-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JNKvWuhKHXstw1aZ7PPGRpQ8tdzmAxAt2t+v/NjaHG8l2Imfu6p9ZoGEwVTzMoz+ mMNrxzne+4KmapNAoiOgSg== 0000912057-00-011289.txt : 20000314 0000912057-00-011289.hdr.sgml : 20000314 ACCESSION NUMBER: 0000912057-00-011289 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARGOSY GAMING CO CENTRAL INDEX KEY: 0000895385 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AMUSEMENT & RECREATION SERVICES [7900] IRS NUMBER: 371304247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11853 FILM NUMBER: 568221 BUSINESS ADDRESS: STREET 1: 219 PIASA ST CITY: ALTON STATE: IL ZIP: 62002 BUSINESS PHONE: 6184747500 MAIL ADDRESS: STREET 1: 219 PIASA STREET CITY: ALTON STATE: IL ZIP: 62002 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999 COMMISSION FILE NUMBER: 0-21122 ------------------------ ARGOSY GAMING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE (State or other jurisdiction of 37-1304247 incorporation or organization) (I.R.S. Employer Identification No.) 219 PIASA STREET, ALTON, ILLINOIS 62002 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (618) 474-7500 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ------------------- 13 1/4% First Mortgage Notes due 2004 New York Common Stock, par value $.01 per share New York Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 8, 2000, the aggregate market value of the registrant's Common Stock held by non-affiliates was $239,598,211. The closing price of the Common Stock on March 8, 2000 as reported on the New York Stock Exchange, was $11.50. As of March 8, 2000, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 28,346,604. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1999, 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 18, 2000 as described in the Cross Reference Sheet and a Table of Contents included herewith, are incorporated herein by reference into Parts II and III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS
PAGE REFERENCE OR REFERENCE (1) ---------------- PART I ITEM 1. BUSINESS.................................................... 1 ITEM 2. PROPERTIES.................................................. 26 ITEM 3. LEGAL PROCEEDINGS........................................... 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 30 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)...................................... 31 ITEM 6. SELECTED FINANCIAL DATA..................................... 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (3)............................... 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (4)............. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 101 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (5)...... 101 ITEM 11. EXECUTIVE COMPENSATION (6).................................. 101 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (7).............................................. 101 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (6).......... 101 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................... 102
- ------------------------ (1) Certain information is incorporated by reference, as indicated below, from the Annual Report to Stockholders for the fiscal year ended December 31, 1999 (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 18, 2000, (the "Proxy Statement"). (2) Proxy Statement section entitled "Market for Registrant's Common Equity and Related Stockholder Matters." (3) Annual report, pages 26-33, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) Annual report, pages 34-55, 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." PART I ITEM 1. BUSINESS Except where otherwise noted, the words "we," "us," "our," and similar terms, as well as references to "Argosy" or the "Company" refer to Argosy Gaming Company and all of its subsidiaries. We are a leading owner and operator of five riverboat casinos located in emerging gaming markets of the central United States. We pioneered riverboat gaming in St. Louis, Kansas City, Baton Rouge and Sioux City by opening the first casino in each of those markets. Our newest riverboat casino serves the Cincinnati market from Lawrenceburg, Indiana and is one of the largest revenue producing riverboats in the United States gaming industry. We operate the Lawrenceburg casino through a joint venture subsidiary of which we currently own a 57.5% interest. We are a Delaware corporation. Our principal executive offices are located at 219 Piasa Street, Alton, Illinois 62002 and our telephone number is (618) 474-7500. You may obtain additional information about us at our website, www.argosycasinos.com. The following summarizes our casino properties:
PRINCIPAL METROPOLITAN GAMING CASINO NAME MARKETS SERVED 1999 NET REVENUES POSITIONS - ----------- --------------------------------- ----------------- --------- (IN THOUSANDS) Argosy Casino--Lawrenceburg Cincinnati-Dayton-Columbus, Ohio $332,235 2,652 Alton Belle Casino St. Louis, Missouri 88,079 1,010 Argosy Casino--Riverside Kansas City, Missouri 89,813 1,324 Argosy Casino--Baton Rouge Baton Rouge, Louisiana 55,110 1,012 Belle of Sioux City Casino Sioux City, Iowa 28,889 553
In mid-1997, we began implementing a strategic plan that has helped transform us from a company focused on developing casino properties to one recognized for achieving superior operational performance. Our strategy emphasizes increasing revenues and profits through expanding direct marketing programs, investing in state-of-the-art gaming products, such as new slot machines and player tracking systems, and improving cost controls. Our initiatives have had the greatest impact at our four western casinos in Alton, Riverside, Baton Rouge and Sioux City. For the year ended December 31, 1999, net revenues at the western casinos combined increased 20% to $262 million, while EBITDA (earnings before interest, taxes, depreciation and amortization) increased 70% to $58 million. At Lawrenceburg, 1999 net revenues grew to $332 million while EBITDA increased to $123 million, due to increased casino revenues and a full year of hotel operations. Overall, we reported record results in 1999 with a 17% increase in net revenues to $559 million and a 30% increase in EBITDA to $157 million. BUSINESS STRATEGY By capitalizing on the extensive gaming industry experience of our management team, we have developed a strategy to maximize the performance of our operating assets and improve financial results. We continue to implement changes at each of our properties to improve our competitive position, increase gaming revenues and enhance profitability. The key elements of our business strategy include: (1) utilizing direct marketing to encourage repeat business and foster customer loyalty; (2) enhancing the gaming product at our casinos by investing in state-of-the-art gaming equipment; (3) renovating our properties to create more exciting gaming environments; and (4) increasing our financial flexibility to enable us to pursue future business opportunities. - REDIRECT MARKETING EFFORTS TOWARDS DIRECT MARKETING. Our primary marketing focus is through direct and relationship marketing to encourage repeat business and foster customer loyalty. At each of our 1 properties we use sophisticated player tracking systems to identify and reward premium players and our most loyal customers. Based on a player's gaming activity, we create targeted promotions including exclusive direct mail offers and "member's only" concerts, parties, tournaments, sweepstakes and special entertainment events. - INVEST IN NEW GAMING EQUIPMENT. Because slot machines represent 80% of our revenues, we began a program in 1998 to systematically upgrade our gaming product with state-of-the-art slot machines. During 1999, approximately 80% of the maintenance capital was allocated to upgrade gaming product. We believe that regularly replacing slot machines with the most popular products creates a more exciting gaming experience and increases profitability. At our western casinos, the upgraded machines increased the average daily revenue over the older machines they replaced. At Lawrenceburg, additional new slot product helped us take advantage of increased market demand. Going forward we expect to replace an average of 15-20% of our gaming equipment annually. - RENOVATE OUR RIVERBOAT AND DOCKSIDE ENTERTAINMENT FACILITIES.To maintain a fresh and exciting gaming experience for our customers, we have developed a prudent capital investment plan to systematically renovate our casino and entertainment facilities. During 1999 we completed a $19 million project at Alton that replaced the existing entertainment pavilion with a newly renovated barge that was originally used as the Lawrenceburg temporary landing facility and an additional new barge. The Alton renovation significantly enhanced the facility's restaurant and entertainment amenities and added an additional 130 slot machines. In June 1999, we completed a $5 million renovation and retheming of our Baton Rouge riverboat. The renovation of the Baton Rouge riverboat's third deck features approximately 200 of the newest and most popular video poker machines and gaming product upgrades to target the video poker market. In July 1999, we began construction of a $20 million, 300 room convention hotel adjacent to the Baton Rouge riverboat casino. - INCREASE FINANCIAL FLEXIBILITY. In June of 1999, we completed a refinancing which has allowed us to lower our overall cost of capital, reduce our annual borrowing cost by approximately $13 million and provide the flexibility to take advantage of growth opportunities as they arise. In the future, we will look to invest in growth opportunities that add shareholder value while maintaining the proper capital structure. These opportunities could include the potential purchase of the minority interests in our Lawrenceburg casino as well as other strategic opportunities. CASINO PROPERTIES ARGOSY CASINO LAWRENCEBURG PROPERTY: The Lawrenceburg casino is located on the Ohio River in Lawrenceburg, Indiana approximately 15 miles west of Cincinnati and is the closest casino to the Cincinnati metropolitan area. The Lawrenceburg casino is one of the largest riverboats in the United States with 74,300 square feet of gaming space on three levels with 2,004 slot machines and 108 table games. The vessel can accommodate 4,000 passengers; however, to enhance our customers' comfort and enjoyment, we operate at a self-imposed capacity of 3,600 passengers. We typically conduct 9 two-hour cruises seven days a week, with an additional cruise on Friday and Saturday evenings, for a total of 65 cruises per week. Each cruise lasts two hours including a 30 minute boarding time and we charge admission fees ranging from $5 to $9 depending on the time and day of the cruise. Approximately 50% of our weekend cruises are sold out. Indiana gaming law permits dockside gaming only when inclement weather or water conditions prevent a riverboat from cruising. At such times, the Lawrenceburg casino remains dockside and operates on its normal schedule. The complex also includes a 300 room hotel, which was completed in June 1998, a 200,000 square foot land-based entertainment pavilion and support facility featuring a 350 seat buffet restaurant, two specialty restaurants, an entertainment lounge and a 1,800 space parking garage. Employee and overflow parking is provided at a 1,400 space remote lot that is accessed by shuttle bus. We opened the Lawrenceburg casino on December 10, 1996 and, through September 30, 1997, operated from a temporary site utilizing a leased 2 vessel and entertainment and support barge that featured approximately 1,275 gaming positions. Parking for the temporary facility was provided by 1,400 space remote lot from which we operated a shuttle to and from the casino. On October 1, 1997, the Lawrenceburg casino commenced operations from its permanent riverboat vessel, which it used on a limited capacity basis at the temporary site. On December 9, 1997, the Lawrenceburg casino moved to its permanent site and became fully operational in June 1998 with the completion of its hotel. We are the sole general partner of, and hold a 57.5% general partnership interest in, Indiana Gaming Company, L.P., a joint-venture subsidiary of the Company that operates the Lawrenceburg casino. Conseco Entertainment L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29.0% limited partnership interest and certain other investors hold the remaining 13.5% limited partnership interest in the Lawrenceburg partnership. We manage the operations of the Lawrenceburg casino and receive a management fee of 7.5% of EBITDA, while Conseco receives a financial advisory fee of 5.0% of EBITDA. For a more complete description of the partnership agreement see "Lawrenceburg Casino Partnership Agreement." GAMING MARKET: The Lawrenceburg casino draws from a population of approximately 1.6 million residents in the Cincinnati metropolitan area and an additional 5.4 million people who reside within 100 miles of Lawrenceburg, including the major metropolitan markets of Dayton and Columbus, Ohio and, to a lesser extent, Indianapolis, Indiana and Lexington, Kentucky. We are currently adding approximately 18,000 customers to our Lawrenceburg casino database each month. In the Cincinnati market, the Lawrenceburg casino directly competes with one other riverboat casino, which opened in October 1996. A new riverboat casino is expected to open in the third quarter of 2000 located approximately 40 miles from Lawrenceburg in Switzerland County, Indiana. The two riverboat casinos operating in the Cincinnati market generated $453 million of gaming revenues in 1999, a 6% increase from 1998. The Lawrenceburg casino represented 59% of gaming position capacity in the Cincinnati market, and captured 68% of the market's gaming revenues. Secondarily, the Company competes with a riverboat casino in Bridgeport, Indiana in the Louisville, Kentucky area approximately 100 miles from Lawrenceburg. Our closest competitor is located approximately 15 miles further south of Lawrenceburg in Rising Sun, Indiana. A new riverboat casino is expected to open in the third quarter of 2000 located approximately 40 miles from Lawrenceburg in Switzerland County, Indiana. The new competitor will be located even further from Lawrenceburg and we expect it will primarily draw customers from Lexington and the Southern Indiana area. Indiana gaming law currently limits the number of gaming licenses to be issued in the state to a total of 11, including a maximum of 5 licenses along the Ohio River and a limit of one license per county. Casino gaming is not currently permitted under the laws of either Ohio or Kentucky. Our Indiana gaming license is subject to renewal in 2001 and on an annual basis thereafter. Indiana gaming law does not restrict the size of a licensee's gaming facility or place limits on customer losses or betting levels. CAPITAL IMPROVEMENTS: In 1999, we focused our capital improvements at Lawrenceburg on a $1.4 million renovation and upgrade of the riverboat casino to include a high stakes gaming area. ALTON BELLE CASINO PROPERTY: The Alton Belle Casino is located on the Mississippi River in Alton, Illinois approximately 20 miles northeast of downtown St. Louis. We commenced operations in Alton, Illinois in September 1991 as the first gaming facility in Illinois and the St. Louis metropolitan market. Following the success of our original Alton riverboat casino, we built and opened a larger three-deck contemporary style cruise liner. The cruise liner features 26,500 square feet of gaming space, 818 slot machines and 32 table games. In June, Illinois passed a law permitting casinos to offer continuous dockside gaming. As a result, the Alton 3 Belle Casino remains dockside and offers its customers unlimited ingress and egress during its hours of operation. During 1999, we replaced our existing 37,000 square foot entertainment pavilion with a newly-renovated barge that was originally used as the Lawrenceburg temporary landing facility and an additional new barge. The new entertainment pavilion is approximately 60,000 square feet and features a newly designed entrance, 130 additional slot machines, larger and improved food and beverage venues and a new 400 seat main showroom offering better viewing and more comfortable seating. Parking is available at an adjacent city-owned surface parking facility and at two sites in the city of Alton, to and from which we provide valet parking as well as free shuttle service. GAMING MARKET: The Alton Belle Casino generally draws from a population of approximately 2.5 million within the St. Louis metropolitan area and an additional 1.2 million within a 100-mile radius of the City of St. Louis. The target customers of the Alton Belle Casino are drawn largely from the northern and eastern regions of the greater St. Louis metropolitan area, as well as portions of central and southern Illinois. The Alton Belle Casino faces competition from five other riverboat casino companies currently operating in the St. Louis area and expects the level of competition to remain intense in the future. As an Illinois licensee, the Alton Belle Casino is not subject to Missouri's $500 loss limit and therefore has a competitive advantage in attracting high-end customers over competitors operating under Missouri licenses. The riverboat casinos operating in the St. Louis market generated $613 million of gaming revenues in 1999, a 14% increase from 1998. The Alton Belle Casino represented approximately 10% of gaming position capacity in the St. Louis market, and captured approximately 14% of the market's gaming revenues. Illinois gaming law currently limits the number of gaming licenses to be issued in the state to 10. Each license permits the operation of up to two boats as part of a single riverboat gaming operation with a combined maximum of 1,200 gaming positions. Our Illinois gaming license is subject to annual renewal in October 2000. CAPITAL IMPROVEMENTS: During 1999, we replaced our existing entertainment pavilion with the newly renovated barge originally used as the Lawrenceburg temporary facility and an additional new barge. This $19 million project features larger and improved food and beverage venues, approximately 130 additional slot machines and a new 400 seat main showroom offering better viewing and more comfortable seating. ARGOSY CASINO OF GREATER KANSAS CITY PROPERTY: The Argosy Casino of Greater Kansas City is located on the Missouri River in Riverside, Missouri on a 55-acre site approximately five miles from downtown Kansas City. The riverboat features approximately 36,000 square feet of gaming space, 1,090 slot machines and 39 table games. The Kansas City casino began operations in Kansas City, Missouri on June 22, 1994 as the first gaming facility to open in the Kansas City market. During November 1999, Missouri adopted open boarding, allowing customers unlimited ingress and egress, eliminating the two hour mock cruising requirements. The Kansas City casino is complemented by an 85,000 square foot land-based entertainment facility featuring specialty and buffet restaurants, a sports/entertainment lounge and 8,000 square feet of banquet/ conference facilities. A parking garage and surface parking areas with 2,027 spaces are located adjacent to the pavilion. GAMING MARKET: The Kansas City casino draws from a population of approximately 1.6 million in the greater Kansas City metropolitan area and an additional 900,000 within a 100-mile radius of Kansas City. The Kansas City casino site offers convenient access from two major highways. The Kansas City casino 4 primarily attracts customers who reside in the northern and western regions of the Kansas City metropolitan area. We currently face competition from three other casinos in the Kansas City area. The four riverboat casinos operating in the Kansas City market generated $487 million of gaming revenues in 1999, a 6% increase from 1998. Our Kansas City casino represented 14% of gaming position capacity in the Kansas City market, and captured 17% of the market's gaming revenues. Our Missouri gaming license is subject to renewal in June 2000 and again every two years thereafter. CAPITAL IMPROVEMENTS: Our primary capital investment focus at Kansas City in 1999, was the replacement of 115 slot machines, expanded cage operations, additional reserve fill slot stands and interior signage upgrades. ARGOSY CASINO--BATON ROUGE PROPERTY: The Argosy Casino--Baton Rouge is located on the Mississippi River in downtown Baton Rouge, Louisiana. The riverboat features approximately 28,000 square feet of gaming space, 790 slot machines and 37 table games. The Argosy Casino--Baton Rouge began operations in September 1994 as the first riverboat gaming facility in the Baton Rouge market. The Argosy Casino--Baton Rouge is a three-level riverboat casino that typically conducts eight 3-hour cruises seven days of the week. Louisiana gaming law provides that a gaming vessel need not cruise if there is inclement weather or if the river conditions endanger the passengers or crew. During such times that the Argosy Casino--Baton Rouge is prevented from cruising it operates on an unlimited ingress and egress schedule. The riverboat casino is complemented by our adjacent real estate development known as Catfish Town. Catfish Town includes a 50,000 square foot glass-enclosed atrium, entertainment/sports lounge, buffet/coffee shop, conference facilities and approximately 150,000 square feet of retail space that is currently available for lease. Catfish Town is located adjacent to Baton Rouge's convention complex, the Centroplex, which has a 12,000-seat arena and a 30,000-square foot exhibition hall. The Argosy Casino--Baton Rouge provides parking at a 733-space parking garage and a 271-space surface parking lot adjacent to Catfish Town. GAMING MARKET: The Argosy Casino--Baton Rouge draws from a population of approximately 540,000 in the Baton Rouge metropolitan area. The Baton Rouge casino faces competition from one casino located in downtown Baton Rouge, a nearby Native American casino and multiple casinos throughout Louisiana. The two riverboat casinos operating in the Baton Rouge market generated approximately $139 million of gaming revenues in 1999, a 19% increase from 1998. The Argosy Casino--Baton Rouge represented 45% of gaming position capacity in the Baton Rouge market, and generated 38% of the market's gaming revenues. The casinos benefited from the elimination of video poker machines in non-casino locations in the majority of Baton Rouge parishes as of July 1, 1999. In June, we completed a renovation of the Argosy Casino--Baton Rouge's facilities to aggressively pursue the approximately $80 million portion of the video poker market that was eliminated. Our Louisiana license is subject to renewal in July of each year. CAPITAL IMPROVEMENTS: In June, 1999, we completed a nearly $5 million renovation and retheming of all three levels of our Baton Rouge casino. The major upgrade features an exciting new Caribbean pirate theme and a reconfigured third deck including a video poker area with its own separate service and featuring the newest and most popular video poker machines available. JAZZ ENTERPRISES: Jazz Enterprises, Inc. owns and operates the Catfish Town development adjacent to the riverboat casino. The development of the historical Catfish Town riverfront warehouse district into a 5 retail/entertainment district was an integral element in obtaining a Louisiana gaming license for the Argosy Casino--Baton Rouge. Our original intent was to develop and operate the casino and our joint-venture partner would develop and manage the Catfish Town real estate and hotel. In 1995 our real estate partner experienced financial difficulties, and to preserve our gaming license, we purchased Jazz Enterprises, Inc. Pursuant to a development agreement, Jazz Enterprises, Inc. has certain obligations to the City of Baton Rouge including the obligation to construct a convention size hotel or collect and pay to the City an incremental head tax of $2.50 per passenger, fund a transportation system connecting downtown Baton Rouge and Catfish Town and to develop the Catfish Town facility to accommodate restaurants, retail space and entertainment and restaurant facilities. During July 1999, we began construction of a $20 million 300-room hotel in Baton Rouge to fulfill our obligations under the development agreement. We expect that annual cash flows at Baton Rouge will benefit by $3 million due to the elimination of the incremental head tax based on current passenger boarding levels. The incremental head tax reduction for 1999 was approximately $1.6 million. BELLE OF SIOUX CITY PROPERTY: The Belle of Sioux City is located on the Missouri River in downtown Sioux City, Iowa. The riverboat features 12,500 square feet of gaming space, 427 slot machines and 21 table games. The Belle of Sioux City typically conducts one two-hour cruise each day for 100 days per year. At all other times the Belle of Sioux City remains dockside and operates with unlimited ingress and egress. The casino is complemented by adjacent barge facilities featuring buffet dining facilities, meeting space and administrative support offices. We became the manager of the Belle of Sioux City on October 4, 1994 and on December 1, 1994 began operating the Belle of Sioux City through a partnership in which we are a 70% general partner and Sioux City Riverboat Corp., Inc. is a 30% limited partner. As manager of the casino we receive a management fee of 4.5% based upon the facility's adjusted gross gaming revenues (as defined in the management agreement). GAMING MARKET: The Belle of Sioux City draws from a population of approximately 80,000 in Sioux City and an estimated 100,000 residents within a 40-mile radius of Sioux City. The Belle of Sioux City competes primarily with land-based Native American casinos that are not required to report gaming revenues and other operating statistics, therefore market comparisons cannot be made. We also compete with certain providers and operators of video gaming in the neighboring state of South Dakota. In addition, we compete with slot machines at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs/Omaha, Nebraska market. Our Iowa gaming license is subject to annual renewal each March. CAPITAL IMPROVEMENTS: In 1999 we spent $2.4 million to enhance our customers' gaming experience at the Belle of Sioux City. Specifically, we replaced approximately 250 slot machines and completely renovated the riverboat's interior, including new ceilings, lighting, wallcovering and carpeting. INSURANCE We carry property and casualty insurance on our land-based assets and our vessels, generally in the amount of their replacement costs, with a nominal deductible with respect to our land-based assets and a deductible equal to 2% of the replacement value of the vessels. Our land-based assets are not currently covered by flood insurance. Our 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. Our general liability insurance with respect to our 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 we have a $250,000 per occurrence deductible with a $1 million per occurrence limit. We carry business interruption 6 insurance at our properties which carry a deductible ranging from 14 to 30 days depending on the location and maximum coverage of up to $35 million. COMPETITION The U.S. gaming industry is intensely competitive and features many participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery and poker machines not located in casinos, Native American gaming and other forms of gambling in the United States. Gaming competition is particularly intense in each of the markets where we operate. Historically, we have been an early entrant in each of our markets; however, as competing properties have opened, our operating results in each of these markets have been negatively affected. Many of our competitors have more gaming industry experience, are larger and have significantly greater financial and other resources. In addition, some of our direct competitors in certain markets may have superior facilities and/or operating conditions in terms of: (i) dockside versus cruising riverboat gaming; (ii) multiple riverboat casinos, which feature more continuous boarding; (iii) amenities offered at the gaming facility and the related support and entertainment facilities; (iv) convenient parking facilities; (v) a location more favorably situated to the population base of a market and ease of accessibility to the casino site; and (vi) favorable tax or regulatory factors. There could be further competition in our markets as a result of the upgrading or expansion of facilities by existing market participants, the entrance of new gaming participants into a market or legislative changes. We expect each market in which we participate, both current and prospective, to be highly competitive. MARKETING We have changed our marketing focus from mass marketing to direct and relationship marketing in order to encourage repeat business and foster customer loyalty. We have designed an overall marketing strategy to attain our objective of utilizing direct marketing as our primary means of communicating with our customers. Although the marketing plan for each of our properties is tailored to the specific needs of the site, the overall strategic components are relatively constant: - Further refine and enhance our database marketing efforts; - Create a full-service player development program to service our premium customers; - Aggressively market our gaming product and facility improvements; - Refine, enhance and expand the schedule of parties, events and entertainment; and - Utilize public relations as a tool to increase awareness, and reinforce marketing efforts by publicizing winners. A key tactic in implementing our overall strategy is the effective use of the information we obtain regarding our customers' playing activity. At each of our properties, we encourage patrons to join the Argosy Preferred Club. We then track the member's level of play through the use of sophisticated player tracking systems. As of December 31, 1999, we had over 800,000 active Preferred Club members and we are adding, on average, over 20,000 new members each month. In 1998, we engaged database managers to enhance our database and oversee our data collection and utilization programs. Utilizing the information from our database, we create targeted promotions including exclusive direct mail offers and "members only" parties, tournaments, sweepstakes and special entertainment events. EMPLOYEES As of December 31, 1999, we employed approximately 4,394 full-time and 656 part-time employees. Approximately 2,286 employees, located throughout our properties, are represented by the Seafarers International Union of North America. We have collective bargaining agreements with that union which 7 expire at various times between June 2003 and June 2004. In Alton eleven of our employees are represented by the International Brotherhood of Electrical Workers and approximately 85 employees are represented by the United Plant Guard Workers of America. In addition, 23 employees located throughout our properties except Alton are represented by American Maritime Officers Union. We have not experienced any work stoppages and believe our labor relations are generally satisfactory. LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT GENERAL. Through our wholly-owned subsidiary, The Indiana Gaming Company, we are the majority partner in Indiana Gaming Company L.P., the Indiana partnership that owns and operates the Lawrenceburg casino. The Indiana Gaming Company, is the sole manager of the partnership and receives a fee of 7.5% of EBITDA (as defined in the partnership agreement). The Indiana Gaming Company's management of the casino is subject only to certain actions or major decisions which require the consent of a majority in interest of the limited partners. The largest minority partner, Conseco, receives a financial advisory fee of 5.0% of EBITDA. PARTNER DISTRIBUTIONS. After principal and interest on capital loans is repaid, cash flow is distributed to the partners as follows: - first, to the partners pro rata for tax payments in an amount equal to their taxable net income for such period; - 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; - third, in payment of a preferred return of 14% on any preferred equity contributed by the partners; - fourth, as a return of the preferred equity contributed by the partners; - fifth, as a return of common equity contributed by the partners; and - sixth, to the partners in accordance with their respective percentage interests. These distributions are required to be made no less frequently than quarterly, but historically, they 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. PARTNERSHIP INTEREST BUY-SELL OBLIGATIONS. The Lawrenceburg partnership agreement provides that: (i) 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) or (ii) at any time after a deadlock by the partners 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. After the selling partner gives notice of its intent to sell, the partners have 60 days to attempt in good faith to agree to a purchase price. If no agreement is reached within 60 days, then the selling partner's interest is appraised to determine its fair market value. After the appraised fair market value of the selling partner's interest is determined, the other partners have 60 days to reject a purchase at that price. After such a rejection, the general partner is required to solicit bids and sell all of the assets of the Lawrenceburg partnership within twelve months to the highest bidder and following such sale, dissolve Indiana Gaming Company L.P. No assurance can be given that we will have sufficient funds to acquire any selling partner's interest in the circumstances provided for above or that we will choose to make such a purchase. In such an event, the assets of the Lawrenceburg partnership would have to be sold to the highest bidder as provided above, 8 which could result in our losing control of the Lawrenceburg casino. If we sold the assets of the Lawrenceburg partnership, any outstanding amounts under the credit facility would be accelerated and under the indenture we would be required to make an offer to purchase the exchange notes. In addition, the partnership agreement provides all partners with a right of first refusal on transfers of any partnership interest. A foreclosure by a secured creditor, such as the lenders under the credit facility, would constitute a transfer of our partnership interest and under the partnership agreement provides all partners a right of first refusal on that partnership interest. REMOVAL AS GENERAL PARTNER. The partnership agreement provides that The Indiana Gaming Company, can be removed as general partner of the partnership by the limited partners under certain limited circumstances, including: - 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; - if the general partner is convicted of embezzlement or fraud; - certain bankruptcy events; - if our partnership interest in the Lawrenceburg partnership is less than 40% due to sales or dilution for failure to pay required capital; - 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; - certain acts by the general partner constituting "gross mismanagement;" and - if a secured creditor, such as the lenders under the credit facility, were to foreclose on the pledge of our partnership interest in the Lawrenceburg partnership. Upon removal, the general partnership interest 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 above, other than a less than 40% ownership, the limited partners may acquire all, but not less than all, of The Indiana Gaming Company's interest for fair market value as determined by an appraisal process. 9 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. Newly enacted legislation eliminated the prohibition on gaming operations in counties with populations over 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). 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 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). Our Illinois gaming license is subject to renewal in October, 2000. Newly enacted legislation has extended the renewal period from annually to once every four years. Our license is eligible for renewal upon: - payment of a $5,000 fee; and - the Illinois Gaming Board's determination that we continue 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. 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 10 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. We are required to obtain formal approval from the Illinois Gaming Board for changes in: - our key personnel, including our officers, directors, managing agents, or holders of a 5% or greater ownership interest in the business entity; - our organizational form; - our equity and debt capitalization; - our investors and/or debt holders; - our sources of funds; - our economic development plan; - the Alton Belle Casino's capacity or significant design changes; - the number of gaming positions available on the Alton Belle Casino; - anticipated economic impact; or - oral or written agreements relating to 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: - working capital requirements; - debt service requirements; - requirements for repairs and maintenance; and - 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; - be accessible to disabled persons; - be either a replica of a 19th century Illinois riverboat or be a casino cruise ship design; and - comply with applicable federal and state laws, including but not limited to U.S. Coast Guard regulations. Pursuant to legislation enacted in June, 1999, we are not required to cruise and may conduct gaming activities while remaining dockside offering unlimited ingress and egress to our patrons. In addition, the legislation removed the ownership restriction. The legality of the legislation is currently being challenged in the Illinois Court system. There can be no assurance that the legislation will be found to be valid. If found invalid, we would be required to cruise. 11 The Riverboat Act imposes a graduated wagering tax based on adjusted gross receipts from gambling games at the following rates:
ADJUSTED GROSS RECEIPTS TAX RATE - ----------------------- -------- Up to $25,000,000............................... 15% $25,000,001 to $50,000,000...................... 20% $50,000,001 to $75,000,000...................... 25% $75,000,001 to $100,000,000..................... 30% $100,000,001 and above.......................... 35%
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 the Alton Belle Casino. 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. We also pay a $.25 admission tax to the City of Alton for each person admitted to the Alton Belle Casino. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming as it may deem necessary and proper and into alleged violations of the Riverboat Act. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to riverboat gaming operations at all times. A holder of any license is subject to the imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or suspend licenses, as the 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 is empowered to administer, regulate and enforce the system of riverboat gaming established under Indiana's Riverboat Gambling Act (the "Indiana Riverboat 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 12 Indiana Riverboat 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 not more than 11 owner's licenses statewide. Each license 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 follows: - two licenses for riverboats operating from Gary; - one license for a riverboat operating in Hammond; - one license for a riverboat operating in East Chicago; - one license for a riverboat operating in any city located in LaPorte, Porter or Lake counties, not including the above-named cities; - 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 - 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 after the effective date of the license. 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 eligible for an owner's license pursuant to the Indiana Riverboat Act and the rules and regulations adopted thereunder. Our 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 any person in which the applicant has an equity interest of at least one percent (1%) of all shares. 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 13 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 - 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 and the penalty of perjury 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 and not for the purpose of causing, directly or indirectly, the election of a majority of the board of directors, any change in the corporate charter, bylaws, management, policies or operations of a riverboat licensee; - the name, address, telephone number, social security number or federal tax identification number of the officers and directors, or their equivalents, of the institutional investor, as well as 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 list of all regulatory agencies with which the institutional investor, or an affiliate that beneficially owns voting securities of the riverboat licensee, files periodic reports; 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. 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; 14 - 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 Indiana Riverboat Act imposes a tax on admissions to gaming excursions at a rate of $3.00 for each person admitted to each 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. The number and issuance of tax-free passes is subject to the rules of the Indiana Gaming Commission. A list of all persons to whom the tax-free passes are issued must be filed with the Indiana Gaming Commission. A tax is imposed on the adjusted gross receipts received from gaming games under the Indiana Riverboat 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 Indiana Riverboat 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: - have a valid certificate of inspection from the U.S. Coast Guard to carry at least 500 passengers; and - 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 - 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 - 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: - the master determines that the conditions have sufficiently diminished for the riverboat to safely proceed; or - 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 15 applicant that exceeds the total dollar amount of $50,000 shall be a written contract. A riverboat license applicant means an applicant for a riverboat owner's license that has been issued a certificate of suitability. Pursuant to Indiana Gaming Commission rules, riverboat licensees and riverboat license applicants must submit: - an internal control procedure regarding purchasing transactions which must contain provisions regarding ethical standards, compliance with state and federal laws, and prohibitions on the acceptance of gifts and gratuities by purchasing and contracting personnel from suppliers of goods or services; - 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 - 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 that is not in compliance with Indiana law and Indiana Gaming Commission rules or that does not maintain the integrity of the riverboat gambling industry. 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 Indiana Riverboat 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 women's' business enterprises such that 10% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts for goods and services be expended with minority enterprises and 5% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts for goods and services 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. However, if a determination is made that a person holding an owner's license has failed to demonstrate compliance, the person has ninety (90) days from the date of determination to comply. 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 16 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. 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 nonprofit 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 limited to 10 and restricted to the counties where such boats were operating (or licensed to operate in the future) as of May 1, 1998. 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. Our Iowa gaming license is subject to renewal in March 2000. The Iowa Commission has broad discretion with regard to such renewals. The annual license fee to operate an excursion gambling boat is based on the passenger carrying capacity, including crew, for which the excursion gambling boat is registered. The annual fee is five dollars per person capacity. Licenses issued by the Iowa Commission may not be transferred to another person or entity. We 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 17 debit cards or coins. Wagers may only be made by persons 21 years of age and older. A licensee may not accept a credit card to purchase coins, tokens or other forms of credit to be wagered on gambling games. The legislation imposes a graduated tax based on adjusted gross receipts at the following rates:
TAX ADJUSTED GROSS RECEIPTS RATE - ----------------------- -------- Up to $1,000,000................................ 1% $1,000,001 to $3,000,000........................ 10% $3,000,001 and above............................ 20%
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. An admission tax paid to the City of Sioux City and the Casino's non profit partner is imposed for each person admitted to the Belle of Sioux City Casino based upon a graduated scale at the following rates: $2.00 for each passenger up to 300,000 $3.00 for each passenger over 300,000 but not over 500,000 $3.50 for each passenger over 500,000 Additionally, the Belle of Sioux City is required to pay a fee to Woodbury County in the amount of $.25 per passenger, up to $300,000. Pursuant to its rule making authority, the Iowa Commission requires officers, directors, owners, partners, joint venturers, trustees or other persons who have a beneficial interest, direct or indirect, of 5 percent or more, of the Company to be licensed by the Iowa Commission. The Iowa Commission has jurisdiction to deny, suspend or revoke the license of an applicant or licensee in which a director, officer, or holder of a beneficial interest includes or involves any person or entity which would be, or is, ineligible in any respect, such as through want of character, moral fitness, financial responsibility, professional qualifications or due to failure to meet other criteria employed by the Iowa Commission, to participate in gaming. The Iowa Commission may order the ineligible person or entity to terminate all relationships with the licensee or applicant, including divestiture of any ownership interest or beneficial interest at acquisition cost. Any contract in excess of $50,000 must be submitted to and approved by the Iowa Commission. 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. A gaming license is issued for five years and the Company's license will be subject to renewal in March 2000. 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 18 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, were transferred to the Louisiana Gaming Control Board. The Louisiana Enforcement Division retains certain enforcement powers and responsibilities relative to investigations, audits, and imposing regulatory sanctions that are subject to administrative review. The laws and regulations of Louisiana seek to: - prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; - establish and maintain responsible accounting practices and procedures; - maintain effective control over the financial practices of licensees, including establishing procedures for reliable record keeping and making periodic reports to the Board; - prevent cheating, and fraudulent practices; - provide a source of state and local revenues through fees; and - ensure that gaming licensees, to the extent practicable, employ and contract with Louisiana residents, women and minorities. The Louisiana Act specifies certain restrictions and conditions relating to the operation of riverboat gaming, including but not limited to the following: - 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; - each round trip riverboat cruise may not be less than three nor more than eight hours in duration, subject to specified exceptions; - agents of the Board are permitted on board at any time during gaming operations; - gaming devices, equipment and supplies may be purchased or leased from permitted suppliers; - gaming may only take place in the designated gaming areas and upon designated rivers or waterways; - 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; - wagers may be received only from a person present on a licensed riverboat; - persons under 21 are not permitted in designated gaming areas; - except for slot machine play, wagers may be made only with tokens, chips or electronic cards purchased from the licensee aboard a riverboat; - 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; - licensees must have adequate protection and indemnity insurance; - licensees must have all necessary federal and state licenses, certificates and other regulatory approvals prior to operating a riverboat; and 19 - gaming may only be conducted in accordance with the terms of the license and the rules and regulations adopted by the Board. The transfer of a license or permit or an interest in a license or permit is prohibited without prior approval of the Louisiana Gaming Control Board. The sale, purchase, assignment, transfer, pledge or other hypothecation, lease, disposition or acquisition 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 review and approval or disapproval. A security issued by a corporation that holds a license must disclose these restrictions, although a publicly traded corporation incorporated before January 15, 1992 is only required to include the statement of restrictions for certificates issued after the corporation applies for a license. 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. Section 2523 of the Regulations requires 60 days prior notification to and prior approval from the Board of: - the application for, receipt, acceptance or modification of a loan; - the use of any cash, property, credit, loan or line of credit; or - guarantee or granting of other forms of security for a loan by a licensee or person acting on a licensee's behalf. There are exceptions to prior written approval including exceptions for 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 registered with the SEC and 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: - receive dividends or interest on securities of the corporation; - exercise directly or indirectly a right conferred by securities of the corporation; - receive remuneration or economic benefit from the licensee; or - continue in an ownership or economic interest in the licensee. Fees for conducting gaming activities on a riverboat include: - $50,000 per riverboat for the first year of operation and $100,000 per year per riverboat thereafter; - a state franchise fee of 15% of net gaming proceeds; - a state license fee of 3.5% of net gaming proceeds; and - 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 20 presenting historical data that are submitted to the Board, including annual financial statements that have been audited by an independent certified public accountant. 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 in non-casino locations commencing July 1, 1999. 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. Opponents of gaming in Missouri have brought several legal challenges to gaming in the past and may possibly bring similar challenges in the future. There can be no assurances that any future challenges, if brought, would not further interfere with full-scale gaming operations in Missouri, including the operations of the Company and its subsidiaries. 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. 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 applications which include detailed personal financial information and are subject to thorough investigations. All gaming employees must obtain an annual occupational license issued by the Missouri Gaming Commission. Operators' 21 licenses are issued through application to the Missouri Gaming Commission, which requires, among other things: - investigations into an applicant's character, financial responsibility and experience qualifications; - the submission of an affirmative action plan for the hiring and training of minorities and women; - the submission of an economic development or impact report. License fees are a minimum of $50,000 for the initial application and a minimum $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 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: (1) riverboat excursions are limited to a duration of four hours, and gaming may be conducted at any time during the excursion; (2) 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; (3) 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) any transfer or issuance of an ownership interest in a gaming licensee (or holding company) that is not a publicly held entity or (b) any pledge or hypothecation of, or grant of any type of security interest (collectively, a "lien") in, an ownership interest in a gaming licensee (or a holding company) that is not a publicly held entity (which lien may only be made to or held by a financial institution), provided that no such ownership interest may be transferred pursuant to any such lien without a separate notice being given to the Missouri Gaming Commission; (4) at least 15 day's prior notice must be given to the Missouri Gaming Commission of the intention to consummate any of the following transactions (and the Missouri Gaming Commission may reopen the licensing hearing of the applicable gaming licensee prior to or following the consummation of such transaction to consider the effect of the transaction on the gaming licensee's suitability): (a) any issuance of ownership interests in a publicly held gaming licensee (or holding company), if such issuance would involve, directly or indirectly, an amount of ownership interests equaling 5% or more of the ownership interests in the gaming licensee (or holding company), (b) any private incurrence of debt of $1,000,000 or more by a Class A licensee (or any affiliated holding company), 22 (c) any public issuance of debt by a Class A licensee (or any affiliated holding company) or (d) any significant related party transactions; (5) consummation of the following transactions must be reported to the Missouri Gaming Commission no later than 7 days after such consummation: (a) any transfer or issuance of ownership interests in a publicly held gaming licensee (or holding company), if such transfer or issuance has resulted in any entity or group of entities acting in concert owning, directly or indirectly, a total amount of ownership interests equaling 5% or more of the ownership interests in the gaming licensee or holding company or (b) the creation of any lien in 5% or more of the ownership interests in a publicly held gaming licensee (or holding company), provided that no such ownership interest may be transferred voluntarily or involuntarily pursuant to any such lien without a separate notice being given to the Missouri Gaming Commission; (6) any Class A licensee must notify the Missouri Gaming Commission of its intention or the intention of any affiliated entity to consummate any transaction that involves or relates to the gaming licensee and has a dollar value of $1,000,000 or more no later than 7 days after the consummation of such transaction; (7) the license held by a gaming licensee automatically becomes null and void upon any change in control of the licensee (or its holding company) unless the Missouri Gaming Commission has given its prior approval for such change in control; (8) no withdrawals of capital, loans, advances or distributions of any type of assets in excess of 5% of the accumulated earnings of a Class A licensee to anyone with an ownership interest in the licensee may occur without the prior approval of the Missouri Gaming Commission; (9) the Missouri Gaming Commission may take appropriate action against a licensee or other person who has been disciplined in another jurisdiction for gaming related activity; and (10) no holder of a Class A license may enter into any contract relating to its licensed activities for consideration in excess of fair market value. 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 gambling devices, 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, U.S. 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. We began dockside operations in August 1995. Dockside gaming in Missouri may differ from dockside gaming in 23 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 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 may not make a wager on an excursion gambling boat and may 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, an annual 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. LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally prohibited form of lottery. In order to amend the Kansas constitution, two-thirds of the members of each house of the Kansas legislature and a majority of Kansas voters would have to approve a proposed amendment. Several Kansas racetracks have publicly lobbied for the right to conduct casino games. In early 1999, the Kansas state legislature failed to pass a bill which would have authorized casino gambling within its borders. The State of Kansas has approved Class III Indian compacts with four separate tribes authorizing the tribes to conduct table and keno games, but not slot machines, on their respective reservation lands. One such casino is open and is located approximately 60 miles from Kansas City. KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally prohibited form of lottery. In order to amend the Kentucky constitution, three-fifths of the members of each house of the Kentucky legislature and a majority of Kentucky voters would have to approve a proposed amendment. Several Kentucky racetracks have publicly lobbied for the right to conduct casino games and the current governor of Kentucky recently has withdrawn a previously proposed constitutional amendment to allow 12 to 14 land-based casinos to operate, mainly along Kentucky's borders, at convention hotels. The Kentucky attorney general's office has stated that a constitutional amendment is necessary to permit casino gaming. 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. A proposed constitutional amendment which would allow casino gambling on Indian lands in Nebraska subject to a vote of the people was introduced in the Nebraska legislature in January 2000. The Resolution failed to receive the necessary five affirmative committee votes needed to advance for further consideration. 24 FEDERAL AND NON-GAMING REGULATIONS We 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. We have not made, and do 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 us. 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 us 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, the outside of the hull of the vessels must be inspected. The U.S. Coast Guard has developed a pilot program which utilizes underwater equipment to complete a hull inspection while the vessel remains in service. This procedure was utilized to inspect the Alton casino in February 1998. If the procedure is ever disapproved by the U. S. Coast Guard, we would be required to remove a riverboat from service and seek to lease another riverboat casino or discontinue operations for the inspection period. All of our shipboard employees 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. We are subject to the provisions of the Americans With Disabilities Act but do not anticipate incurring significant expenses to bring our facilities or procedures into compliance with such Act. The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires banks, other financial institutions and casinos to monitor receipts and disbursements of currency in excess of $10,000 and report them to the United States Department of the Treasury (the "Treasury"). In management's opinion, the BSA may have resulted in a reduction in the volume of play by high level wagerers. The Treasury has proposed tentative amendments to the BSA which would apply solely to casinos and their reporting of currency transactions. The most significant proposed change in the BSA is a reduction in the threshold at which customer identification data must be obtained and documented by the casino, from $10,000 to $3,000 (which may include the aggregation of smaller denomination transactions). Additionally, the amendments would substantially increase the record-keeping requirements imposed upon casinos relating to customer data, currency and non-currency transactions. Management believes the proposed amendments, if enacted in their current form, could result in a further reduction in the volume of play by upper-and middle-level wagerers while adding operating costs associated with the more extensive record-keeping requirements. However, we do not expect that the effect on our operations would be material. 25 ITEM 2. PROPERTIES The following is a list of the Company's principal properties as of December 31, 1999. 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 and its $200 million Senior Secured Credit Facility Agreement dated June 8, 1999.
INTEREST FUNCTION (1) LEASE EXPIRATION -------- ------------------------------------ ----------------------- ALTON, ILLINOIS Office Building Leased Executive Offices Real Property Leased Landing Rights Alton Belle II Owned Riverboat Casino Office Building Owned Offices Support Barges Owned Landing and Office facilities Month to Month Spirit of America Barge Owned Staging Vessel April 2001(3) RIVERSIDE, MISSOURI Real Property Leased Landing Rights Real Property Owned Permanent Landing Site Argosy IV Owned Riverboat Casino December 2004(3) 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(3) SIOUX CITY, IOWA Argosy V Owned Riverboat Casino Support Barge Owned Staging Barge Real Property Leased Landing Rights June 2002
- ------------------------ (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. (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) Renewal options available. 26 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. V. 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 unfair trade practices 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 Gaming Enforcement Division. 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 Shareholders 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 offset rights against such deferred purchase price payments for indemnification claims of the Company against the Former Jazz Shareholders and for liabilities that the Former Jazz Shareholders 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 offset 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 Capitol 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, 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 Jazz Shareholders, 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 that was issued to the Company. The suit alleges the same, or substantially similar, facts that formed the basis of the federal claim which was dismissed on November 17, 1997. The defendants 27 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. 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 Jazz Shareholders. On behalf of Jazz and the Former Jazz Shareholders, a supervisory writ was filed with the First Circuit Court of Appeal, State of Louisiana, seeking a dismissal of the claims. Capitol House has also 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 filed a Motion for Rehearing before the Court of Appeal, which was ultimately denied. Thereafter, Jazz and the Former Jazz Shareholders filed a writ of certiorari to the Louisiana Supreme Court, which writ was also denied. Jazz and the Former Jazz Shareholders are now conducting discovery and intend to file additional exceptions and/or motions for summary judgment in the trial court. Capitol House's appeal of the trial court's dismissal of Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam was finally argued before the First Circuit, which reversed the trial court's ruling and overturned the defendants' peremptory exception of no cause of action thereby causing these defendants to return to this litigation. Argosy, Argosy of Louisiana and the Partnership have filed a writ or certiorari with the Louisiana Supreme Court which is still pending. The Louisiana Supreme Court denied to grant the defendants' writ application, thus defendants will be joined with Jazz and the Former Jazz Shareholders to assert their additional defenses in this matter by various exceptions and/or motions for summary judgment. An adverse ruling in this matter could have 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 damages based on claims of breach of fiduciary duty and 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 plaintiff's claims are derivative in nature, and that plaintiff has failed to comply with the demand requirements under Iowa limited partnership law. Also, plaintiff 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. Plaintiff has since filed a Third and Fourth Amended Petition, adding a claim for fraudulent nondisclosure. The Court has denied one of Argosy's motions for partial summary judgment. The Court has scheduled May 30, 2000 for the trial date. The discovery cutoff deadline for the parties is April 28, 2000. Plaintiff designated its experts on February 28, 2000, and defendants must designate their experts by April 17, 2000. A settlement conference, if required, is set for May 24, 2000. The parties have exchanged discovery. Depositions are proceeding. The Company is unable to determine what effect, if any, the suit would have on its business or operations. PENDING INTERNAL REVENUE SERVICE AUDIT In November 1994, the Internal Revenue Service ("IRS") began a combined audit for the 1992 and 1993 tax years of Argosy Gaming Company (the "Company"), and the Company's predecessors in interest, Metro Tourism & Entertainment, Inc. ("Metro"), Alton Riverboat Gambling Partnership ("ARGP"). 28 Metro and J. Connors Group, Inc. ("Connors") were the partners of ARGP which until the Company's initial public offering in February 1993 owned and operated the Alton, Illinois riverboat casino. The principal issues raised by the IRS involve the status of Metro as an S corporation and the deductibility of the $8.5 million accommodation fee paid to William McEnery in 1992 and 1993. The total Federal income tax liability asserted by the IRS against the Company is approximately $11.5 million including interest through December 31, 1999. The Company is currently contesting the proposed adjustments with the IRS Appeals Office. Management does not expect the lawsuit will have a material adverse effect on the Company's financial position or results of operations. STEVEN B. SMALL ET AL. V. HARRAHS ET AL. In November 1997, the Missouri Supreme Court issued a ruling striking down a legislative definition of the Missouri and Mississippi Rivers in the context of a constitutional amendment permitting gaming on the Missouri and Mississippi Rivers. Following the decision of the Missouri Supreme Court, Steven B. Small filed a putative class action against the Missouri Gaming Company and other gaming companies in the Kansas City area in the United States District Court for the Western District of Missouri. STATE OF MISSOURI, EX. REL. STEVEN B. SMALL, ET AL., V. HARRAH'S NORTH KANSAS CITY CORP., ET, AL. Small asserted that the licenses of the Missouri Gaming Company and the other defendants were invalid and that the defendants were violating federal and state laws, including the Racketeer Influenced Corrupt Organizations Act. Small also asserted that the Missouri Gaming Company and other defendants threatened him in violation of the Hobbs Act. Small also claimed that for a period of time the Missouri Gaming Company's boat cruised into Kansas. Small sought to recover his losses as well as all losses sustained by the putative class plus injunctive relief. Small never obtained certification of a class. In June 1998, the District Court of Missouri dismissed Small's action against the Missouri Gaming Company. Small appealed the decision to the United States Court of Appeals for the Eighth Circuit. THE PEOPLE OF THE STATE OF MISSOURI, ET AL. V. HARRAH'S--NORTH KANSAS CITY CORPORATION, ET AL. The Eighth Circuit affirmed the District Court's decision. On October 30, 1998, Small filed an action seeking declaratory relief in the Circuit Court of the Circuit Court of Cole County, Missouri. The relief sought was a declaration that the gaming operators were conducting illegal games of chance. The Circuit Court of Cole County dismissed Small's action without providing the relief sought. Small has appealed the decision to the Missouri Court of Appeals for the Western District of Missouri. PEOPLE OF THE STATE OF MISSOURI EX. RE. STEVEN B. SMALL, APPELLANT V. HARRAH'S NORTH KANSAS CITY CORP., ET AL. The appeal remains pending. 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. 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 L.P. and is being used for development and operation of the riverboat gaming facility in the City for which Indiana Gaming L.P. has been awarded a riverboat owner's license by the Commission. Defendants are the District and its individual directors. In 1998, Indiana Gaming L.P. 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. 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 29 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 suits 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 amended complaint. The parties have fully briefed the Plaintiff's motion for class certification and are awaiting a decision from the court. On June 22, 1999 the Court ordered that the plaintiffs could conduct limited class discovery on the defendants promotional and advertising documents. The Plaintiff's currently are conducting such discovery. The Company is unable to determine what effect, if any, the suit would have on its business or operations. INTERIM HOLDINGS, L.L.C. VS. ARGOSY GAMING COMPANY, ET AL On January 6, 2000, the Company was named as a defendant in a lawsuit filed by Interim Holdings, L.L.C., in the Circuit Court of St. Louis County, Missouri, in a case styled INTERIM HOLDINGS, L.L.C. V. ARGOSY GAMING COMPANY, ET AL. The Company has removed the case to federal court, where a motion for remand is pending. The lawsuit is styled as a "bill in equity." It concerns a loan and consulting agreement entered into between Argosy and a Floyd Warmann and Interim Holdings, Inc., as part of Argosy's attempt to obtain lease rights for a gaming facility in downtown St. Louis. The complaint alleges that Argosy's consulting payments and loans to Warmann, in return for his working to obtain lease rights for a potential St. Louis gaming facility, defrauded the creditors of Warmann. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 30 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
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net revenues..................... $ 594,554 $ 506,668 $ 344,083 $ 244,817 $ 252,691 Income (loss) from operations.... 123,025 87,811 6,530 (10,751) 27,662 Net income (loss)................ 11,479 5,741 (40,213) (24,839) 6,953 Diluted net income (loss)........ 0.40 0.23 (1.65) (1.02) 0.29 Weighted average diluted common shares outstanding........... 28,920,656 24,604,485 24,333,333 24,333,333 24,333,333 ---------- ---------- ---------- ---------- ---------- PRO FORMA NET INCOME DATA (UNAUDITED):(1) Pro forma net income............. $ 5,712 Diluted pro forma net income per share.......................... 0.23 Pro forma, diluted shares outstanding.................... 24,333,333 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets..................... $ 566,860 $ 562,752 $ 559,856 $ 530,528 $ 309,882 Long-term debt, including current maturities....................... 379,373 424,000 449,790 380,208 169,702 Total stockholders' equity....... 58,245 40,863 32,663 72,701 97,540 ---------- ---------- ---------- ---------- ----------
- ------------------------ (1) Pro forma net income per share for the year ended December 31, 1995, reflect the Company's June 7, 1995, acquisition of Jazz Enterprises, Inc. as if the acquisition had occurred on January 1, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Annual Report, pages 26-33 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 34-55, 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". 31 FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X. FINANCIAL STATEMENTS OF ALTON GAMING COMPANY Report of Independent Auditors.................. 33 Balance Sheets.................................. 34 Statements of Income............................ 35 Statements of Stockholder's Equity.............. 36 Statements of Cash Flows........................ 37 Notes to Financial Statements................... 38 FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY Report of Independent Auditors.................. 42 Balance Sheets.................................. 43 Statements of Operations........................ 44 Statements of Stockholder's Equity.............. 45 Statements of Cash Flows........................ 46 Notes to Financial Statements................... 47 CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC. Report of Independent Auditors.................. 51 Consolidated Balance Sheets..................... 52 Consolidated Statements of Operations........... 53 Consolidated Statements of Stockholder's Deficit....................................... 54 Consolidated Statements of Cash Flows........... 55 Notes to Consolidated Financial Statements...... 56 FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM Report of Independent Auditors.................. 61 Balance Sheets.................................. 62 Statements of Operations........................ 63 Statements of Partners' Equity.................. 64 Statements of Cash Flows........................ 65 Notes to Financial Statements................... 66 FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC. Report of Independent Auditors.................. 70 Balance Sheets.................................. 71 Statements of Operations........................ 72 Statements of Stockholder's Deficit............. 73 Statements of Cash Flows........................ 74 Notes to Financial Statements................... 75 CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY Report of Independent Auditors.................. 80 Consolidated Balance Sheets..................... 81 Consolidated Statements of Operations........... 82 Consolidated Statements of Stockholder's Equity........................................ 83 Consolidated Statements of Cash Flows........... 84 Notes to Consolidated Financial Statements...... 85 FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P. Report of Independent Auditors.................. 91 Balance Sheets.................................. 92 Statements of Income............................ 93 Statements of Partners' Equity.................. 94 Statements of Cash Flows........................ 95 Notes to Financial Statements................... 96
32 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, 1999 and 1998, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Chicago, Illinois January 28, 2000 33 ALTON GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash...................................................... $ 4,260 $ 4,383 Accounts receivable, net of allowance for doubtful accounts of $53 and $255, respectively.................. 363 125 Deferred income taxes..................................... 734 616 Other current assets...................................... 765 986 ------- ------- Total current assets.................................... 6,122 6,110 ------- ------- Due from affiliates....................................... 3,485 10,046 Net property and equipment................................ 46,252 26,808 Other assets.............................................. 2 2 ------- ------- TOTAL ASSETS............................................ $55,861 $42,966 ======= ======= CURRENT LIABILITIES: Accounts payable.......................................... $ 7,798 $ 1,597 Accrued payroll and related expenses...................... 1,692 1,515 Income taxes payable to affiliate......................... 3,298 -- Slot club liability....................................... 620 727 Other accrued liabilities................................. 1,359 1,309 Accrued insurance......................................... 1,710 1,073 ------- ------- Total current liabilities............................... 16,477 6,221 ------- ------- OTHER LONG-TERM OBLIGATIONS-RELATED PARTY................... 218 201 DEFERRED INCOME TAXES....................................... 2,813 3,201 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......................................... 36,096 33,086 ------- ------- Total stockholder's equity.............................. 36,353 33,343 ------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $55,861 $42,966 ======= =======
See accompanying notes to financial statements. 34 ALTON GAMING COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $84,664 $67,798 $61,877 Food, beverage and other.................................. 6,262 6,564 7,433 ------- ------- ------- 90,926 74,362 69,310 Less promotional allowances............................... (2,847) (2,298) (2,102) ------- ------- ------- Net revenues................................................ 88,079 72,064 67,208 ------- ------- ------- COSTS AND EXPENSES: Casino.................................................... 37,201 31,466 31,672 Food, beverage and other.................................. 5,096 5,728 7,113 Other operating expenses.................................. 5,583 5,398 5,623 Selling, general and administrative....................... 12,811 11,637 10,856 Allocation of corporate costs-related party............... 2,952 1,869 2,247 Depreciation and amortization............................. 4,273 3,985 4,455 ------- ------- ------- 67,916 60,083 61,966 ------- ------- ------- Income from operations...................................... 20,163 11,981 5,242 ------- ------- ------- OTHER INCOME (EXPENSE): Interest income........................................... 178 64 70 Interest expense.......................................... (102) (78) (14) ------- ------- ------- 76 (14) 56 ------- ------- ------- Income before income taxes.................................. 20,239 11,967 5,298 Income tax expense.......................................... 7,967 4,748 2,002 ------- ------- ------- Net income.................................................. $12,272 $ 7,219 $ 3,296 ======= ======= =======
See accompanying notes to financial statements. 35 ALTON GAMING COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED STOCKHOLDER'S SHARES STOCK PAR EARNINGS EQUITY -------- -------- ---------- -------- ------------- 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 Net income................................. -- -- -- 12,272 12,272 Dividends.................................. -- -- -- (9,262) (9,262) ----- -- ---- ------- ------- Balance, December 31, 1999................... 1,000 $1 $256 $36,096 $36,353 ===== == ==== ======= =======
See accompanying notes to financial statements. 36 ALTON GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $12,272 $7,219 $3,296 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 4,273 3,985 4,455 Loss on disposal of equipment............................. 412 26 90 Deferred income taxes..................................... (506) (470) 192 Changes in operating assets and liabilities: Accounts receivable..................................... (238) 86 119 Other current assets.................................... (196) (647) (28) Accounts payable........................................ 6,201 798 (748) Other accrued liabilities............................... 746 240 96 Income taxes payable to affiliate....................... 3,309 (225) 214 ------- ------ ------ Net cash provided by operating activities............. 26,273 11,012 7,686 ------- ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (19,712) (3,158) (1,686) ------- ------ ------ Net cash used in investing activities................. (19,712) (3,158) (1,686) ------- ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid............................................ (9,262) (7,652) (5,765) Due from affiliate........................................ 2,561 359 (6) Increase in other long term obligations-related party..... 17 15 15 ------- ------ ------ Net cash used in financing activities................. (6,684) (7,278) (5,756) ------- ------ ------ Net (decrease) increase in cash........................... (123) 576 244 Cash, beginning of year................................... 4,383 3,807 3,563 ------- ------ ------ Cash, end of year......................................... $ 4,260 $4,383 $3,807 ======= ====== ======
See accompanying notes to financial statements. 37 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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: Shore improvements.......................................... 5 to 30 years Riverboat, dock and improvements............................ 5 to 20 years Furniture, fixtures and equipment........................... 5 to 10 years
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. Food, beverage and other revenue is recognized at the time the related service is performed. 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:
1999 1998 1997 -------- -------- -------- Food, beverage and other............................ $2,774 $2,311 $2,358
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $1,062, $1,499 and $2,807 for the years ended December 31, 1999, 1998 and 1997, 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. 38 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Leasehold and shore improvements........................ $ 2,309 $ 1,936 Riverboat, dock and improvements........................ 45,006 30,469 Furniture, fixtures and equipment....................... 20,932 15,089 -------- -------- 68,247 47,494 Less accumulated depreciation and amortization.......... (21,995) (20,686) -------- -------- Net property and equipment.............................. $ 46,252 $ 26,808 ======== ========
During December 1999, the Company replaced certain dockside barges and related facilities with a net book value of $7.3 million as part of a major renovation. The Company is currently evaluating the future use of these replaced assets which may include utilization by an Argosy affiliate or sale of the assets. If these assets are sold, a loss could be recorded for a substantial portion of the $7.3 million net book value. 3. INCOME TAXES Income tax expense for the years ended December 31, 1999, 1998 and 1997, consists of the following:
1999 1998 1997 -------- -------- -------- Current: Federal........................................... $7,421 $4,570 $1,586 State............................................. 1,052 648 224 ------ ------ ------ 8,473 5,218 1,810 ------ ------ ------ Deferred: Federal........................................... (443) (411) 155 State............................................. (63) (59) 37 ------ ------ ------ (506) (470) 192 ------ ------ ------ Income tax expense.............................. $7,967 $4,748 $2,002 ====== ====== ======
The provision for income taxes for the years ended December 31, 1999, 1998 and 1997, differs from that computed at the Federal Statutory tax rate as follows:
1999 1998 1997 -------- -------- -------- Federal statutory rate........................... 35.0 34.0% 34.0% State income taxes, net of federal benefit....... 4.8 4.8 4.8 Other............................................ (0.4) 0.9 (1.0) ----- ----- ----- 39.4% 39.7% 37.8% ===== ===== =====
39 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, 1999 and 1998, are as follows:
1999 1998 -------- -------- Depreciation.............................................. $(2,859) $(3,247) Start-up costs............................................ 46 46 Other..................................................... 734 616 ------- ------- Net deferred tax liability................................ $(2,079) $(2,585) ======= =======
4. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid $102, $52 and $14 for interest for the years ended December 31, 1999, 1998 and 1997, respectively, and $5,224, $5,390 and $1,597 for income taxes in 1999, 1998 and 1997 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 certain 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 $1,070, $1,104 and $2,023 for the years ended December 31, 1999, 1998 and 1997, 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. During 1999, an affiliate transferred a barge with a net book value of approximately $4,000 to the Company. This amount reduced the due from affiliates in the accompanying balance sheets. 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 40 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 $242, $223 and $530 for the years ended December 31, 1999, 1998 and 1997, respectively. 7. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1999, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 2000....................................................... $741 2001....................................................... 176 2002....................................................... 18 2003....................................................... 5
Rent expense for the years ended December 31, 1999, 1998 and 1997, was $767, $466 and $532, 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 $14,800, including interest through December 31, 1999, 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. In June 1996, Argosy 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. As part of a refinancing, in June 1999, Argosy retired through a tender offer $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million Senior Secured Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Company is a named borrower under the Credit Facility and borrowings are secured by substantially all of the assets of the Company. The Company is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 41 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, 1999 and 1998, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Kansas City, Missouri January 28, 2000 42 THE MISSOURI GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash...................................................... $ 5,027 $ 3,905 Accounts receivable, net of allowance for doubtful accounts of $18 and $55, respectively................... 187 34 Prepaid rent.............................................. -- 960 Other current assets...................................... 1,108 365 Deferred income taxes..................................... 162 312 ------- ------- Total current assets.................................... 6,484 5,576 ------- ------- NET PROPERTY AND EQUIPMENT.................................. 63,574 66,819 OTHER ASSETS: Deposits.................................................. 205 221 Other..................................................... 753 913 ------- ------- Total other assets...................................... 958 1,134 ------- ------- TOTAL ASSETS................................................ $71,016 $73,529 ======= ======= CURRENT LIABILITIES: Accounts payable.......................................... $ 1,528 $ 1,405 Accrued payroll and related expenses...................... 1,544 1,383 Slot club liability....................................... 1,128 924 Accrued insurance......................................... 1,082 752 Installment contracts payable............................. 147 500 Income taxes payable to affiliate......................... 3,282 269 Other current liabilities................................. 641 586 ------- ------- Total current liabilities............................... 9,352 5,819 ------- ------- DUE TO AFFILIATES,.......................................... 37,996 49,056 DEFERRED INCOME TAXES....................................... 2,555 2,260 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......................................... 16,113 11,394 ------- ------- Total stockholder's equity.............................. 21,113 16,394 ------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $71,016 $73,529 ======= =======
See accompanying notes to financial statements. 43 THE MISSOURI GAMING COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $84,892 $71,955 $61,750 Food, beverage and other.................................. 10,995 11,163 10,050 ------- ------- ------- 95,887 83,118 71,800 Less promotional allowances............................... (6,074) (6,157) (5,252) ------- ------- ------- Net revenues.............................................. 89,813 76,961 66,548 ------- ------- ------- COSTS AND EXPENSES: Casino.................................................... 42,352 38,144 33,568 Food, beverage and other.................................. 8,122 8,602 8,583 Selling, general and administrative....................... 16,224 14,201 11,871 Other operating expenses.................................. 4,863 4,722 4,098 Depreciation and amortization............................. 5,688 5,924 5,947 ------- ------- ------- 77,249 71,593 64,067 ------- ------- ------- Income from operations...................................... 12,564 5,368 2,481 ------- ------- ------- OTHER INCOME (EXPENSE): Interest income........................................... 31 56 231 Interest expense.......................................... (4,719) (4,381) (5,162) ------- ------- ------- (4,688) (4,325) (4,931) ------- ------- ------- Income (loss) before income taxes........................... 7,876 1,043 (2,450) Income tax (expense) benefit................................ (3,157) (443) 929 ------- ------- ------- Net income (loss)........................................... $ 4,719 $ 600 $(1,521) ======= ======= =======
See accompanying notes to financial statements. 44 THE MISSOURI GAMING COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED STOCKHOLDER'S SHARES STOCK PAR EARNINGS EQUITY -------- -------- ---------- -------- ------------- 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 Net income................................. -- -- -- 4,719 4,719 ----- -------- ------ ------- ------- Balance, December 31, 1999................... 1,000 -- $5,000 $16,113 $21,113 ===== ======== ====== ======= =======
See accompanying notes to financial statements. 45 THE MISSOURI GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ 4,719 $ 600 $(1,521) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of fixed assets............. 5,528 5,777 5,740 Amortization of other assets.............................. 160 147 207 Deferred income taxes..................................... 445 467 455 Changes in operating assets and liabilities: Accounts receivable..................................... (153) 235 (49) Other current assets.................................... 217 (148) 85 Accounts payable........................................ 123 96 (2,153) Accrued liabilities..................................... 3,763 316 (4,868) Other assets............................................ 16 998 867 ------- ------ ------- Net cash provided by (used in) operating activities..... 14,818 8,488 (1,237) ------- ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (2,283) (1,339) (998) ------- ------ ------- Net cash used in investing activities................... (2,283) (1,339) (998) ------- ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on installment contracts......................... (353) (207) (94) Payments to affiliate..................................... (11,060) (6,666) (185) ------- ------ ------- Net cash used in financing activities................... (11,413) (6,873) (279) ------- ------ ------- Net increase (decrease) in cash............................. 1,122 276 (2,514) Cash, beginning of year..................................... 3,905 3,629 6,143 ------- ------ ------- Cash, end of year........................................... $ 5,027 $3,905 $ 3,629 ======= ====== =======
See accompanying notes to financial statements. 46 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 1998 and 1997 have been reclassified to conform to the 1999 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: Buildings and shore improvements............................ 5 to 30 years Riverboat, dock and improvements............................ 5 to 20 years Furniture, fixtures and equipment........................... 5 to 10 years
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. Food, beverage and other revenue is recognized at the time the related service is performed. 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:
1999 1998 1997 -------- -------- -------- Food, beverage and other............................ $5,002 $5,231 $4,918
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1999, 1998 and 1997 was $1,234, $1,148 and $2,548, 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. 47 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Land and improvements..................................... $14,657 $14,657 Buildings and improvements................................ 29,527 29,152 Riverboat, dock and improvements.......................... 23,372 23,372 Furniture, fixtures and equipment......................... 21,648 19,740 ------- ------- 89,204 86,921 Accumulated depreciation and amortization................. (25,630) (20,102) ------- ------- Net property and equipment................................ $63,574 $66,819 ======= =======
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, and are included as a component of other assets in the accompanying balance sheet, and are being amortized over ten years using the straight-line method. 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 was 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 expired in November, 1999 and the Company extended the agreement for five years. During the extension periods, there is no minimum rent and percentage rent is 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. 4. INCOME TAXES Income tax (expense) benefit for years ended December 31, 1999, 1998 and 1997, consists of the following:
1999 1998 1997 -------- -------- -------- Current: Federal.......................................... $(2,419) $ 21 $1,240 State............................................ (293) 3 144 ------- ------ ------ (2,712) 24 1,384 ------- ------ ------ Deferred: Federal.......................................... (397) (417) (417) State............................................ (48) (50) (38) ------- ------ ------ (445) (467) (455) ------- ------ ------ Income tax (expense) benefit................... $(3,157) $ (443) $ 929 ======= ====== ======
48 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES (CONTINUED) The provision for income taxes for the years ended December 31, 1999, 1998 and 1997 differs from that computed at the Federal Statutory corporate tax rate as follows:
1999 1998 1997 -------- -------- -------- Federal statutory rate................................. 34.0% 34.0% (34.0)% State income taxes, net of federal benefit............. 4.1 4.1 (4.1) Other.................................................. 2.0 4.3 0.2 ---- ---- ------ 40.1% 42.4% (37.9)% ==== ==== ======
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 -------- -------- Start-up costs............................................ $ -- $ 105 Depreciation.............................................. (2,555) (2,365) Other, net................................................ 162 312 ------- ------- Net deferred tax liability................................ $(2,393) $(1,948) ======= =======
5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment of $707 in 1998, which was financed through installment contracts. The Company paid $4,719, $6,752 and $5,393 for interest and $400, $114 and $3,518 for income taxes in 1999, 1998 and 1997, respectively. 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 $913, $994 and $2,603 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company has outstanding long-term debt with Argosy in the amounts of $37,996 and $49,056 at December 31, 1999 and 1998, 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. Argosy has indicated that it will not demand payment on the long-term debt prior to January 1, 2001. 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 49 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. EMPLOYEES BENEFIT PLAN (CONTINUED) determined annually by the Company. Expense recognized by the Company under the Plan was $73, $203 and $422 for the years ended December 31, 1999, 1998 and 1997, respectively. 8. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1999, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 2000.................................................. $320 2001.................................................. 20 2002.................................................. 20 2003.................................................. 20
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $1,727, $1,483 and $1,539, respectively. The Company is restricted from making certain distributions to Argosy and other affiliates unless approved by state gaming authorities. In June 1996, Argosy 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. As part of a refinancing, in June 1999, Argosy retired through a tender offer $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million of Senior Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Company is a named borrower under the Credit Facility and borrowings are secured by substantially all the assets of the Company. The Company is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 50 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP New Orleans, Louisiana January 28, 2000 51 ARGOSY OF LOUISIANA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 4,192 $ 3,025 Accounts receivable, net of allowance for doubtful accounts of $290 and $708, respectively................. 1,049 301 Income taxes receivable from related party................ 717 717 Other current assets...................................... 1,039 577 ------- ------- Total current assets.................................... 6,997 4,620 ------- ------- NET PROPERTY AND EQUIPMENT.................................. 39,548 39,670 OTHER ASSETS: Deferred lease acquisition cost, net...................... 1,592 1,700 Other..................................................... 4 13 ------- ------- Total other assets...................................... 1,596 1,713 ------- ------- TOTAL ASSETS................................................ $48,141 $46,003 ======= ======= CURRENT LIABILITIES: Accounts payable.......................................... $ 771 $ 595 Accrued payroll and related expenses...................... 1,151 966 Other accrued liabilities................................. 1,932 2,521 Due to affiliates......................................... 7,397 3,149 Accrued interest-related party............................ 3,706 2,304 Accrued insurance......................................... 1,689 1,166 Notes payable and current maturities of long-term debt-related party...................................... 16,687 13,349 ------- ------- Total current liabilities................................... 33,333 24,050 ------- ------- LONG-TERM DEBT-RELATED PARTY................................ 31,382 34,709 DEFERRED INCOME TAXES....................................... 432 432 MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............... 1,132 1,484 STOCKHOLDER'S DEFICIT: Common stock--$1 par value, 1,000 shares authorized, issued and outstanding.................................. 1 1 Accumulated deficit....................................... (18,139) (14,673) ------- ------- (18,138) (14,672) ------- ------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................. $48,141 $46,003 ======= =======
See accompanying notes to consolidated financial statements. 52 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $53,262 $46,828 $47,628 Food, beverage and other.................................. 5,205 6,108 7,046 ------- ------- ------- 58,467 52,936 54,674 Less promotional allowances................................. (3,357) (3,882) (4,238) ------- ------- ------- Net revenues................................................ 55,110 49,054 50,436 ------- ------- ------- COSTS AND EXPENSES: Casino.................................................... 30,189 28,869 27,887 Food, beverage and other.................................. 4,403 5,612 6,799 Other operating expenses.................................. 5,140 4,798 5,147 Selling, general and administrative....................... 12,617 11,036 12,346 Depreciation and amortization............................. 5,219 5,272 5,468 ------- ------- ------- 57,568 55,587 57,647 ------- ------- ------- Loss from operations........................................ (2,458) (6,533) (7,211) INTEREST (EXPENSE) INCOME: Interest to related party................................. (1,402) (1,395) (1,402) Interest, net............................................. 42 60 89 ------- ------- ------- Loss before income taxes and minority interest.............. (3,818) (7,868) (8,524) Income tax benefit.......................................... -- -- 420 Minority interest........................................... 352 756 838 ------- ------- ------- Net loss.................................................... $(3,466) $(7,112) $(7,266) ======= ======= =======
See accompanying notes to consolidated financial statements. 53 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMMON ACCUMULATED SHARES STOCK DEFICIT TOTAL -------- -------- ----------- -------- 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) Net loss............................................. (3,466) (3,466) ----- -- -------- -------- Balance, December 31, 1999............................. 1,000 $1 $(18,139) $(18,138) ===== == ======== ========
See accompanying notes to consolidated financial statements. 54 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(3,466) $(7,112) $(7,266) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation.............................................. 5,111 5,164 5,083 Amortization.............................................. 108 108 385 Loss on writedown of assets............................... 129 317 -- Minority interest......................................... (352) (756) (838) Deferred income taxes..................................... -- -- (420) Changes in operating assets and liabilities: Accounts receivable..................................... (748) 183 127 Income tax receivable from related party................ -- 25 137 Other current assets.................................... (462) (148) 430 Accounts payable........................................ 176 (176) (356) Accrued payroll and related expenses.................... 185 47 170 Accrued interest to related party....................... 1,402 1,402 902 Other accrued liabilities............................... 64 342 467 ------- ------- ------- Net cash provided by (used in) operating activities... 2,147 (604) (1,179) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................... (5,117) (919) (444) Proceeds from sale of equipment to affiliates............... -- -- 486 ------- ------- ------- Net cash (used in) provided by investing activities... (5,117) (919) 42 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in amounts due to affiliates....................... 4,248 1,354 1,795 Proceeds from (payments on) notes payable and long-term debt...................................................... 11 (52) (280) Payments on installment contracts........................... (131) (183) -- Decrease in other assets.................................... 9 -- -- ------- ------- ------- Net cash provided by financing activities................... 4,137 1,119 1,515 ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 1,167 (404) 378 Cash and cash equivalents, beginning of year................ 3,025 3,429 3,051 ------- ------- ------- Cash and cash equivalents, end of year...................... $ 4,192 $ 3,025 $ 3,429 ======= ======= =======
See accompanying notes to consolidated financial statements. 55 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"). 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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: Riverboat, dock and improvements............................ 15 to 20 years Furniture, fixtures and equipment........................... 5 to 7 years
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 $567 and $458 at December 31, 1999 and 1998, 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. Food, beverage and other revenue is recognized at the time the related service is performed. 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. 56 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 has been included in costs and expenses as follows:
1999 1998 1997 -------- -------- -------- Food, beverage and other............................ $3,206 $4,457 $4,974
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $1,893, $1,552 and $1,656 in 1999, 1998 and 1997, 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Leasehold and shore improvements............................ $ 6,970 $ 6,970 Riverboat, docks and improvements........................... 36,080 36,077 Furniture, fixtures and equipment........................... 21,287 18,065 -------- -------- 64,337 61,112 Less accumulated depreciation and amortization.............. (24,789) (21,442) -------- -------- Net property and equipment.................................. $ 39,548 $ 39,670 ======== ========
3. LONG-TERM DEBT-RELATED PARTY Notes payable and long-term debt consists of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- 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 2000...................................................... 1,844 1,844 Noninterest-bearing advances from Argosy, no stated maturity.................................................. 28,698 28,687 ------- ------- 48,069 48,058 Less current maturities..................................... (16,687) (13,349) ------- ------- $31,382 $34,709 ======= =======
The carrying value of long-term debt approximates fair value at December 31, 1999. During 1999 and 1998, 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 current 57 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT-RELATED PARTY (CONTINUED) portion of the long-term debt during 2000 and has agreed to not demand payment on the noninterest bearing advances prior to January 1, 2001. 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, 1999 and which have not yet been paid are as follows: 2000............................................ $16,687 2001............................................ 2,684
4. INCOME TAXES Income tax benefit consists of the following:
YEARS ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 --------- --------- -------- Deferred: Federal............................................ $ -- $ -- $384 State.............................................. -- -- 36 --------- --------- ---- Total deferred....................................... -- -- 420 --------- --------- ---- Income tax benefit................................... $ -- $ -- $420 ========= ========= ====
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 -------- -------- Tax over book depreciation................................ $(4,224) $(4,374) Net operating loss carryforward........................... 9,925 8,654 Pre-opening............................................... -- 116 Other, net................................................ 298 407 Minority interest......................................... (432) (432) ------- ------- 5,567 4,371 Valuation allowance....................................... (5,999) (4,803) ------- ------- Net deferred tax assets (liabilities)..................... $ (432) $ (432) ======= =======
58 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:
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Tax at U. S. statutory rates................................ (34.0)% (34.0)% (35.0)% State income tax, net of federal tax benefit................ (5.3) (5.3) (5.3) Valuation allowance......................................... 35.6 37.7 28.6 Minority interest........................................... -- -- 4.0 Other, net.................................................. 3.7 1.6 2.8 ----- ----- ----- (0.0)% (0.0)% (4.9)% ===== ===== =====
The Company has not recorded any income tax benefit on its operating losses in 1999 or 1998 and has recorded a valuation allowance against its net deferred tax assets in 1999 and 1998 due to the uncertainty of realization. The Company has tax net operating loss carryforwards of approximately $25,300 which expire from 2010 to 2019. 5. RELATED PARTY TRANSACTIONS The Company leases, 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 $4,303, $3,354 and $3,398 in 1999, 1998 and 1997, respectively. Approximately $3,291, $2,833 and $2,920 in 1999, 1998 and 1997, 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 $1,316, $1,474 and $2,511 in 1999, 1998 and 1997, 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 $42, $169 and $392 in 1999, 1998 and 1997, respectively. 7. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $336 in 1998 which was financed through installment contracts. The Company paid interest of $18, $3 and $500 in 1999, 1998 and 1997, respectively. 59 ARGOSY OF LOUISIANA, INC. 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 as of December 31, 1999 are as follows: YEARS ENDING DECEMBER 31, - ------------------------------------------------------------ 2000........................................................ $444 2001........................................................ 387 2002........................................................ 33 2003........................................................ 3
In June 1996, Argosy 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. As part of a refinancing, in June 1999, Argosy retired through a tender offer $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million Senior Secured Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Company is a named borrower under the Credit Facility and borrowings are secured by substantially all of the assets of the Company. The Company is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 60 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, 1999 and 1998, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP New Orleans, Louisiana January 28, 2000 61 CATFISH QUEEN PARTNERSHIP IN COMMENDAM BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 4,182 $ 3,025 Accounts receivable, net of allowance for doubtful accounts of $290 and $708, respectively................. 1,049 301 Inventories............................................... 175 209 Other current assets...................................... 750 254 ------- ------- Total current assets.................................... 6,156 3,789 ------- ------- NET PROPERTY AND EQUIPMENT.................................. 39,548 39,670 OTHER ASSETS: Deferred lease acquisition costs, net..................... 1,592 1,700 Other..................................................... 4 13 ------- ------- Total other assets...................................... 1,596 1,713 ------- ------- TOTAL ASSETS................................................ $47,300 $45,172 ======= ======= CURRENT LIABILITIES: Accounts payable.......................................... $ 771 $ 595 Accrued payroll and related expenses...................... 1,151 966 Accrued insurance......................................... 1,689 1,166 Other accrued liabilities................................. 1,575 2,459 Accrued interest-related party............................ 3,706 2,304 Due to affiliates......................................... 7,397 3,149 Notes payable and current maturities of long-term debt-related party...................................... 16,687 13,349 ------- ------- Total current liabilities............................... 32,976 23,988 ------- ------- LONG-TERM DEBT--RELATED PARTY............................... 2,684 6,022 PARTNERS' EQUITY............................................ 11,640 15,162 ------- ------- TOTAL LIABILITIES AND PARTNERS' EQUITY...................... $47,300 $45,172 ======= =======
See accompanying notes to financial statements. 62 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $53,262 $46,828 $47,628 Food, beverage and other.................................. 5,205 6,108 7,046 ------- ------- ------- 58,467 52,936 54,674 Less promotional allowances............................... (3,357) (3,882) (4,238) ------- ------- ------- Net revenues................................................ 55,110 49,054 50,436 ------- ------- ------- COSTS AND EXPENSES: Casino.................................................... 30,189 28,869 27,887 Food, beverage and other.................................. 4,403 5,612 6,799 Other operating expenses.................................. 5,140 4,798 5,147 Selling, general and administrative....................... 12,321 10,716 12,201 Depreciation and amortization............................. 5,219 5,272 5,468 ------- ------- ------- 57,272 55,267 57,502 ------- ------- ------- Loss from operations........................................ (2,162) (6,213) (7,066) INTEREST (EXPENSE) INCOME: Related parties............................................. (1,402) (1,405) (1,402) Other, net.................................................. 42 59 89 ------- ------- ------- (1,360) (1,346) (1,313) ------- ------- ------- NET LOSS.................................................... $(3,522) $(7,559) $(8,379) ======= ======= =======
See accompanying notes to financial statements. 63 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
ARGOSY OF JAZZ TOTAL LOUISIANA, ENTERPRISES, PARTNERS' INC. INC. EQUITY ---------- ------------ --------- 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 Net loss.................................................. (3,170) (352) (3,522) ------- ------ ------- Partners' equity at December 31, 1999....................... $10,476 $1,164 $11,640 ======= ====== =======
See accompanying notes to financial statements. 64 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(3,522) $(7,559) $(8,379) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation.............................................. 5,111 5,164 5,083 Amortization.............................................. 108 108 385 Loss on writedown of assets............................... 129 -- -- Changes in operating assets and liabilities: Accounts receivable..................................... (748) 183 127 Other current assets.................................... (462) (145) 205 Accounts payable........................................ 176 (176) (356) Accrued payroll and related expenses.................... 185 47 170 Accrued interest to related parties..................... 1,402 1,402 902 Other accrued liabilities............................... (231) 320 404 ------- ------- ------- Net cash provided by (used in) operating activities....... 2,148 (656) (1,459) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................... (5,117) (919) (444) Proceeds from sale of equipment to affiliates............... -- -- 486 ------- ------- ------- Net cash provided by (used in) investing activities....... (5,117) (919) 42 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in advances from affiliates........................ 4,248 1,354 1,795 Payments on installment contracts........................... (131) (183) -- Decrease in other assets.................................... 9 -- -- ------- ------- ------- Net cash provided by financing activities................. 4,126 1,171 1,795 ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 1,157 (404) 378 Cash and cash equivalents, beginning of year................ 3,025 3,429 3,051 ------- ------- ------- Cash and cash equivalents, end of year...................... $ 4,182 $ 3,025 $ 3,429 ======= ======= =======
See accompanying notes to financial statements. 65 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"). 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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, 1999 and 1998. 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: Riverboat, dock and improvements............................ 15 to 20 years Furniture, fixtures and equipment........................... 5 to 7 years
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 $567 and $458 at December 31, 1999 and 1998, 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. Food, beverage and other revenue is recognized at the time the related service is performed. 66 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 has been included in costs and expenses as follows:
1999 1998 1997 -------- -------- -------- Food, beverage and other............................ $3,206 $4,457 $4,974
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $1,893, $1,552 and $1,656 in 1999, 1998 and 1997, 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Leasehold and shore improvements............................ $ 6,970 $ 6,970 Riverboat, docks and improvements........................... 36,080 36,077 Furniture, fixtures and equipment........................... 21,287 18,065 -------- -------- 64,337 61,112 Less accumulated depreciation and amortization.............. (24,789) (21,442) -------- -------- Net property and equipment.................................. $ 39,548 $ 39,670 ======== ========
3. LONG-TERM DEBT Notes payable and long-term debt consists of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- 8% unsecured note payable to Argosy in quarterly installments of including interest, through July 2001..... $ 17,527 $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 2000...................................................... 1,844 1,844 -------- -------- 19,371 19,371 Less current maturities..................................... (16,687) (13,349) -------- -------- $ 2,684 $ 6,022 ======== ========
The carrying value of long-term debt approximates fair value at December 31, 1999. During 1999 and 1998, 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 2000. 67 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, 1999 and which have not yet been paid are as follows: 2000............................................ $16,687 2001............................................ 2,684
4. RELATED PARTY TRANSACTIONS The Partnership leases, 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 $4,303, $3,354 and $3,398 in 1999, 1998 and 1997, respectively. Approximately $3,291, $2,833 and $2,920 in 1999, 1998 and 1997, 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 $1,316, $1,474 and $2,511 for the years ended December 31, 1999, 1998 and 1997, 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 $42, $169 and $392 in 1999, 1998 and 1997, 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 $18, $3 and $500 in 1999, 1998 and 1997, respectively. 68 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1999 are as follows: Years ending December 31, - ------------------------------------------------ 2000............................................ $444 2001............................................ 387 2002............................................ 33 2003............................................ 3
In June 1996, Argosy 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. As part of a refinancing, in June 1999, Argosy retired through a tender offer $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million Senior Secured Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Partnership is a named borrower under the Credit Facility and borrowings are secured by substantially all of the assets of the Partnership. The Partnership is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 69 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Chicago, Illinois January 28, 2000 70 JAZZ ENTERPRISES, INC. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 46 $ -- Other current assets...................................... 104 110 -------- -------- Total current assets.................................... 150 110 -------- -------- NET PROPERTY AND EQUIPMENT.................................. 50,631 52,733 GOODWILL, NET............................................... 18,728 19,325 NOTE RECEIVABLE............................................. 1,892 1,892 OTHER ASSETS................................................ 1,303 1,636 -------- -------- TOTAL ASSETS................................................ $ 72,704 $ 75,696 ======== ======== CURRENT LIABILITIES: Accounts payable and accrued liabilities.................. $ 2,923 $ 2,843 Current maturities of long-term debt...................... 604 545 -------- -------- Total current liabilities............................... 3,527 3,388 -------- -------- LONG-TERM DEBT.............................................. 5,883 6,552 LONG-TERM DEBT--RELATED PARTY............................... 76,147 75,625 STOCKHOLDER'S DEFICIT: Common stock, no par value, 100,000 shares authorized, 200 shares issued and outstanding........................... -- -- Accumulated deficit....................................... (12,853) (9,869) -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................. $ 72,704 $ 75,696 ======== ========
See accompanying notes to financial statements. 71 JAZZ ENTERPRISES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Lease revenue--related party.............................. $ 3,291 $ 2,833 $ 2,920 Rent revenue.............................................. 397 349 378 ------- ------- ------- 3,688 3,182 3,298 ------- ------- ------- COSTS AND EXPENSES: Operating expenses........................................ 1,119 1,100 1,071 Selling, general and administrative....................... 1,695 2,882 1,608 Depreciation and amortization............................. 2,701 2,679 2,354 ------- ------- ------- 5,515 6,661 5,033 ------- ------- ------- Loss from operations........................................ (1,827) (3,479) (1,735) OTHER (EXPENSE) INCOME: Interest expense.......................................... (805) (860) (909) Equity in loss of unconsolidated partnership.............. (352) (756) (838) Interest income........................................... -- -- 200 ------- ------- ------- NET LOSS.................................................... $(2,984) $(5,095) $(3,282) ======= ======= =======
See accompanying notes to financial statements. 72 JAZZ ENTERPRISES, INC. STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ACCUMULATED SHARES STOCK DEFICIT TOTAL -------- --------- ----------- -------- 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) Net loss............................................. -- -- (2,984) (2,984) --- --------- -------- -------- Balance, December 31, 1999............................. 200 $ -- $(12,853) $(12,853) === ========= ======== ========
See accompanying notes to financial statements. 73 JAZZ ENTERPRISES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(2,984) $(5,095) $(3,282) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization........................... 2,701 2,679 2,354 Write off of deferred lease costs....................... -- 1,200 -- Equity in losses of unconsolidated partnership.......... 352 756 838 Other current assets.................................... 6 27 (59) Accounts payable and accrued liabilities................ 80 (238) (478) ------- ------- ------- Net cash provided by (used in) operating activities... 155 (671) (627) ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................ (2) (231) (897) ------- ------- ------- Net cash used in investing activities....................... (2) (231) (897) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt.................................. -- -- 760 Principal payments on long-term debt........................ (610) (491) (115) Advances from affiliate..................................... 522 1,553 1,442 Increase in other assets.................................... (19) (180) (543) ------- ------- ------- Net cash (used in) provided by financing activities....... (107) 882 1,544 ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 46 (20) 20 Cash and cash equivalents at beginning of year.............. -- 20 -- ------- ------- ------- Cash and cash equivalents at end of year.................... $ 46 $ -- $ 20 ======= ======= =======
See accompanying notes to financial statements. 74 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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, 1999. 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 $2,735 and $2,138 at December 31, 1999 and 1998, 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: Buildings and improvements...................... 31 years Furniture, fixtures and equipment............... 5 to 7 years
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. 75 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: 2000............................................ $378 2001............................................ 439 2002............................................ 493 2003............................................ 211 2004............................................ 106 Thereafter...................................... 436
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. The Company did not expense any advertising costs in 1999, 1998 or 1997. 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Land...................................................... $ 8,300 $ 8,300 Buildings and improvements................................ 47,025 47,023 Furniture, fixtures and equipment......................... 2,453 2,453 ------- ------- 57,778 57,776 Less accumulated depreciation and amortization............ (7,147) (5,043) ------- ------- Net property and equipment................................ $50,631 $52,733 ======= =======
76 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT Notes payable and long-term debt consists of the following:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Notes payable to former owner, principal and interest due quarterly through September 2015, discounted at 10.5%..... $ 6,487 $ 7,097 Noninterest bearing advances from Argosy, no stated maturity.................................................. 76,147 75,625 ------- ------- 82,634 82,722 Less current maturities..................................... (604) (545) ------- ------- $82,030 $82,177 ======= =======
The carrying value of long-term debt approximates fair value at December 31, 1999. Maturities of long-term debt, excluding the noninterest bearing advances from Argosy, are as follows: 2000............................................ $ 604 2001............................................ 670 2002............................................ 743 2003............................................ 825 2004............................................ 915 Thereafter...................................... 2,730
Argosy has indicated that it will not demand payment on the noninterest bearing advances prior to January 1, 2001 and has agreed to provide operating support to the Company during 2000. 4. INCOME TAXES The provision for income taxes for the years ended December 31, 1999, 1998 and 1997, differs from that computed at the federal statutory tax rate as follows:
1999 1998 1997 -------- -------- -------- Tax at U. S. statutory rates................................ (34.0)% (34.0)% (34.0)% State income tax, net of federal tax benefit................ (5.3) (5.3) (5.3) Valuation allowance......................................... 31.3 32.9 35.0 Goodwill amortization....................................... 7.9 4.8 4.6 Other, net.................................................. 0.1 1.6 (0.3) ----- ----- ----- 0.0% 0.0% 0.0% ===== ===== =====
77 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES (CONTINUED) The tax effects of significant temporary differences of the Company representing deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows:
1999 1998 -------- -------- Tax over book depreciation.................................. $ (787) $ (887) Preopening.................................................. 824 824 Net operating loss carryforwards............................ 5,231 4,289 Other, net.................................................. (433) (325) ------ ------ 4,835 3,901 Valuation allowance......................................... (4,835) (3,901) ------ ------ Net deferred tax assets..................................... $ -- $ -- ====== ======
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 $13,317 which expire from 2008 through 2019. 5. RELATED PARTY TRANSACTIONS The Company leases, 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 $3,291, $2,833 and $2,920 in 1999, 1998 and 1997, respectively, resulted from this lease with the Partnership. 6. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest of $805, $860 and $909 in 1999, 1998 and 1997, respectively. 7. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1999 are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 2000............................................ $ 242 2001............................................ 242 2002............................................ 242 2003............................................ 242 2004............................................ 242 Thereafter...................................... 17,162
Rent expense for the years ended December 31, 1999, 1998, and 1997 was $245, $240 and $244, respectively. In June 1996, Argosy 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. As part of a refinancing, in June 1999, Argosy retired through a tender offer 78 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million Senior Secured Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Company is a named borrower under the Credit Facility and borrowings are secured by substantially all of the assets of the Company. The Company is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 79 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, 1999 and 1998, and the related consolidated statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Indianapolis, Indiana January 28, 2000 80 THE INDIANA GAMING COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 29,979 $ 25,491 Accounts receivable, net of allowance for doubtful accounts of $679 and $701, respectively................. 776 707 Deferred income taxes..................................... 394 254 Other current assets...................................... 449 642 -------- -------- Total current assets.................................... 31,598 27,094 -------- -------- NET PROPERTY AND EQUIPMENT.................................. 187,685 194,731 OTHER ASSETS: Due from affiliate........................................ 1,553 -- Intangible assets, net of accumulated amortization of $4,120 and $2,675, respectively......................... 28,121 29,566 Deferred income taxes..................................... -- 722 -------- -------- Total other assets...................................... 29,674 30,288 -------- -------- TOTAL ASSETS................................................ $248,957 $252,113 ======== ======== CURRENT LIABILITIES: Accounts payable.......................................... $ 3,278 $ 1,974 Accrued payroll and related expenses...................... 4,557 4,195 Accrued interest and dividends payable-related parties.... 765 2,183 Installment contracts payable............................. -- 1,961 Accrued admission and gaming taxes........................ 16,286 10,835 Other accrued liabilities................................. 8,926 9,402 Income taxes payable...................................... 48,266 24,534 Current maturities of long-term debt...................... 9,822 11,095 -------- -------- Total current liabilities............................... 91,900 66,179 -------- -------- LONG-TERM DEBT.............................................. 37,022 118,933 DEFERRED INCOME TAXES....................................... 408 -- MINORITY INTERESTS.......................................... 45,724 30,516 STOCKHOLDER'S EQUITY Common stock--$.01 par value, 1,000 shares authorized, issued and outstanding.................................. -- -- Retained earnings......................................... 73,903 36,485 -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................. $248,957 $252,113 ======== ========
See accompanying notes to consolidated financial statements. 81 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $308,316 $264,352 $127,908 Admissions................................................ 18,893 16,025 7,895 Food, beverage, hotel and other........................... 33,481 24,922 7,005 -------- -------- -------- 360,690 305,299 142,808 Less promotional allowances............................... (28,455) (20,578) (5,784) -------- -------- -------- Net revenues................................................ 332,235 284,721 137,024 -------- -------- -------- COSTS AND EXPENSES: Casino.................................................... 126,572 110,330 58,081 Food, beverage, hotel and other........................... 22,269 18,879 5,746 Other operating expenses.................................. 8,667 8,222 13,119 Selling, general and administrative....................... 51,643 41,615 21,606 Management fees-related parties........................... 6,154 5,201 1,924 Depreciation and amortization............................. 13,692 12,622 10,922 -------- -------- -------- 228,997 196,869 111,398 -------- -------- -------- Income from operations...................................... 103,238 87,852 25,626 -------- -------- -------- OTHER INCOME (EXPENSE): Interest income........................................... 283 1,205 1,400 Interest expense.......................................... (7,070) (10,254) (3,588) -------- -------- -------- (6,787) (9,049) (2,188) -------- -------- -------- Income before minority interests and income taxes........... 96,451 78,803 23,438 Minority interests.......................................... (34,061) (26,023) (6,989) Income tax expense.......................................... (24,972) (21,220) (3,259) -------- -------- -------- Net income.................................................. $ 37,418 $ 31,560 $ 13,190 ======== ======== ========
See accompanying notes to consolidated financial statements. 82 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL COMMON RETAINED STOCKHOLDER'S SHARES STOCK (DEFICIT) EARNINGS (DEFICIT) EQUITY -------- -------- ------------------ ---------------- 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 Net income................................... -- -- 37,418 37,418 ----- -------- -------- -------- Balance, December 31, 1999..................... 1,000 -- $ 73,903 $ 73,903 ===== ======== ======== ========
See accompanying notes to consolidated financial statements. 83 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income.................................................. $ 37,418 $ 31,560 $ 13,190 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 13,692 12,622 10,922 Deferred taxes.......................................... 990 1,883 (2,859) Loss on disposal of equipment........................... 729 391 -- Minority interests...................................... 34,061 26,023 6,989 Changes in operating assets and liabilities: Accounts receivable..................................... (69) (325) (244) Other current assets.................................... 193 537 527 Accounts payable........................................ 1,304 (3,962) 2,821 Accrued interest payable and dividends payable--related party................................................. (228) (1,744) 1,917 Income taxes payable.................................... 23,732 18,619 5,915 Accrued liabilities..................................... 5,331 15,684 6,381 -------- -------- -------- Net cash provided by operating activities................. 117,153 101,288 45,559 -------- -------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow............................ -- 13,114 1,805 Purchases of property and equipment....................... (5,925) (27,676) (113,141) Payments under development agreement...................... -- (6,583) (13,586) -------- -------- -------- Net cash used in investing activities..................... (5,925) (21,145) (124,922) -------- -------- -------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: (Decrease) increase in advances from affiliates........... (64,677) (52,953) 49,812 Payments on installment contracts......................... (1,961) (3,125) (4,116) Repayment of long-term debt--partner loans................ (16,284) (21,939) (2,710) Payment of preferred equity return to partners............ (3,253) (3,688) (1,163) Common equity distributions............................... (14,672) (10,808) (1,514) Payment of preferred equity principal to partner.......... (2,118) -- -- (Payments on) proceeds from long-term debt................ (3,775) (3,292) 71,648 Other..................................................... -- (104) (553) -------- -------- -------- Net cash (used in) provided by financing activities......... (106,740) (95,909) 111,404 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 4,488 (15,766) 32,041 Cash and cash equivalents, beginning of year................ 25,491 41,257 9,216 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 29,979 $ 25,491 $ 41,257 ======== ======== ========
See accompanying notes to consolidated financial statements. 84 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 two limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, and Centaur, Inc., a 13.5% 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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: 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
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. 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, 1999 and 1998. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $401 and $271 at December 31, 1999 and 1998, 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. Admissions, hotel and other revenue is recognized at the time the related service is performed. The retail value of 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 85 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1999 1998 1997 -------- -------- -------- Admissions......................................... $ 5,895 $4,409 $1,646 Hotel rooms........................................ 1,059 751 -- Food, beverage and other........................... 11,590 9,455 2,459
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $5,803, $5,245 and $4,877 for the years ended December 31, 1999, 1998 and 1997, 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Land.................................................... $ 16,045 $ 16,045 Building and leasehold and shore improvements........... 129,157 128,923 Riverboat, docks and improvements....................... 41,808 40,191 Furniture, fixtures and equipment....................... 33,412 31,134 -------- -------- 220,422 216,293 Less accumulated depreciation and amortization.......... (32,737) (21,562) -------- -------- Net property and equipment.............................. $187,685 $194,731 ======== ========
86 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, 1999 and 1998:
1999 1998 -------- -------- Capital loans payable to Argosy, noninterest bearing, no stated due date....................................... $ -- $ 63,125 Capital loans payable to Conseco, interest at prime plus 6% (14.5% at December 31, 1999) principal paid in annual installments through 2004...................... 28,911 45,196 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (9.5% at December 31, 1999)............. 17,933 21,707 -------- -------- 46,844 130,028 Less current maturities................................. (9,822) (11,095) -------- -------- $ 37,022 $118,933 ======== ========
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 were paid with distributions of Cash Flow from the Partnership. Interest expense amounted to $7,070, $10,254 (net of $1,086 capitalized) and $3,588 (net of $8,391 capitalized) in the years ended December 31, 1999, 1998 and 1997, respectively. Maturities of long-term debt at December 31, 1999 are as follows: 2000....................................................... $ 9,822 2001....................................................... 19,677 2002....................................................... 5,782 2003....................................................... 5,782 2004....................................................... 5,781
87 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax expense for years ended December 31, 1999, 1998 and 1997 consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Current: Federal........................................ $20,914 $16,863 $ 5,337 State.......................................... 3,068 2,474 781 ------- ------- ------- Total current.................................... 23,982 19,337 6,118 ------- ------- ------- Deferred: Federal........................................ 863 1,642 (2,466) State.......................................... 127 241 (393) ------- ------- ------- Total deferred................................... 990 1,883 (2,859) ------- ------- ------- Income tax expense............................... $24,972 $21,220 $ 3,259 ======= ======= =======
The provision for income taxes for the year ended December 31, 1999, 1998 and 1997 differs from that computed at the Federal Statutory tax rate as follows:
1999 1998 1997 -------- -------- -------- 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) Other.................................................... (0.1) 0.1 (0.3) ---- ---- ----- 40.0% 40.2% 19.8% ==== ==== =====
The tax effects of significant temporary differences representing deferred tax assets (liabilities) at December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 -------- -------- -------- Depreciation...................................... $(1,841) $(1,384) $ -- Preopening........................................ 1,433 2,106 2,785 Other, net........................................ 394 254 74 ------- ------- ------ $ (14) $ 976 $2,859 ======= ======= ======
The Company utilized a net operating loss carryforward for income tax purposes of approximately $260 during 1997. 5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $1,798 and $4,154, 1998 and 1997, respectively, which was financed through installment contracts. 88 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED) The Company paid $7,141(including $5,350 to related parties), $12,467 (including $9,908 to related parties) and $5,300 (including $5,007 to related parties) in interest for the years ended December 31, 1999, 1998 and 1997. The Company paid $250, $778 and $143 in taxes for the year ended December 31, 1999, 1998 and 1997, respectively. 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 in 1997. 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 $104, $106 and $107 in 1999, 1998 and 1997, 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 $743, $410 and $517 for the years ended December 31, 1999, 1998 and 1997, respectively. 89 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, 1999, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 2000....................................................... $ 422 2001....................................................... 196 2002....................................................... 143 2003....................................................... 3
Rent expense for the years ended December 31, 1999, 1998, 1997 was $789, $745 and $6,459, 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, 1999 and 1998. 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 $3,424 and $2,256 for the years ended December 31, 1999 and 1998, 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. As of January 28, 2000, none of the partners have exercised their right to sell its interest to the other partners. GUARANTY OF PARENT OBLIGATIONS--In June 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The Company has pledged its interest in the Partnership, as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. As part of a refinancing, in June 1999, Argosy retired through a tender offer $212.7 million of its Mortgage Notes and at December 31, 1999, $22.2 million of the Mortgage Notes remain outstanding. On June 8, 1999, Argosy issued $200 million of Senior Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year, $200 million Senior Secured revolving bank credit agreement ("Credit Facility"). The Company is a named borrower under the Credit Facility and borrowings are secured by substantially all the assets of the Company except those assets of the Partnership. The Company is a guarantor, under the terms of the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of Argosy, including borrowings under the Credit Facility. 90 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, 1999 and 1998, and the related statements of income, partners' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Indianapolis, Indiana January 28, 2000 91 INDIANA GAMING COMPANY, L.P. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 29,979 $ 25,491 Accounts receivable, net of allowance for doubtful accounts of $679 and $701, respectively................. 776 707 Other current assets...................................... 449 642 -------- -------- Total current assets.................................... 31,204 26,840 -------- -------- NET PROPERTY AND EQUIPMENT.................................. 186,477 193,469 OTHER ASSETS: Intangible assets, net of accumulated amortization of $4,120 and $2,675, respectively......................... 28,121 29,566 -------- -------- Total other assets...................................... 28,121 29,566 -------- -------- TOTAL ASSETS................................................ $245,802 $249,875 ======== ======== CURRENT LIABILITIES: Accounts payable.......................................... $ 3,278 $ 2,744 Accrued payroll and related expenses...................... 4,557 4,195 Accrued interest and preferred equity return.............. 2,120 4,574 Installment contracts payable............................. -- 1,961 Accrued admission and gaming taxes........................ 16,286 10,835 Other accrued liabilities................................. 8,666 8,360 Due to affiliates......................................... 953 945 Current maturities of long-term debt...................... 17,875 21,478 -------- -------- Total current liabilities............................... 53,735 55,092 -------- -------- LONG-TERM DEBT.............................................. 69,234 107,722 PARTNERS' EQUITY: General partner........................................... 77,160 56,592 Limited partners.......................................... 45,673 30,469 -------- -------- Total partners' equity.................................. 122,833 87,061 -------- -------- TOTAL LIABILITIES AND PARTNERS' EQUITY.................... $245,802 $249,875 ======== ========
See accompanying notes to financial statements. 92 INDIANA GAMING COMPANY, L.P. STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES: Casino.................................................... $308,316 $264,352 $127,908 Admissions................................................ 18,893 16,025 7,895 Food, beverage, hotel and other........................... 33,481 24,922 7,005 -------- -------- -------- 360,690 305,299 142,808 Less promotional allowances............................... (28,455) (20,578) (5,784) -------- -------- -------- Net revenues................................................ 332,235 284,721 137,024 -------- -------- -------- COSTS AND EXPENSES: Casino.................................................... 126,572 110,330 58,081 Food, beverage, hotel and other........................... 22,269 18,879 5,746 Other operating expenses.................................. 8,667 8,222 13,119 Selling, general and administrative....................... 51,643 41,615 21,607 Management fees-related parties........................... 15,386 13,209 4,809 Depreciation and amortization............................. 13,634 12,567 10,922 -------- -------- -------- 238,171 204,822 114,284 -------- -------- -------- Income from operations...................................... 94,064 79,899 22,740 OTHER INCOME (EXPENSE): Interest income........................................... 283 1,205 1,400 Interest expense.......................................... (14,203) (19,874) (7,694) -------- -------- -------- (13,920) (18,669) (6,294) -------- -------- -------- Net income prior to preferred equity return................. 80,144 61,230 16,446 Preferred equity return..................................... (4,864) (5,554) (5,443) -------- -------- -------- Net income attributable to common equity partners........... $ 75,280 $ 55,676 $ 11,003 ======== ======== ========
See accompanying notes to financial statements. 93 INDIANA GAMING COMPANY, L.P. STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
COMMON EQUITY (DEFICIT) PREFERRED EQUITY ------------------------------ ------------------------------ TOTAL GENERAL LIMITED GENERAL LIMITED PARTNERS' PARTNER PARTNERS TOTAL PARTNER PARTNERS TOTAL EQUITY -------- -------- -------- -------- -------- -------- --------- 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 return.................. 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 Net income prior to preferred equity return.................. 46,083 34,061 80,144 -- -- -- 80,144 Preferred equity return.......... (2,797) (2,067) (4,864) 2,801 2,063 4,864 -- Accrued preferred equity distribution................... -- -- -- (2,801) (2,063) (4,864) (4,864) Preferred equity principal repayments..................... -- -- -- (2,866) (2,118) (4,984) (4,984) Common equity distributions...... (19,852) (14,672) (34,524) -- -- -- (34,524) -------- -------- -------- ------- ------- ------- -------- Balance, December 31, 1999......... $ 59,470 $ 32,597 $ 92,067 $17,690 $13,076 $30,766 $122,833 ======== ======== ======== ======= ======= ======= ========
See accompanying notes to financial statements. 94 INDIANA GAMING COMPANY, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income attributable to common equity partners......... $ 75,280 $ 55,676 $ 11,003 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 13,634 12,567 10,922 Accrued preferred equity dividends.................... 4,864 5,554 5,443 Loss on disposal of equipment......................... 729 391 -- Changes in operating assets and liabilities: Accounts receivable................................... (69) (325) (244) Other current assets.................................. 193 537 527 Accounts payable...................................... 534 (3,192) 3,502 Accrued interest payable.............................. (2,627) (8,010) 4,625 Accrued liabilities................................... 9,223 17,914 5,436 -------- -------- -------- Net cash provided by operating activities........... 101,761 81,112 41,214 -------- -------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow............................ -- 13,114 1,805 Purchases of property and equipment....................... (5,925) (27,676) (112,867) Payments under development agreement...................... -- (6,583) (13,586) -------- -------- -------- Net cash used in investing activities............... (5,925) (21,145) (124,648) -------- -------- -------- CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: Payments on installment contracts......................... (1,961) (3,125) (4,116) Payment of preferred return to partners................... (7,788) (8,680) (2,736) Payment of preferred equity principal to partner.......... (4,984) -- -- Proceeds from contributed capital......................... -- 1,814 13,569 Repayment of long-term debt-related party................. (38,317) (36,911) (6,369) Repayment of long-term debt-outside party................. (3,774) (3,292) -- Proceeds from long-term debt.............................. -- -- 119,243 Common equity distributions............................... (34,524) (25,435) (3,563) Other..................................................... -- (104) (553) -------- -------- -------- Net cash (used in) provided by financing activities..... (91,348) (75,733) 115,475 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 4,488 (15,766) 32,041 Cash and cash equivalents, beginning of year................ 25,491 41,257 9,216 -------- -------- -------- Cash and cash equivalents, end of year...................... $ 29,979 $ 25,491 $ 41,257 ======== ======== ========
See accompanying notes to financial statements. 95 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 two limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, and Centaur, Inc., a 13.5% limited partner. Net income 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 1998 and 1997 amounts have been reclassified to conform to the 1999 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. 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: 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
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. 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, 1999 and 1998. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $401 and $271 at December 31, 1999 and 1998, 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. Admissions, hotel and other revenue is recognized at the time the related service is performed. The retail value of 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 96 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1999 1998 1997 -------- -------- -------- Admissions.................................................. $5,895 $4,409 $1,646 Hotel rooms................................................. 1,059 751 -- Food, beverage and other.................................... 11,590 9,455 2,459
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $5,803, $5,245 and $4,877 for the years ended December 31, 1999, 1998 and 1997, respectively. INCOME TAXES--No provision 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:
DECEMBER 31, ------------------- 1999 1998 -------- -------- Land........................................................ $ 16,045 $ 16,045 Building and leasehold and shore improvements............... 127,839 127,605 Riverboat, docks and improvements........................... 41,808 40,191 Furniture, fixtures and equipment........................... 33,412 31,135 -------- -------- 219,104 214,976 Less accumulated depreciation and amortization.............. (32,627) (21,507) -------- -------- Net property and equipment.................................. $186,477 $193,469 ======== ========
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, -------------------- 1999 1998 -------- --------- Capital loans payable to partners, interest at prime plus 6% (14.5% at December 31, 1999), principal paid in annual installments through 2004................................. $ 69,176 $ 107,493 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (9.5% at December 31, 1999)............................... 17,933 21,707 -------- --------- 87,109 129,200 Less current maturities..................................... (17,875) (21,478) -------- --------- $ 69,234 $ 107,722 ======== =========
97 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT (CONTINUED) 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 $12,240, $18,444 (net of $1,146 capitalized) and $7,320 (net of $8,321 capitalized) for the years ended December 31, 1999, 1998, and 1997, respectively. Maturities of long-term debt at December 31, 1999 are as follows: 2000....................................................... $17,875 2001....................................................... 27,728 2002....................................................... 13,835 2003....................................................... 13,835 2004....................................................... 13,836
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. During 1999, in accordance with the partnership agreement, $4,984 of the preferred equity initially contributed was repaid. Of the amount repaid, $2,866 was paid to the General Partner and $2,118 was paid to Conseco. 5. SUPPLEMENTAL CASH FLOW INFORMATION The Partnership acquired equipment in the amount of $1,798 and $4,154 in 1998, and 1997, respectively, which was financed through installment contracts. The Partnership paid $13,735 ($11,943 to related parties), $25,889 ($23,329 to related parties) and $12,004 ($11,712 to related parties) in interest for the years ended December 31, 1999, 1998 and 1997, 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. 98 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. OTHER RELATED PARTY TRANSACTIONS (CONTINUED) 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 in 1997. 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 $104, $106 and $107 in 1999, 1998, and 1997, 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 $743, $410 and $517 for the years ended December 31, 1999, 1998 and 1997, respectively. 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, 1999, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 2000....................................................... $422 2001....................................................... 196 2002....................................................... 143 2003....................................................... 3
Rent expense, including related party leases, for the years ended December 31, 1999, 1998 and 1997 was $789, $745 and $6,459, 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 99 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, 1999 and 1998. 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 $3,424 and $2,256 at December 31, 1999 and 1998, 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. As of January 28, 2000, none of the partners have exercised their right to sell its interest to the other partners. 100 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 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. 101 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, 1999 and 1998. Consolidated Statements of Operations--years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows--years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Stockholders' Equity--years ended December 31, 1999, 1998 and 1997. 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 103 are filed with this Form 10-K or incorporated by reference as set forth below. 102 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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). 3.3 Certificate of Incorporation of Alton Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.4 By-laws of Alton Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.5 Certificate of Incorporation of Argosy of Louisiana, Inc. (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.6 By-laws of Argosy of Louisiana, Inc. (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.7 Amended and Restated Articles of Partnership In Commendam of Catfish Queen Partnership In Commendam (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.8 Certificate of Incorporation of the Indiana Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.9 By-laws of the Indiana Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.10 Certificate of Incorporation of Iowa Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.11 By-laws of Iowa Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.12 Certificate of Incorporation of Jazz Enterprises, Inc. (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.13 By-laws of Jazz Enterprises, Inc. (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference).
103
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 3.14 Certificate of Incorporation of The Missouri Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 3.15 By-laws of The Missouri Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) 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 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). 4.3 First Supplemental Indenture dated as of May 18, 1999, with respect to the Indenture dated as of June 5, 1996, by and among the Company, Bank One Trust Company, NA. (as successor in interest to First National Bank of Commerce), as Trustee, and the Guarantors named therein, for the Company's 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. 333-83567) and incorporated herein by reference). 4.4 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). 4.5 Indenture dated as of June 8, 1999 by and among the Company, Bank One Trust Company, as Trustee, and the Subsidiary Guarantors named therein, for the Company's 10 3/4% Senior Subordinated Notes due 2009 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 4.6 Form of the Company's 10 3/4% Senior Subordinated Notes due 2009 issued on June 8, 1999 in the aggregate principal amount of $200,000,000 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 4.7 Registration Rights Agreement dated as of June 8, 1999 by and among the Company, the Subsidiary Guarantors named therein and the Placement Agents named therein (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 4.8 Form of Exchange Agent Agreement between the Company and Bank One Trust Company, NA. (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference).
104
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 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 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). 4.14 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). 4.15 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). 4.16 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 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). 10.2 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). 10.3 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).
105
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 10.4 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). 10.5 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). 10.6 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). 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 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). 10.12 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). 10.13 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). 10.14 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).
106
EXHIBIT NUMBER DESCRIPTION - --------------------- ----------- 10.15 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). 10.16 Employment Agreement between the Company and James B. Perry dated as of April 22, 1999 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 10.17 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). 10.18 Credit Agreement dated as of June 8, 1999 among the Company, Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership In Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc. and The Missouri Gaming Company, as Borrowers, the Lenders named therein and Wells Fargo Bank, National Association, as Agent Bank (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-83567) and incorporated herein by reference). 10.19 Form of Separation Agreement 13 Portions of the 1999 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of Contents. 21 List of Subsidiaries 23 Consent of Ernst & Young LLP 24 Powers of Attorney of directors 27 Financial Data Schedule
- ------------------------ (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, 1999: None (c) The Exhibits filed herewith, if any, are identified on the Exhibit index 107 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 10th day of March, 2000. ARGOSY GAMING COMPANY BY: /S/ JAMES B. PERRY ----------------------------------------- PRESIDENT AND CHIEF EXECUTIVE OFFICER
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 Executive ------------------------------------------- Officer March 10, 2000 James B. Perry /s/ DALE R. BLACK Vice President--Chief ------------------------------------------- Financial Officer (Principal March 10, 2000 Dale R. Black Accounting 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 10, 2000
108 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1999 AND 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents................................. $ 531 $ 50,818 Restricted cash in escrow................................. 25,244 -- Income taxes receivable................................... 653 747 Receivables............................................... 1,479 796 Deferred income taxes..................................... 17,261 183 Other current assets...................................... 1,555 1,047 -------- -------- Total current assets.................................... 46,723 53,591 Net property and equipment................................ 1,040 644 Investment in and advances to consolidated subsidiaries... 338,095 332,528 Other assets.............................................. 8,900 13,028 Deferred taxes............................................ -- 3,546 -------- -------- TOTAL ASSETS............................................ $394,758 $403,337 ======== ======== CURRENT LIABILITIES: Accounts payable and accrued liabilities.................. $ 7,917 $ 7,134 Current maturities of long-term debt...................... 22,242 -- -------- -------- Total current liabilities............................... 30,159 7,134 Long-term debt.............................................. 303,800 350,000 Deferred income taxes....................................... 2,554 -- Series A Convertible Preferred Stock, $.01 par value, 10,000,000 shares authorized, 0 and 547 shares issued and outstanding at December 31, 1999 and 1998, respectively... -- 5,340 STOCKHOLDERS' EQUITY: Common stock, $.01 par; 60,000,000 shares authorized; 28,325,106 and 25,830,313 shares issued and outstanding at December 31, 1999 and 1998, respectively 283 258 Capital in excess of par.................................... 80,362 74,484 Accumulated deficit......................................... (22,400) (33,879) -------- -------- 58,245 40,863 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $394,758 $403,337 ======== ========
See accompanying notes to condensed financial statements. 109 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) DECEMBER 31, 1999, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- REVENUES Management fees and other................................... $ 3,108 $ 1,988 $ 5,795 COSTS AND EXPENSES General and administrative.................................. 15,144 9,984 23,630 -------- ------- -------- Loss from operations........................................ (12,036) (7,996) (17,835) Net interest expense........................................ (32,203) (38,356) (32,145) Equity in net income of consolidated subsidiaries........... 49,383 27,488 7,287 -------- ------- -------- Income (loss) before income taxes and extraordinary item.... 5,144 (18,864) (42,693) Income tax benefit.......................................... 31,282 25,425 2,480 -------- ------- -------- Net income (loss) before extraordinary item................. 36,426 6,561 (40,213) Extraordinary loss on extinguishment of debt (net of income tax benefit of $13,500)................................... (24,920) -- -- -------- ------- -------- Net income (loss)........................................... 11,506 6,561 (40,213) Preferred stock dividend and accretion...................... (27) (820) -- -------- ------- -------- Net income (loss) attributable to common stockholders....... $ 11,479 $ 5,741 $(40,213) ======== ======= ========
See accompanying notes to condensed financial statements. 110 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) DECEMBER 31, 1999, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1999 1998 1997 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 11,506 $ 6,561 $ (40,213) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................. 1,654 2,458 4,033 Gain on sale of assets.................................... (203) -- -- Extraordinary item........................................ 24,920 -- -- Writedown of assets held for sale......................... -- -- 9,600 Compensation expense recognized on issuance of stock...... 113 239 175 Deferred income taxes..................................... 2,522 (1,440) 6,454 Changes in operating assets and liabilities: Other current assets.................................... (1,141) 1,808 11,254 Accounts payable and accrued liabilities................ 783 (1,677) (1,714) -------- -------- --------- Net cash provided by (used in) operating activities... 40,154 7,949 (10,411) -------- -------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from sale of assets.............................. 503 -- -- Investment in and advances to subsidiaries................ (1,567) 17,969 (53,350) Restricted cash held by trustee........................... -- 12,431 57,201 Purchased of property and equipment....................... (382) (58) (2,084) -------- -------- --------- Net cash provided by (used in) investing activities... (1,446) 30,342 1,767 -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility............................. 161,800 -- -- Repayment of credit facility.............................. (58,000) -- -- Proceeds from the issuance of long term stock............. 200,000 -- -- Issuance of preferred stock............................... -- 7,365 -- Cash held in escrow....................................... (25,244) -- -- Repurchase of First Mortgage Notes........................ (241,043) -- -- Redemption of convertible debentures...................... (117,280) -- -- Increase in deferred finance costs........................ (8,736) -- (85) Other..................................................... (492) (625) -- -------- -------- --------- Net cash provided by (used in) financing activities... (88,995) 6,740 (85) -------- -------- --------- Net (decrease) increase in cash and cash equivalents........ (50,287) 45,031 (8,729) Cash and cash equivalents, beginning of year................ 50,818 5,787 14,516 -------- -------- --------- Cash and cash equivalents, end of year...................... $ 531 $ 50,818 $ 5,787 ======== ======== =========
See accompanying notes to condensed financial statements. 111 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY ONLY) DECEMBER 31, 1999, 1998 AND 1997 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 statments of Argosy. 112 EX-10.19 2 EXHIBIT 10.19 EXHIBIT 10.19 FORM OF SEPARATION AGREEMENT This Separation Agreement is made and entered into this ____ day of ______, 2000 (this "Agreement") by and between ARGOSY GAMING COMPANY, a Delaware corporation (the "Company") and [Employee], an individual residing in the State of [State], (the "Employee"); RECITALS: The Compensation Committee of the Company's Board of Directors believes it is in the best interest of the Company to enter into this Agreement with the Employee. NOW THEREFORE, in consideration of the premises and of the covenants and agreements herein contained, the parties hereto agree as follows: 1. EMPLOYMENT. The Company agrees that the Employee shall be employed by the Company during the term of this Agreement initially in the capacity of [Job Title], or in such other capacity as determined by the Company's Chief Executive Officer or Board of Directors. The Employee shall have such duties and responsibilities as are assigned to the Employee by the Chief Executive Officer or Board of Directors of the Company. The Employee acknowledges and agrees that the Employee's duties and responsibilities hereunder may include serving as an officer of the Company's subsidiaries and affiliates without any additional compensation therefor. The Employee hereby accepts employment from the Company upon the terms and conditions herein set forth and agrees to devote his/her best efforts and energies to the business of the Company. 2. TERM. The term of this agreement shall begin on [Date] and continue unless terminated as hereinafter provided in Sections 5 and 6 hereof. 3. COMPENSATION. (a) BASE SALARY. During the term of this Agreement the Company shall pay to Employee a Base Salary equal to [Salary] per annum. The Company shall pay the Base Salary to Employee in accordance with the usual and customary payroll procedures of the Company. This Base Salary may be adjusted upward at any time without altering the terms of this Agreement. (b) EXECUTIVE AND MANAGEMENT OPTIONS. You shall be eligible to participate in any and all stock option programs created by the Stock Option Committee of the Board of Directors; provided, however, the Stock Option Committee has sole and absolute discretion in granting stock options. The terms and conditions of the stock option program and the stock option grant will be more fully set forth in any Stock Option Agreements and stock grant certificates adopted and delivered respectively. (c) FRINGE BENEFITS. The Employee shall be entitled to participate in all insurance and other fringe benefit programs of the Company as are accorded other employees of the Company holding similar positions as the Employee. The employee shall be (i) entitled to participate in the company's health plan effective the first day of employment if a new employee, and (ii) entitled to coverage or reimbursement for any family medical and dental costs not covered by the Company's plans, subject to the Company's Supplemental Medical and Dental Reimbursement Plan for Executives and regulatory guidelines. (d) SPECIAL ALLOWANCES. The Company agrees to pay a special allowance of $500 per month to reimburse the Employee for any initiation fees, monthly dues and any assessments in social clubs, fees associated with executive services such as financial planning, as well as to defray the costs and expenses of his/her automobile. (e) COMPLIMENTARY PRIVILEGES. The Employee shall be entitled to an employee discount of not less than 25% at Company retail establishments. The Employee and his/her immediate family shall be entitled to complimentary privileges in the Company restaurants and eating establishments. (f) REIMBURSEMENT OF EXPENSES. The Employee shall be reimbursed for all items of travel and entertainment and miscellaneous expenses reasonably incurred by him/her on behalf of the Company. Reimbursement for such expenses will be pursuant to, and limited by, the Company's policies with respect to reimbursing business expenses of employees of the Company holding similar positions as the Employee and will require proper documentation. (g) ENTIRE COMPENSATION. The compensation and benefits provided for in this Agreement are in full payment of the services to be rendered by the Employee to the Company. 4. CHANGE OF CONTROL. In the event that there occurs a Change of Control (as hereinafter defined) of the Company, the Employee shall, notwithstanding any actions taken by the Company or its successor after the Change of Control, be entitled to an amount equivalent to three years of Base Salary. Such amount shall be paid only if the Employee's employment is (i) terminated due to the Change of Control, or terminated within one (1) year after the Change of Control, or (ii) if the Employee is offered and declines a position with lesser responsibility, or lesser salary as a result of the Change of Control, or is offered and declines a position with lesser responsibility, or lesser salary within one (1) year after the Change of Control. In the event the Employee's employment is terminated after the public announcement of a Change of Control but prior to the consummation of a Change of Control for any reason other than those set forth in Sections 5, 6(a), (b), (d) or (e), then the Employee shall be entitled to an amount equivalent to three years of Base Salary. For purposes of this Agreement, "Change of Control" shall have the meaning as set forth in the Company's Indenture dated July 6, 1994 with Bank One (Springfield, Illinois) for its 12% Convertible Subordinated Notes due 2001. 5. DEATH OR TOTAL DISABILITY OF EMPLOYEE. (a) DEATH. In the event of the death of the Employee during the term of this Agreement, this Agreement shall terminate effective as of the date of the Employee's death and the Company shall have no further obligations or liability hereunder, except the Company shall pay to the Employee's estate the portion, if any, of the (i) Employee's Base Salary for the period up to the Employee's date of death which remains unpaid; and (ii) amounts payable pursuant to any employee benefits plans in which the Employee was a participant prior to his/her death. (b) DISABILITY. In the event the Employee suffers a Disability (as hereinafter defined) during the term of this Agreement, the Company shall have the right to terminate the Employee's employment hereunder by giving the Employee ten (10) days written notice thereof, and upon expiration of such ten (10) day period, the Company shall not have any further obligations or liability under this Agreement, except the Company shall pay to Employee the portion, if any, of: (i) the Employee's Base Salary for the period to the date of termination which remains unpaid; and (ii) any amounts payable pursuant to any employee benefit plans in which the Employee was a participant prior to the date of his termination. The term "Disability", when used herein, shall mean when the Employee qualifies for a benefit under the Company's long term disability plan or if the Company does not have a long term disability plan, it shall mean a mental or physical condition which, in the reasonable opinion of the Company's designated medical doctor, renders the Employee unable or incompetent to carry out the job responsibilities he/she held or tasks to which he/she was assigned at the time the disability was incurred for a period of 60 consecutive days or 60 days in any 12 consecutive month period. 6. TERMINATION. Notwithstanding anything contained in this Agreement to the contrary, the Employee's employment under this Agreement may be terminated by the Company upon written notice to Employee for any of the following reasons: (a) If the Employee is denied a gaming license by any state gaming board or any other gaming authority having jurisdiction over the operations of the Company or its subsidiaries or affiliates ("Gaming Body"), or if the Employee's license issued by any Gaming Body is suspended, revoked, sanctioned or reprimanded for any period of time or for any conduct; (b) If the Employee commits an offense involving moral turpitude under Federal, State or local laws or ordinances or conducts himself/herself publicly or privately in any manner which causes him/her to be held in public ridicule or scorn, or causes public scandal or uses liquors, narcotics or drugs to such an extent as will have visible detrimental effect on the Company; (c) If the Employee fails to perform his/her job responsibilities in a manner satisfactory to the Chief Executive Officer or the Board of Directors; (d) If the Employee knowingly violates any of the internal control procedures and/or company policies of the Company; or, knowingly violates any statute, rule or regulation of any Gaming Body, the United States Coast Guard, or any other governmental body having jurisdiction over the business activities of the Company; and; (e) If the Employee breaches any term or condition of this agreement. In the event that the Company shall terminate the Employee's employment pursuant to this Section 6, the Company shall not have any further obligations or liabilities under this Agreement, except the Company shall (a) pay to the Employee his/her Base Salary up to the 30th day following the date of the Employee's termination hereunder or if the termination is pursuant to Section 6(c) hereof or pursuant to a job elimination with results in a discontinuation of employment with the Company, then the Company shall pay to Employee his/her Base Salary for three (3) months following the date of the Employee's termination; and (b) any amounts or benefits payable pursuant to any employee benefit plan in which the Employee was a participant prior to the date of his/her termination, subject, however, to the terms and provisions of any such employee benefit plan. Without limiting the foregoing, the Employee shall surrender all vehicles, credit cards, uniforms, cellular telephones, pagers and other Company property to the Company prior to any payment to the Employee hereunder. Following any notice of termination of employment hereunder, Employee shall fully cooperate with the Company in all matters relating to the winding up of his/her pending work on behalf of the Company and the orderly transfer of such work to the other professional employees of the Company. On or after the giving of notice of termination hereunder and during any applicable notice period, the Company shall be entitled to such full-time or part-time services of Employee as the Company may reasonably require. 7. DISCOVERIES. The Employee will promptly disclose in writing to the Company each improvement, discovery, idea, concept and invention relating to the business of the Company, made or conceived by the Employee either alone or in conjunction with others while employed by the Company hereunder or within six (6) months after the termination of such employment. This provision shall not apply to an invention for which no equipment, supplies, facility or trade secret information of the Company was used and which was developed entirely on the Employee's own time, and (a) which does not relate (i) to the business of the Company or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) which does not result from any work performed by the Employee for the Company. The Employee will not disclose any such improvement, discovery, idea, concept or invention to any person except the Company. Each such improvement, discovery, idea, concept or invention shall be the sole and exclusive property of, and is hereby assigned to, the Company, and at the request of the Company, the Employee will assist and cooperate with the Company and any person or persons (at the Company's or such other person's expense) from time to time designated by the Company to obtain for the Company the grant of any letters patent in the United States and/or such other country or countries as may be designated by the Company, covering any such improvement, discovery, idea, concept or invention and will in connection therewith execute such applications, statements, assignments or other documents, furnish such information and data and take all such other action (including, without limitation, the giving of testimony) as the Company may from time to time reasonably request. 8. NON-DISCLOSURE AND NON-COMPETITION. (a) The Employee recognizes and acknowledges that he/she will have access to certain confidential information of the Company, including but not limited to, trade secrets, customer lists, sales records, future casino development plans and other proprietary commercial information, and that such information constitutes valuable, special and unique property of the Company. The Employee agrees that he/she will not, for any reason or purpose whatsoever, during or after the term of his/her employment, disclose any of such confidential information to any party without express authorization of the Company, except as necessary in the ordinary course of performing his/her duties hereunder. (b) The Employee agrees with the Company that during the term of his/her employment with the Company (or any affiliate or subsidiary of the Company) and for a period of one (1) year following the termination of his/her employment with the Company (or any affiliate or subsidiary of the Company), he/she will not, without prior written consent of the Company, engage directly or indirectly in any business (either financially or as a shareholder, employee, officer, partner, independent contractor or owner, or in any other capacity calling for the rendition of personal service or acts of management, operation or control) which owns, operates or manages casinos, bingo parlors or other gaming facilities within the Territory (as hereinafter defined); provided, however, that Employee may own up to three percent (3%) of any class of securities of a corporation engaged in such a competitive business if such securities are listed on a national securities exchange or registered under the Securities Exchange Act of 1934. (c) The Employee further agrees that for a period of ninety (90) days following the termination of his/her employment with the Company (or any affiliate or subsidiary of the Company), he/she will not, without prior written consent of the Company, recruit any other Company employees away from the Company. (d) The term "Territory" as used herein shall mean a 150 mile radius of each casino, bingo parlor or gaming facility being operated or managed by the Company or for which the Company has either received a local community endorsement or filed for a gaming license as of the date of termination. (e) The Employee acknowledges that his/her compliance with the agreements in paragraphs 8(a) and 8(b) hereof is necessary to protect the good will and other proprietary interests of the Company and that he/she is one of the principal executives of the Company and conversant with its affairs, its trade secrets, its customers and other proprietary information. The Employee acknowledges that a breach of his/her agreements in paragraphs 8(a) and 8(b) hereof will result in irreparable and continuing damage to the Company and the business of the Company, for which there will be no adequate remedy at law; and agrees that in the event of any breach of the aforesaid agreements in paragraphs 8(a) and 8(b), the Company and its successors and assigns shall be entitled to injunctive relief of 50% of the Employee's annual salary and to such other and further relief as may be proper. The Employee further agrees that in the event of any breach of the agreement in paragraph 8(c), the Company and its successors and assigns shall be entitled to injunctive relief of 100% of the Employee's annual salary and to such other and further relief as may be proper. 9. SUPERSEDES OTHER AGREEMENTS. This Agreement supersedes and is in lieu of any and all other employee arrangements between the Employee and the Company or any of their respective subsidiary and affiliated companies. 10. AMENDMENTS. Any amendment to this Agreement, including any extensions or renewal of the term of employment of Employee, shall be made in writing and signed by the parties hereto. 11. ENFORCEABILITY. If any provision of this Agreement shall be held invalid or unenforceable, in whole or in part, then such provision shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from the Agreement as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision had been originally incorporated herein as so modified or restricted, or as if such provision had not been originally incorporated herein, as the case may be. 12. GOVERNING LAW. The validity and effect of this Agreement shall be governed exclusively by the laws of the State of Illinois, excluding the "conflicts of laws" rules of that state. 13. ASSIGNMENT. (a) The rights and obligations of the Company under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company, subject to the provisions set forth in Section 4 hereof. (b) This Agreement and the obligations created hereunder may not be assigned by the Employee. 14. ATTORNEYS' FEES. In the event any legal action to enforce the terms and conditions of this Agreement is commenced, reasonable attorneys' fees, court costs and all reasonable costs of litigation shall be awarded to the prevailing party. 15. NOTICES. All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given when personally delivered or mailed, by certified or registered mail, return receipt requested, addressed to the intended recipient as follows: IF TO THE EMPLOYEE: [Address] IF TO THE COMPANY: Argosy Gaming Company 219 Piasa Street Alton, IL 62002 ATTN: Legal Department Any party may from time to time change its address for the purposes of notices to that party by a similar notice specifying a new address, but no such change shall be deemed to have been given until it is actually received by the party sought to be charged with the contents. 16. WAIVER. No claim or right arising out of a breach or default under this Agreement can be discharged in whole or in part by a waiver of that claim or right unless the waiver is supported by consideration and is in writing and executed by the aggrieved party hereto or its or his/her duly authorized agent. A waiver by any party hereto of a breach or default by the other party hereto of any provision of this Agreement shall not be deemed a waiver of any prior or subsequent compliance therewith, and such provision shall remain in full force and effect. IN WITNESS WHEREOF, this Agreement has been executed by the Company, by a duly authorized officer, and by the Employee on the date first above written. ARGOSY GAMING COMPANY By: ------------------------------- Title: ---------------------------- EMPLOYEE ---------------------------------- EX-13 3 EXHIBIT 13 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ ANNUAL REPORT 1999 ============================================================================== 1 ARGOSY GAMING COMPANY 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 Argosy Casino in Baton Rouge, Louisiana; the Belle of Sioux City Casino in Sioux City, Iowa; and the Argosy Casino and Hotel in Lawrenceburg, Indiana. The results of the Company's Lawrenceburg casino reflect a phased opening strategy. The Lawrenceburg casino opened at a temporary site on December 10, 1996, moved to and opened the permanent pavilion on December 10, 1997 and became fully operational with the opening of its hotel in May 1998. The Company's results of operations for the year ended December 31, 1999 reflect increases in both revenues and operating income at all of its casino properties. This improvement is primarily attributable to the successful execution of the Company's operating strategy, which 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, continued emphasis on database marketing techniques, and prudently investing in gaming and gaming-related assets for its properties. In addition, 1999 revenues were favorably impacted by regulatory changes in three of its markets; dockside gaming in Alton, beginning June 26, the July 1 elimination of video poker at many non-casino sites in Baton Rouge, and the advent of open boarding in Kansas City on November 15. The Company expects that these regulatory changes will continue to have positive year over year impact through the first half of 2000. In addition, the results of the Company's Baton Rouge casino were favorably impacted by an elimination of an additional head tax of $2.50 per passenger which ceased on July 29, 1999 when the Company began construction of a $20 million, 300 room convention hotel at its Baton Rouge property. The Company's ability to recover the carrying value of its long-lived assets in Baton Rouge is dependent on several factors, including maintaining the current level of operating results and the competitive environment. If the Company does not achieve anticipated operating results or experiences deterioration in its operating results or the competitive environment, management's evaluation of recoverability could change and the Company could record an impairment loss amounting to a substantial portion of its $113 million Baton Rouge investment. During December 1999, the Company replaced its landing facility at its Alton property which had a net book value of $7.3 million. The Company is currently evaluating the future use of these assets which may include utilization in the Company's other operations or the sale of the assets. If these assets are sold, a loss could be recorded for a substantial portion of the $7.3 million net book value. During 1999, the Company recorded an extraordinary loss of $24.9 million (net of a $13.5 million tax benefit) related to the early extinguishment of debt. Also, during 1999, the Company recognized a $10.0 million tax benefit representing prior federal income tax net operating losses that are expected to be utilized in 2000. 2 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In Thousands)
YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 ---------------- ---------------- ----------------- CASINO REVENUES Alton Belle Casino $ 84,664 $ 67,798 $ 61,877 Argosy Casino - Riverside 84,892 71,955 61,750 Argosy Casino - Baton Rouge 53,262 46,828 47,628 Belle of Sioux City Casino 28,013 22,572 20,667 Argosy Casino - Lawrenceburg 308,316 264,352 127,908 --------- --------- --------- Total $ 559,147 $ 473,505 $ 319,830 ========= ========= ========= NET REVENUES Alton Belle Casino $ 88,079 $ 72,064 $ 67,208 Argosy Casino - Riverside 89,813 76,960 66,548 Argosy Casino - Baton Rouge 55,110 49,054 50,436 Belle of Sioux City Casino 28,889 23,526 21,672 Argosy Casino - Lawrenceburg 332,235 284,721 137,024 Other 428 343 1,195 --------- --------- --------- Total $ 594,554 $ 506,668 $ 344,083 ========= ========= ========= INCOME (LOSS) FROM OPERATIONS(1) Alton Belle Casino $ 23,115 $ 13,850 $ 7,489 Argosy Casino - Riverside 12,564 5,369 2,481 Argosy Casino - Baton Rouge 1,129 (3,381) (4,146) Belle of Sioux City Casino 4,570 1,919 848 Argosy Casino - Lawrenceburg 103,295 87,907 25,625 Jazz Enterprises, Inc. (4) (5,118) (6,312) (4,655) Corporate (5) (15,113) (9,990) (11,432) Other (1,417) (1,551) 1,701 --------- --------- --------- Total $ 123,025 $ 87,811 $ 17,911 ========= ========= ========= EBITDA(1)(2) Alton Belle Casino $ 27,388 $ 17,835 $ 11,944 Argosy Casino - Riverside 18,252 11,293 8,428 Argosy Casino - Baton Rouge 6,348 1,891 1,322 Belle of Sioux City Casino 5,838 3,016 1,861 Argosy Casino - Lawrenceburg 123,083 105,674 38,471 Lawrenceburg financial advisory fee (3) (6,154) (5,200) (1,924) Jazz Enterprises, Inc. (4) (2,417) (3,633) (2,301) Corporate (5) (15,082) (9,436) (9,324) Other (173) (193) 2,726 --------- --------- --------- Total $ 157,083 $ 121,247 $ 51,203 ========= ========= =========
3 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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) The Lawrenceburg partnership pays a financial advisory fee equal to 5.0% of its EBITDA to a minority partner. (4) Jazz Enterprises, Inc. is a wholly-owned subsidiary that owns and operates the Catfish Town real estate development adjacent to the Company's Baton Rouge casino. (5) 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. 4 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 CASINO--Casino revenues for the year ended December 31, 1999, increased by 18.1% to $559.1 million from $473.5 million for the year ended December 31, 1998, due in part to a $44.0 million increase in casino revenues at the Lawrenceburg casino, which generated total casino revenues of $308.3 million for the year ended December 31, 1999. The Company's other properties reported an aggregate 19.9% increase in casino revenues from $209.2 to $250.8 million. This improvement is primarily attributable to the regulatory changes in Illinois, Louisiana and Missouri and to the continued implementation of the Company's operating and marketing strategies. Specifically, Alton casino revenues increased from $67.8 to $84.7 million due in part to dockside gaming effective June 1999; Riverside casino revenues increased from $72.0 to $84.9 million; Sioux City casino revenues increased from $22.6 to $28.0 million and Baton Rouge casino revenues increased from $46.8 to $53.2 million. Casino expenses increased 13.0% to $250.6 million for the year ended December 31, 1999, from $221.7 million for the year ended December 31, 1998. This increase is primarily due to an increase of $17.9 million in gaming taxes as a result of the overall increase in casino revenues. Baton Rouge casino expense is net of a $1.6 million decrease in admission taxes due to the elimination of an additional head tax, which commenced when construction began on the Baton Rouge hotel in July 1999. ADMISSIONS--Admissions revenues (net of complimentary admissions) were $7.2 million for the years ended December 31, 1999 and 1998. FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased from $51.1 million to $58.0 million for the year ended December 31, 1999. This increase is attributable to the restaurants and the hotel at the Lawrenceburg property being open for the entire year in 1999. Food, beverage and other net profit improved $6.0 million to $16.5 million for the year ended December 31, 1999. Alton, Riverside and Baton Rouge each reported relatively the same food and beverage revenues but decreases in food and beverage expenses. Alton's decrease was due to the closing of one of its restaurants during the entire year ended December 31, 1999 in conjunction with a major renovation. Riverside's and Baton Rouge's decreases were primarily due to the decreased use of food and beverage as promotional items. The Lawrenceburg hotel contributed $4.2 million in net revenues and $1.9 million of operating profit. The hotel occupancy percentage was 83.2% and the average daily room rate, including promotional allowances, was $84. In 1998, the hotel occupancy percentage was 73.5% and the average daily room rate, including promotional allowances, was $79 during the months the hotel was open. OTHER OPERATING EXPENSES--Other operating expenses increased from $26.6 million in 1998 to $27.9 million for the year ended December 31, 1999. SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative expenses increased 21.7% to $117.5 million for the year ended December 31, 1999, due primarily to an increase at Lawrenceburg of $3.9 million related to expanded marketing and $4.5 million in additional development payments to the city due to the increased gaming revenues. Corporate expenses increased due to expenses of $1.8 million related to a severance and settlement arrangement and $3.1 million related to incentive compensation. Marketing expenses increased $4.8 million for the year ended December 31, 1999 but remained relatively flat, at approximately 7%, as a percentage of casino revenues. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased slightly to $34.1 million for the year ended December 31, 1999, from $33.4 million in 1998. INTEREST EXPENSE--Net interest expense decreased $8.2 million to $45.7 million for the year ended December 31, 1999. The decrease in interest expense is primarily attributable to the refinancing completed during 1999 and a decrease of interest to a minority partner of $3.0 million. This decrease, however, was offset by a decrease in capitalized interest of $1.0 million. 5 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INCOME BEFORE EXTRAORDINARY ITEM - The Company recorded net income before extraordinary item of $36.4 million for the year ended December 31, 1999 compared to net income before extraordinary item of $6.6 million in 1998 due primarily to the factors discussed above. EXTRAORDINARY LOSS - The Company recorded an extraordinary loss of $24.9 million for the year ended December 31, 1999 related to the early extinguishment of debt in conjunction with a refinancing. This extraordinary loss is net of a $13.5 million tax benefit. INCOME TAX EXPENSE - The Company recorded income tax expense of $5.9 million for the year ended December 31, 1999 compared to income tax expense of $1.1 million for the year ended December 31, 1998. The Company's effective tax rate has been impacted favorably in 1999 and 1998 due to the utilization of net operating loss carryforwards. Income tax expense was offset by the reversal of a $10.0 million valuation allowance related to prior federal income tax net operating losses that are expected to be utilized in 2000. The Company expects its effective tax rate to be approximately 39% in the future. NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS--The Company reported net income attributable to common stockholders of $11.5 million for the year ended December 31, 1999 compared to $5.7 million for the year ended December 31, 1998, due primarily to the factors discussed above. 6 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 including promotional allowances, 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 34.0% to $96.6 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%. 7 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES During 1999, the Company generated cash flows from operating activities of $126.7 million compared to $81.7 million for 1998. This increase is attributable to the improved operations from the Company's Alton, Riverside, Baton Rouge and Sioux City properties as well as in the increase in operating income from the Lawrenceburg facility. During 1999, the Company used cash flows for investing activities of $37.1 million versus $14.2 million for 1998. Capital expenditures in 1999 consisted of $10.2 million in maintenance capital, primarily related to slot machine replacements and $27.5 million for expansion projects, including the Company's new landing facility (including 130 additional slot machines) in Alton, renovation of the Baton Rouge boat to accommodate additional slot and video games and commencement of construction of a 300 room hotel in Baton Rouge. For the year ended December 31, 1998, capital expenditures were for investment in the Company's properties including final phase construction projects at the Lawrenceburg facility. During 1999, the Company used $132.3 million in cash flows for financing activities compared to $37.0 million in cash flows for the same period in 1998. In 1999, the Company received proceeds of $200 million from the issuance of subordinated notes and $161.8 million from a bank credit facility. The Company repaid long term debt of $327.7 million, placed $25.2 million in funds in an escrow to retire future debt, repaid $58.0 million on the credit facility, used $30.6 million to pay premiums to retire existing debt in connection with its refinancing and used $8.7 million to pay fees in connection with the refinancing. In 1998, the Company received proceeds of $7.4 million from the sale of preferred stock and warrants. Cash flows in both 1999 and 1998 were used to repay loans related to the Company's Lawrenceburg casino, partner equity distributions related to the Lawrenceburg partnership and for payments on installment contracts and other long term debt. At December 31, 1999, the Company had approximately $47.1 million of cash and cash equivalents, including approximately $30.0 million held at the Indiana Partnership. In addition, the Company has placed in escrow $25.2 million to fund interest payments, redemption premium and principal for the $22.2 million of Mortgage Notes that were not tendered in the refinancing but which will be redeemed in June 2000. At December 31, 1999, the Company had outstanding $200 million of Senior Subordinated Notes, which were issued in June 1999 and are due in June 2009 and $103.8 million on a senior secured revolving credit facility. As of February 25, 2000 availability under the credit facility was approximately $104.0 million. 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 2000, Argosy expects maintenance capital expenditures primarily related to the purchase of new gaming product and facility enhancements to be approximately $20.0 million, and expenditures related to the Baton Rouge hotel to be approximately $18.0 million. The Company believes that cash on hand, operating cash flows and available capacity under its credit facility, will be sufficient to fund its current operating, capital expenditure and debt service obligations. The Company's ability to purchase the minority interest in the Indiana Partnership, in the event that the limited partners exercise their right to sell their interest to the other partners, is substantially dependent upon the success of the Lawrenceburg casino. The Company would be required to fund a portion of the minority interest purchase by obtaining additional debt or equity financing. No assurance can be given that the Company would be able to obtain such additional financing on suitable terms. 8 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 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.
FAIR VALUE (dollars in thousands) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99 - -------------------------------------------------------------------------------------------------------------------------- Fixed Rate Debt $ 22,846 $ 670 $ 743 $ 825 $ 916 $ 202,729 $ 228,729 $ 241,175 Average Interest Rate 13.2% 10.5% 10.5% 10.5% 10.5 10.8% Variable Rate Debt 9,822 19,675 5,782 9,582 105,783 - 150,644 150,644 Average Interest Rate 12.4% 11.0% 14.5% 12.0% 8.6% -
IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expended approximately $1.0 million in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its internal systems, or the services of third parties. The Company will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. 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. 9 ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data)
DECEMBER 31, --------------------------------- 1999 1998 --------------- --------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 47,090 $ 89,857 Restricted cash in escrow 25,244 -- Accounts receivable, net of allowance for doubtful accounts of $1,328 and $1,936, respectively 3,909 2,375 Income taxes receivable 653 747 Deferred income taxes 18,681 1,471 Other current assets 4,840 4,806 ----------- ----------- Total current assets 100,417 99,256 ----------- ----------- NET PROPERTY AND EQUIPMENT 405,205 395,920 ----------- ----------- OTHER ASSETS: Deferred finance costs, net of accumulated amortization of $1,069 and $6,363, respectively 8,782 8,758 Goodwill and other intangible assets, net of accumulated amortization of $7,409 and $5,353, respectively 49,761 51,817 Other 2,695 7,001 ----------- ----------- Total other assets 61,238 67,576 ----------- ----------- Total assets $ 566,860 $ 562,752 =========== ===========
See accompanying notes to consolidated financial statements. 10 ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data)
DECEMBER 31, --------------------------------- 1999 1998 --------------- --------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 17,894 $ 10,500 Accrued payroll and related expenses 12,174 9,857 Other accrued liabilities 39,178 34,898 Accrued interest 3,176 4,490 Current maturities of long-term debt 32,668 11,640 -------- -------- Total current liabilities 105,090 71,385 -------- -------- LONG-TERM DEBT 346,705 412,360 DEFERRED INCOME TAXES 9,945 1,943 OTHER LONG-TERM OBLIGATIONS 219 201 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES 46,656 30,660 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 17) - - SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, 0 AND 547 SHARES ISSUED AND OUTSTANDING - 5,340 AT DECEMBER 31, 1999 AND 1998, RESPECTIVELY STOCKHOLDERS' EQUITY: Common stock, $.01 par; 60,000,000 shares authorized; 28,325,106 and 25,830,313 shares issued and outstanding at December 31, 1999 and 1998, respectively 283 258 Capital in excess of par 80,362 74,484 Retained (deficit) earnings (22,400) (33,879) -------- -------- Total stockholders' equity 58,245 40,863 -------- -------- Total liabilities and stockholders' equity $566,860 $562,752 ======== =========
See accompanying notes to consolidated financial statements. 11 ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except share and per share data)
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- REVENUES: Casino $ 559,147 $ 473,505 $ 319,830 Admissions 18,893 16,025 7,895 Food, beverage and other 57,998 51,057 34,836 --------- --------- --------- 636,038 540,587 362,561 Less promotional allowances (41,484) (33,919) (18,478) --------- --------- --------- Net revenues 594,554 506,668 344,083 --------- --------- --------- COSTS AND EXPENSES: Casino 250,559 221,682 163,935 Selling, general and administrative 117,518 96,550 72,069 Food, beverage and other 41,528 40,550 29,962 Other operating expenses 27,866 26,639 28,695 Depreciation and amortization 34,058 33,436 33,292 Write-down of assets held for sale - - 9,600 --------- --------- --------- 471,529 418,857 337,553 --------- --------- --------- Income from operations 123,025 87,811 6,530 --------- --------- --------- OTHER INCOME (EXPENSE): Interest income 2,870 3,582 5,937 Interest expense (48,594) (57,487) (47,116) --------- --------- --------- (45,724) (53,905) (41,179) --------- --------- --------- Income (loss) before minority interests, income taxes and extraordinary item 77,301 33,906 (34,649) Minority interests (34,975) (26,205) (6,916) Income tax (expense) benefit (5,900) (1,140) 1,352 --------- --------- --------- Net income (loss) before extraordinary item 36,426 6,561 (40,213) Extraordinary loss on extinguishment of debt (net of income tax benefit of $13,500) (24,920) - - --------- --------- --------- Net income (loss) 11,506 6,561 (40,213) Preferred stock dividends and accretion (27) (820) - --------- --------- --------- Net income (loss) attributable to common stockholders $ 11,479 $ 5,741 $ (40,213) ========= ========= ========= Basic net income (loss) per share $ 0.41 $ 0.23 $ (1.65) ========= ========= ========= Diluted net income (loss) per share $ 0.40 $ 0.23 $ (1.65) ========= ========= =========
See accompanying notes to consolidated financial statements. 12
ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands except share and per share data) YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 11,506 $ 6,561 $ (40,213) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 31,393 31,011 31,250 Amortization 4,288 4,329 3,968 Deferred income taxes 4,292 536 (753) Compensation expense recognized on issuance of stock 113 239 175 Loss on the disposal of equipment 902 789 -- Minority interests 34,975 26,205 6,916 Extraordinary item 24,920 -- -- Write-down of assets held for sale -- -- 9,600 Changes in operating assets and liabilities: Accounts receivable (1,534) (236) (221) Other current assets (607) 1,184 3,057 Accounts payable 7,394 (2,070) (2,723) Accrued liabilities 8,917 12,686 10,637 Income taxes receivable 94 429 9,935 --------- --------- --------- Net cash provided by operating activities 126,653 81,663 31,628 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Long-term obligations -- (6,583) (13,586) Purchases of property and equipment (37,162) (34,051) (117,444) Other long-term assets 18 908 (543) Restricted cash held by trustees -- 25,545 59,006 --------- --------- --------- Net cash used in investing activities (37,144) (14,181) (72,567) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 200,000 -- 25,000 Proceeds (net of issuance costs) from sale of Convertible Preferred Stock and Warrants -- 7,365 -- Proceeds from credit facility 161,800 -- -- Repayment of credit facility (58,000) -- -- Payments on long-term debt and installment contracts (6,830) (7,299) (4,326) Increase in deferred finance costs (8,736) -- (638) Repurchase of First Mortgage Notes (241,043) -- -- Redemption of convertible debentures (117,280) -- -- Cash held in escrow (25,244) -- -- Repayment of partner loans (16,285) (21,939) 43,938 Partnership distributions (20,043) (14,496) (2,677) Other (615) (610) 712 --------- --------- --------- Net cash (used in) provided by financing activities (132,276) (36,979) 62,009 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (42,767) 30,503 21,070 Cash and cash equivalents, beginning of year 89,857 59,354 38,284 --------- --------- --------- Cash and cash equivalents, end of year $ 47,090 $ 89,857 $ 59,354 ========= ========= =========
See accompanying notes to consolidated financial statements. 13 ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except share and per share data)
RETAINED TOTAL COMMON CAPITAL IN EARNINGS STOCKHOLDERS' SHARES STOCK EXCESS OF PAR (DEFICIT) EQUITY --------------- ------------- ------------- ------------- ------------- 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 Restricted stock compensation expense -- -- 113 -- 113 Preferred Stock conversion 2,310,011 23 5,344 -- 5,367 Warrants converted 172,496 2 355 -- 357 Exercise of stock options 11,156 -- 46 -- 46 Convertible debentures converted into stock 1,130 -- 20 -- 20 Net income -- -- -- 11,506 11,506 Preferred Stock dividends and accretion -- -- -- (27) (27) ---------- ------ -------- -------- ---------- Balance, December 31, 1999 28,325,106 $ 283 $ 80,362 $(22,400) $ 58,245 ========== ====== ======== ======== ==========
See accompanying notes to consolidated financial statements. 14 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 1998 and 1997 amounts have been reclassified to conform to the 1999 presentation. CASH AND CASH EQUIVALENTS -- The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the following estimated useful lives: Buildings and shore improvements 5 to 33 years Riverboats, docks and improvements 5 to 20 years Furniture, fixtures and equipment 5 to 10 years
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. 15 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. Admissions, hotel and other revenue is recognized at the time the related service is performed. 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:
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Admissions $ 5,895 $ 4,409 $ 1,646 Hotel rooms 1,059 751 -- Food, beverage and other 23,347 22,341 15,628
ADVERTISING COSTS -- The Company expenses advertising costs as incurred. Advertising expense was $10,527, $9,833 and $12,475 in 1999, 1998 and 1997, respectively. DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an effort to identify and develop new gaming locations are expensed as incurred. Preopening costs are expensed as occurred. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------------------- 1999 1998 --------------- --------------- Land $ 39,002 $ 39,002 Buildings, leasehold and shore improvements 217,132 216,067 Riverboats, docks and improvements 164,419 148,162 Furniture, fixtures and equipment 109,399 93,868 Construction in progress 2,642 217 -------------- -------------- 532,594 497,316 Less accumulated depreciation and amortization (127,389) (101,396) -------------- -------------- Net property and equipment $ 405,205 $ 395,920 ============== ==============
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 was included in other assets in the accompanying balance sheet at December 31, 1998. The boat was sold to a third party in 1999. During 1999, the Company determined the barge held for sale was useable as part of the Alton property's dockside renovation. The barge was placed back in service during December 1999 and has been reclassified to property and equipment. 16 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following:
DECEMBER 31, --------------------------------- 1999 1998 --------------- --------------- Accrued gaming and admissions taxes $ 17,532 $ 12,020 Slot club liability 4,195 3,667 Accrued insurance expense 6,232 4,529 Other 11,219 14,682 -------------- -------------- $ 39,178 $ 34,898 ============== ==============
5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------------------- 1999 1998 --------------- --------------- First mortgage notes due June 1, 2004, interest payable semi-annually at 13.25% $ 22,242 $ 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 Senior secured line of credit, expires June 2004, interest payable at least quarterly at either LIBOR or prime plus a margin (from 7.5% to 9.25% at December 31, 1999) 103,800 -- Senior subordinated notes due June 1, 2009, interest payable semi-annually at 10.75% 200,000 -- Notes payable, principal and interest payments due quarterly through September 2015, discounted at 10.5% 6,487 7,097 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime + 1% (9.5% at December 31, 1999), secured by gaming vessel and certain equipment 17,933 21,707 Loans from partner, principal due in annual installments through 2004, interest payable at prime + 6% (14.5% at December 31, 1999) 28,911 45,196 --------- --------- 379,373 424,000 Less: current maturities 32,668 11,640 --------- --------- Long-term debt, less current maturities $ 346,705 $ 412,360 ========= =========
17 On June 8, 1999, the Company issued $200,000 of Senior Subordinated Notes due 2009 ("Subordinated Notes") and entered into a five year $200,000 Senior Secured revolving bank credit agreement ("Credit Facility"). The Credit Facility is secured by liens on substantially all of the Company's assets, and the Company's subsidiaries are co-borrowers. The Company's joint-venture subsidiaries that operate the Argosy Casino & Hotel Lawrenceburg and the Belle of Sioux City Casino are not co-borrowers nor are the assets pledged. All of the Company's wholly-owned operating subsidiaries guarantee the Subordinated Notes. The Company's joint-venture subsidiaries that operate the Argosy Casino & Hotel Lawrenceburg and the Belle of Sioux City Casino do not guarantee the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of the Company, including borrowings under the Credit Facility and the subsidiary guarantees of the Subordinated Notes rank junior to the senior indebtedness of the subsidiary guarantors. The Subordinated Notes and the Credit Facility contain certain restrictions on the payment of dividends on the Company's common stock and the occurrence of additional indebtedness, as well as other typical debt covenants. In addition, the Credit Facility requires the Company to maintain certain financial ratios. The Credit Facility provides for, within two years, additional borrowing availability of $75 million to be used for general corporate purposes and a further $150 million increase to fund the purchase of all outstanding minority interests in the Lawrenceburg partnership. The increases in the Credit Facility are subject to a number of contingencies including lender approval. The Credit Facility is subject to scheduled reductions of 2.5% to 5.0% per quarter, beginning September 2000, of the total borrowing availability. The Company has a $1.9 million letter of credit outstanding at December 31, 1999. The Company used the net proceeds from the issuance of the Subordinated Notes, $25,000 in borrowings under the Credit Facility and approximately $51,000 of cash on hand to tender for and retire approximately $213,000 of its $235,000 outstanding 13 1/4% First Mortgage Notes due 2004 ("Mortgage Notes"). Under terms of the Credit Facility, the Company is required to redeem the remaining $22,242 of untendered Mortgage Notes on June 1, 2000 and has placed monies in escrow to fund the remaining principal, interest payments and the June 2000 redemption premium. At December 31, 1999, the remaining escrow balance of $25,244 is classified as restricted cash in escrow. On July 7, 1999, the Company redeemed all of its outstanding 12% Convertible Subordinated Notes due 2001 ("Convertible Notes"). The Company used borrowings of $105,000 under the Credit Facility and approximately $13,700 of cash to redeem the Convertible Notes. In connection with the early extinguishment of the Mortgage Notes and Convertible Notes, the Company recorded an extraordinary loss of $24,920 net of a tax benefit of $13,500. Interest expense for the years ended December 31, 1999, 1998, and 1997, was $48,594 (net of $115 capitalized), $57,487 (net of $1,086 capitalized), and $47,116 (net of $8,391 capitalized), respectively. Maturities of long-term debt at December 31, 1999 are as follows:
YEARS ENDED DECEMBER 31, ------------------------ 2000 $ 32,668 2001 20,345 2002 6,525 2003 10,407 2004 106,699 Thereafter 202,729
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 warrants expire in 2003. The Preferred Shares provided 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. Through December 31, 1998, the Preferred Shares had been converted into 1,331,980 shares of common stock. During the year ended December 31, 1999, the remaining Preferred Shares were converted into 2,310,011 shares of common stock. 18 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. During 1999, 201,172 warrants were converted into 172,496 shares of common stock. No warrants were converted during 1998. 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
DECEMBER 31, ------------------------------------------------------ 1999 1998 1997 -------------- ------------- --------------- NUMERATOR: Net income (loss) $ 11,506 $ 6,561 $ (40,213) Preferred stock dividends and accretion (27) (820) -- ------------- ---------- --------- Numerator for basic and diluted earnings per share Net income (loss) attributable to common stockholders $ 11,479 $ 5,741 $ (40,213) ============= ========== ========= DENOMINATOR: Denominator for basic earnings per share - Weighted-average shares outstanding 27,828,398 24,498,905 24,333,333 Effect of dilutive securities: Warrants 163,073 -- -- Stock options 569,451 -- -- Preferred stock 264,806 -- -- Restricted stock 94,928 105,580 -- ------------- ---------- --------- Denominator for diluted earnings per share - adjusted Weighted-average shares and assumed conversions 28,920,656 24,604,485 24,333,333 ============= ========== ========== Basic earnings (loss) per share - before extraordinary item $ 1.31 $ 0.23 $ (1.65) Extraordinary item (0.90) -- -- ------------- ---------- --------- Basic earnings (loss) per share - including extraordinary item $ 0.41 $ 0.23 $ (1.65) ============= ========== ============= Diluted earnings (loss) per share - before extraordinary item $ 1.26 $ 0.23 $ (1.65) Extraordinary item (0.86) -- -- ------------- ---------- --------- Diluted earnings (loss) per share - including extraordinary item $ 0.40 $ 0.23 $ (1.65) ============= ========== ==============
Employee and directors stock options to purchase 156,000 shares of common stock at prices ranging from $11.50 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. 19 8. INCOME TAXES Income tax (expense) benefit for the years ended December 31, 1999, 1998 and 1997, consists of the following:
1999 1998 1997 -------------- ------------- ------------- Current: Federal $(13,567) $ -- $ -- State (1,541) (604) 866 ------------- ------------ ------------ (15,108) (604) 866 ------------- ------------ ------------ Deferred: Federal 9,315 -- -- State (107) (536) 486 ------------- ------------ ------------ 9,208 (536) 486 ------------- ------------ ------------ Income tax benefit (expense) $ (5,900) $ (1,140) $ 1,352 ============= ============ ============
The provision for income taxes for the years ended December 31, 1999, 1998 and 1997, differs from that computed at the federal statutory corporate tax rate as follows:
1999 1998 1997 -------------- -------------- -------------- Federal statutory rate 35.0 % 35.0 % (35.0) % State income taxes, net of federal benefit 1.4 2.2 (2.6) Valuation allowance (13.7) (7.8) 38.7 Goodwill amortization 0.3 0.6 0.4 Minority interest in partnership income (15.8) (27.0) (6.7) Other, net 0.4 0.4 1.3 -------------- -------------- -------------- 7.6 % 3.4 % (3.9) % ============== ============== ==============
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1999 and 1998, are as follows:
1999 1998 ----------- ----------- Basis of assets held for sale $ -- $ 3,739 Depreciation (11,783) (14,241) Preopening 2,825 3,709 Benefit of net operating loss carryforward 19,418 18,357 Other, net 22 575 ---------- ----------- 10,482 12,139 Valuation allowance (1,746) (12,611) ---------- ----------- Net deferred tax asset (liability) $ 8,736 $ (472) ========== ===========
The valuation allowance relates to state deferred tax assets established under SFAS 109 for Louisiana net operating loss carryforwards of approximately $38,600 and $32,700 at December 31, 1999 and 1998, respectively, and a federal net operating loss carryforward of approximately $42,400 at December 31, 1998. These loss carryforwards, which will expire from 2012 through 2019, will be carried forward to future years for possible utilization. During 1999, the Company recognized a $10,000 tax benefit representing prior federal income tax net operating losses that are expected to be utilized in 2000. 20 9. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amounts of $2,841 and $4,154 in 1998 and 1997, respectively, which was financed through installment contracts. The Company paid $48,401, $58,356 and $51,185 for interest, and $1,515, $784 and $143 for income taxes in 1999, 1998 and 1997, respectively. The Company issued 2,494,793 and 1,331,980 shares of additional common stock resulting from the conversion of Preferred Stock, the exercise of stock options, conversion of debentures and the conversion of warrants during 1999 and 1998, respectively. 10. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1999, are as follows:
YEARS ENDING DECEMBER 31, ------------------------- 2000 $ 2,146 2001 1,084 2002 507 2003 304 2004 272 Thereafter 17,219
Rent expense for the years ended December 31, 1999, 1998 and 1997, was $5,043, $4,137 and $7,205, 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, 1999, options for 645,024 shares are exercisable under the Stock Option Plan. The weighted average contractual life of outstanding options at December 31, 1999 is approximately 6.5 years and the weighted average exercise price of options outstanding is $5.98. The weighted average fair value of options granted during 1999 was $3.07. 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, 1999 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, the Company does not recognize compensation expense when the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant. 21 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 1999 pro forma net income attributable to common stockholders would have been $11,089 and the pro forma diluted income per share would have been $0.38. 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 56.5%; risk-free interest rate of 6%, and expected option life of three years. The fiscal 1998 pro forma net income attributable to common stockholders would have been $5,579 and the pro forma diluted 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 6.0% and expected option life of five years. 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:
STOCK OPTION PLAN DIRECTORS OPTION PLAN ------------------------------------------------ --------------------------------------------- RANGE OF EXERCISE PRICE RANGE OF EXERCISE PRICE SHARES PER SHARE SHARES PER SHARE ------------------ ----------------------------- ---------------- -------------------------- 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 Granted 275,000 7.06 -- 7.50 -- -- Exercised (11,156) 4.25 -- -- Forfeited (658,000) 16.75 -- -- ------------------ ----------------------------- ---------------- -------------------------- Outstanding, December 31, 1999 1,198,023 $ 3.13 -- $ 16.75 6,000 $ 11.50 ================== ============================= ================ ==========================
22 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 $113, $239 and $175 was recognized in 1999, 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 $1,145, $1,134 and $2,168 in 1999, 1998 and 1997, respectively. 14. SUBSIDIARY GUARANTORS The $22,242 outstanding 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 Mortgage Notes rank senior in right of payment to all existing and future indebtedness of the Company. Pursuant to the Credit Facility, the Company is obligated to redeem the Mortgage Notes in June 2000 and was required to escrow funds sufficient for the redemption. The Credit Facility is secured by a second lien on substantially all of the Company's assets and the Company's subsidiaries are co-borrowers. The Company's joint-venture subsidiaries that operate the Argosy Casino Lawrenceburg and the Belle of Sioux City casino are not co-borrowers. All of the Company's wholly-owned operating subsidiaries guarantee the Subordinated Notes. The Company's joint-venture subsidiaries that operate the Argosy Casino & Hotel Lawrenceburg and the Belle of Sioux City Casino do not guarantee the Subordinated Notes. The Subordinated Notes rank junior to all of the senior indebtedness of the Company, including borrowings under the Credit Facility and the subsidiary guarantees will rank junior to the senior indebtedness of the subsidiary guarantors. The following tables present summarized balance sheet information of the Company as of December 31, 1999 and 1998, and summarized operating statement information for the years ended December 31, 1999, 1998 and 1997. 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. 23 Summarized balance sheet information as of December 31, 1999 and 1998, is as follows:
DECEMBER 31, 1999 ----------------- PARENT COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED --------------- ---------------- ------------------ ------------------ ---------------- ASSETS: Current assets $ 46,723 $ 23,161 $ 34,493 $ (3,960) $ 100,417 Non-current assets 348,036 386,193 220,180 (487,966) 466,443 -------------- ---------------- ------------------- ----------------- ---------------- $ 394,759 $ 409,354 $ 254,673 $ (491,926) $ 566,860 ============== ================ =================== ================= ================ LIABILITIES AND EQUITY: Current liabilities $ 30,159 $ 45,410 $ 56,948 $ (27,427) $ 105,090 Non-current liabilities 306,355 236,263 70,852 (209,945) 403,525 Stockholders' equity 58,245 127,681 126,873 (254,554) 58,245 -------------- ---------------- ------------------- ---------------- --------------- $ 394,759 $ 409,354 $ 254,673 $ (491,926) $ 566,860 =============== ================ =================== ================ =============== DECEMBER 31, 1998 ----------------- PARENT COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED -------------- -------------- ------------------- ----------------- ---------------- 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 liabilities $ 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 stock 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 =============== =============== ==================== ================= ================
24 Summarized operating statement information for the years ended December 31, 1999, 1998 and 1997, is as follows:
YEAR ENDED DECEMBER 31, 1999 PARENT ---------------------------- COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ------------- --------------- ------------- ------------- Net revenues $ 3,108 $ 278,771 $ 361,124 $ (48,449) $ 594,554 Costs and expenses 15,144 196,356 263,779 (3,750) 471,529 Net interest (expense) income (32,203) 633 (14,154) -- (45,724) Net income (loss) attributable to common stockholders (37,903) 49,018 78,326 (77,962) 11,479
YEAR ENDED DECEMBER 31, 1998 PARENT ---------------------------- COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ----------- ------------- ---------------- -------------- ------------- 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
YEAR ENDED DECEMBER 31, 1997 PARENT ---------------------------- COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ------------ --------------- -------------- ------------- 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)
25 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at December 31, 1999 are as follows:
CARRYING FAIR AMOUNT VALUE ---------- ----------- ASSETS: Cash and cash equivalents $ 47,090 $ 47,090 Restricted cash 25,244 25,244 LIABILITIES: First mortgage notes 22,242 23,688 Senior Secured Line of Credit 103,800 103,800 Senior Subordinated Notes 200,000 211,000 Other long-term debt 53,331 53,331
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)
FIRST SECOND THIRD FOURTH ------------ ----------- ----------- ------------ 1999: Net revenues $ 137,391 $ 144,602 $ 156,569 $ 155,992 Income from operations 24,591 29,695 34,553 34,186 Other expense, net 13,227 12,857 10,048 9,592 Net income before extraordinary item 2,921 7,691 14,318 11,496 Net income per share before extraordinary item Basic 0.11 0.27 0.51 0.41 Diluted 0.10 0.27 0.51 0.40 Net income (loss) attributable to common stockholders (1) 2,894 (27,069) 10,658 24,996 Net income (loss) per share (1) Basic 0.11 (0.47) 0.38 0.89 Diluted 0.10 (0.47) 0.37 0.86 FIRST SECOND THIRD FOURTH ------------ ----------- ----------- ------------ 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
(1) The second and third quarters of 1999 include extraordinary losses related to the refinancing and were $34.8 million and $3.6 million, respectively. The fourth quarter of 1999 extraordinary item represents a $13.5 million tax benefit related to the refinancing which was recognized with the reversal of deferred tax valuation reserves and the resulting tax provision. 26 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 $14.8 million, including interest through December 31, 1999, 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. 27 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, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Chicago, Illinois January 28, 2000 28 EX-21 4 EXHIBIT 21 Exhibit 21 LIST OF SIGNIFICANT SUBSIDIARIES The following is a list of the significant subsidiaries of the registrant:
STATE OF PERCENTAGE INCORPORATION OWNERSHIP NAME OF SIGNIFICANT SUBSIDIARY OR ORGANIZATION OF ENTITY - ------------------------------ --------------- --------- 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% Centroplex Centre Convention Hotel, L.L.C. Louisiana Limited Liability Company 100%
EX-23 5 EXHIBIT 23 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 28, 2000, 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, 1999. 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 10, 2000 EX-24 6 EXHIBIT 24 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 27, 2000 /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 EX-27 7 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1999 FORM 10-K OF ARGOSY GAMING COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 47,090 0 4,525 1,328 1,260 100,417 532,594 127,389 566,860 105,090 343,975 0 0 283 57,962 566,860 0 594,554 0 471,529 0 1,003 48,594 42,326 5,900 36,426 0 (24,920) 0 11,506 .41 .40
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