Net revenues $ 82,495 $ 87,509 $ 82,351 $ 91,728
Income (loss) from operations (a) 1,961 7,106 933 (3,470)
Other expense, net 10,460 9,920 9,778 11,021
Net loss (9,017) (4,265) (9,623) (17,308)
Basic and diluted net loss per share (0.37) (0.17) (0.39) (0.71)
</TABLE>
(a) Income from operations includes a charge of $1,750 related to severance
expense for the first quarter of 1997 and a charge of $9,600 for a write-down of
assets held for sale in the fourth quarter of 1997.
<PAGE>
17. COMMITMENTS AND CONTINGENT LIABILITIES
LAWRENCEBURG, INDIANA--Under terms of the Lawrenceburg partnership
agreement, after December 10, 1999, each limited partner has the right to sell
its interest to the other partners (pro rata in accordance with their respective
percentage interests). In the event of this occurrence, if the partners cannot
agree on a selling price, the Indiana Partnership will be sold in its entirety.
OTHER--A predecessor entity to the Company ("Predecessor"), as a result
of a certain shareholder loan transaction, could be subject to federal and
certain state income taxes (plus interest and penalties, if any) if it is
determined that it failed to satisfy all of the requirements of the
S-Corporation provisions of the Internal Revenue Code relating to the
prohibition concerning a second class of stock.
An audit is currently being conducted by the Internal Revenue Service
("IRS") of the Company's federal income tax returns for the 1992 and 1993 tax
years and the IRS has identified the S-Corporation status as one of the issues,
although the IRS has yet to make a formal claim of deficiency. If the IRS
successfully challenges the Predecessor's S-Corporation status, the Company
would be required to pay federal and certain state income taxes on the
Predecessor's taxable income from the commencement of its operations until
February 25, 1993 (plus interest and penalties, if any, thereon until the date
of payment). If the Predecessor was required to pay federal and state income
taxes on its taxable earnings through February 25, 1993, such payments could
amount to approximately $13.5 million, including interest through December 31,
1998, but excluding penalties, if any. While the Company believes the
Predecessor has legal authority for its position that it is not subject to
federal and certain state income taxes because it met the S-Corporation
requirements, no assurances can be given that the Predecessor's position will be
upheld. This contingent liability could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. No
provision has been made for this contingency in the accompanying consolidated
financial statements.
The Company is subject, from time to time, to various legal and
regulatory proceedings, in the ordinary course of business. The Company believes
that current proceedings will not have a material effect on the financial
condition of the Company.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Argosy Gaming Company
We have audited the accompanying consolidated balance sheets of Argosy
Gaming Company as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Argosy Gaming
Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 29, 1999
<PAGE>
Exhibit 21
LIST OF SIGNIFICANT SUBSIDIARIES
The following is a list of the significant subsidiaries of the registrant:
<TABLE>
<CAPTION>
STATE OF PERCENTAGE
INCORPORATION OWNERSHIP
NAME OF SIGNIFICANT SUBSIDIARY OR ORGANIZATION OF ENTITY
- ------------------------------ --------------- ---------
<S> <C> <C>
Alton Gaming Company Illinois Corporation 100%
The Missouri Gaming Company Missouri Corporation 100%
The St. Louis Gaming Company Missouri Corporation 100%
The Indiana Gaming Company Indiana Corporation 100%
Iowa Gaming Company Iowa Corporation 100%
Iowa Development Corporation Iowa Corporation 100%
Argosy of Louisiana, Inc. Louisiana Corporation 100%
Jazz Enterprises, Inc. Louisiana Corporation 100%
Catfish Queen Partnership
In Commendam Louisiana Partnership 100%
Indiana Gaming Company, L.P. Indiana Limited Partnership 57.5%
Belle of Sioux City, L.P. Iowa Limited Partnership 70%
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-76418) pertaining to the Stock Option Plan and
Director Option Plan of Argosy Gaming Company of our report dated January 29,
1999, with respect to the consolidated financial statements of Argosy Gaming
Company incorporated by reference in the Annual Report (Form 10-K) for the year
ended December 31, 1998.
Our audits also included the financial statement schedule of Argosy
Gaming Company listed in Item 14 (a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
March 18, 1999
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Argosy
Gaming Company, a Delaware corporation, which is about to file with the
Securities and Exchange Commission under the provisions of the Securities
Exchange Act of 1934 its Annual Report on Form 10-K for its fiscal year ended
December 31, 1998 hereby constitutes and appoints James B. Perry and Dale R.
Black and each of them, his true and lawful attorneys-in-fact and agents with
full power to act without the other, to sign such Annual Report and to file such
Annual Report and the exhibits thereto and any and all other documents in
connection therewith with the Securities and Exchange Commission, and to do and
perform any and all acts and things requisite and necessary to be done in
connection with the foregoing as fully as he might or could do in person hereby
ratifying and confirming all that said attorneys-in-fact and agents, or either
of them, may lawfully do or cause to be done by virtue hereof.
Dated: January 21, 1999 /s/ Edward F. Brennan
----------------------------------------
Edward F. Brennan
Director
/s/ George L. Bristol
----------------------------------------
George L. Bristol
Director
/s/ Felix Lance Callis
----------------------------------------
Felix Lance Callis
Director
/s/ William F. Cellini
----------------------------------------
William F. Cellini
Director
/s/ Jimmy F. Gallagher
----------------------------------------
Jimmy F. Gallagher
Director
/s/ John Biggs Pratt, Sr.
----------------------------------------
John Biggs Pratt, Sr.
Director
/s/ William McEnery
----------------------------------------
William McEnery
Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS OF
ARGOSY GAMING COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 89,857
<SECURITIES> 0
<RECEIVABLES> 4,148
<ALLOWANCES> 1,936
<INVENTORY> 1,149
<CURRENT-ASSETS> 99,256
<PP&E> 497,316
<DEPRECIATION> 101,396
<TOTAL-ASSETS> 562,752
<CURRENT-LIABILITIES> 71,385
<BONDS> 371,707
5,340
0
<COMMON> 258
<OTHER-SE> 40,605
<TOTAL-LIABILITY-AND-EQUITY> 562,752
<SALES> 0
<TOTAL-REVENUES> 506,668
<CGS> 0
<TOTAL-COSTS> 418,857
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 922
<INTEREST-EXPENSE> 57,487
<INCOME-PRETAX> 7,701
<INCOME-TAX> 1,140
<INCOME-CONTINUING> 6,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,561
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
