-----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, L1jgVWNsug9PGQAEW4vBgnFC+ETm84v+v/AfC0V1hFuS/j7FQ/3INf+rYiZHnCq/ GRDkh6jJAGgzmuZ/DRnK7A== 0000912057-97-011103.txt : 19970401 0000912057-97-011103.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011103 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-11853 FILM NUMBER: 97568907 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 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 19 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 COMMISSION FILE NUMBER: 0-21122 ARGOSY GAMING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 37-1304247 - ---------------------------------------- -------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization Identification No.) 219 PIASA STREET, ALTON, ILLINOIS 62002 - ---------------------------------------- -------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (618) 474-7500 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------------------------- ---------------------- 13 1/4% First Mortgage Notes due 2004 New York 12% Convertible Subordinated Notes due 2001 New York Common Stock, par value $.01 per share New York Securities registered pursuant to Section 12(g) of the None Act: 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 12, 1997, the aggregate market value of the registrant's Common Stock held by non-affiliates was $54,715,732. The closing price of the Common Stock on March 12, 1997 as reported on the New York Stock Exchange, was $4. As of March 12, 1997, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 24,333,333. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996, and of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 22, 1997 as described in the Cross Reference Sheet and a Table of Contents included herewith, is incorporated herein by reference into Parts II and III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS PAGE REFERENCE OR REFERENCE(1) -------------- PART I ITEM 1. BUSINESS............................................... 1 ITEM 2. PROPERTIES............................................. 20 ITEM 3. LEGAL PROCEEDINGS...................................... 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)............................... 26 ITEM 6. SELECTED FINANCIAL DATA(3)............................. 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(4)............... 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(5)......... 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................. 96 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(6)....................................... 97 ITEM 11. EXECUTIVE COMPENSATION(7)............................. 97 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(8)....................................... 97 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(7)..... 97 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................... 98 - ------------------------ (1) Certain information is incorporated by reference, as indicated below, from the Annual Report to Stockholders for the fiscal year ended December 31, 1996 (the "Annual Report") and the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 22, 1997, (the "Proxy Statement"). (2) Proxy Statement section entitled "Market for Registrant's Common Equity and Related Stockholder Matters." (3) Annual report, page 19, section entitled "Financial Highlights." (4) Annual report, pages 21-29, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Annual report, pages 30-47, 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." (6) Proxy Statement sections entitled "Election of Directors" and "Management." (7) Proxy Statement sections entitled "Executive Compensation" and "Certain Transactions." (8) Proxy Statement section entitled "Record Date, Required Vote, Outstanding Shares and Holdings of Certain Stockholders--Security Ownership of Certain Beneficial Owners and Management." PART I ITEM 1. BUSINESS GENERAL Argosy Gaming Company (the "Company") is a leading multi-jurisdictional developer, owner and operator of riverboat casinos and related entertainment facilities in the midwestern and southern United States. The Company, through its subsidiaries, owns and operates riverboat casinos in Alton, Illinois, Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux City, Iowa. The Company's business strategy emphasizes the phased development of attractive gaming and related entertainment facilities in gaming jurisdictions that the Company believes possess favorable long-term demographic and competitive characteristics. As part of this strategy, the Company endeavors to be an early entrant in emerging gaming markets, to establish a customer base and to develop its gaming properties in stages. The Company's casinos were the first gaming facilities to open in each of the St. Louis, Kansas City and Baton Rouge markets. By employing a phased development strategy, the Company believes it can reduce its initial capital investment and adapt the nature and scope of subsequent developments based on a continuing assessment of the size and competitive outlook of each of the Company's gaming markets. The Company intends to utilize management's proven ability to successfully open riverboat casino properties in new markets by continuing to pursue opportunities to develop or acquire (either independently or through joint ventures) riverboat, dockside and/or land-based gaming operations. The Company's operating strategy is to develop a loyal customer base by offering a variety of gaming and non-gaming entertainment amenities at attractive facilities that emphasize high standards of service and customer satisfaction. In each of its gaming markets, the Company establishes marketing programs that identify, target and attract local patrons typically residing within a 100-mile radius of its gaming facilities. The Company's marketing programs are designed to increase customer awareness, patronage and loyalty, as well as to encourage repeat business. The Company focuses and evaluates its marketing efforts through player tracking systems, slot clubs and preferred player clubs and utilizes mass advertising, direct mail and special promotions to attract customers within each of its gaming markets. Unless the context otherwise requires, "Company" and "Argosy" shall mean Argosy Gaming Company and its subsidiaries. The Company's principal executive offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone number is (618) 474-7500. CURRENT OPERATIONS ALTON BELLE CASINO, ALTON, ILLINOIS The Company commenced operations in Alton, Illinois in September 1991 as the first gaming facility to open in the St. Louis market and in the State of Illinois. The Alton Belle Casino provides casino style gaming on the Mississippi River at Alton, Illinois, approximately 20 miles northeast of downtown St. Louis. The Alton Belle Casino features 22,800 square feet of gaming space with approximately 650 slot machines and 39 table games for a total of approximately 950 gaming positions. The Alton Belle Casino can board up to approximately 1,500 passengers including a typical crew and casino staff. The Alton Belle Casino also currently includes a 37,000-square foot, three-level floating entertainment pavilion that features sports and entertainment lounges, a 120-seat buffet, a 90-seat fine dining restaurant, conference facilities and a food court. Additionally, the Company is the only gaming operator in the St. Louis market that offers its customers off-track betting facilities. Parking is available at an adjacent city-owned surface parking facility and at two sites in the city of Alton, to and from which the Company provides valet parking as well as free shuttle service. 1 ARGOSY CASINO, RIVERSIDE, MISSOURI The Argosy Casino began operations in Riverside, Missouri on June 22, 1994 as the first gaming facility to open in the Kansas City market. The Argosy Casino's riverboat is styled as a turn-of-the-century paddle wheel steamboat and features approximately 35,000 square feet of gaming space with approximately 950 slot machines and 60 table games for a total of approximately 1,435 gaming positions. The Company has constructed a land-based landing and entertainment pavilion, which opened on January 15, 1996 at a cost of approximately $45 million. The 85,000-square foot, land-based entertainment pavilion features a Mediterranean theme and includes over 14,000 square feet of banquet and conference facilities, a 78-seat specialty restaurant, a sports and entertainment lounge and a 350-seat buffet restaurant. The facility also features 624-space parking garage and a 1,262-space surface parking area located adjacent to the new pavilion. The Company leases a portion of its site from the City of Riverside, Missouri, pursuant to a five-year land lease agreement with a minimum aggregate rent of $5 million for the entire five-year lease period, payable in advance. In addition to minimum rent, during the initial five-year lease term, percentage rent will be payable in an amount equal to 3% of adjusted gross receipts over $100 million annually. The Company will have the option to extend the lease agreement for three successive five-year terms. In all extension periods, there will be no minimum rent, and percentage rent will be payable as follow: (i) 3% on the first $50 million of adjusted gross receipts; (ii) 4% on adjusted gross receipts between $50 million and $100 million; and (iii) 5% on adjusted gross receipts in excess of $100 million. BELLE OF BATON ROUGE, BATON ROUGE, LOUISIANA The Belle of Baton Rouge began operations in Baton Rouge, Louisiana in September, 1994 as the first riverboat gaming facility in the Baton Rouge market. The Belle of Baton Rouge is a three-level, ante-bellum themed riverboat casino that contains 28,000 square feet of gaming space with approximately 775 slot machines and 43 table games, for a total of 1,125 gaming positions. The riverboat casino is complemented by the Company's adjacent, land-based entertainment development known as Catfish Town. The first phase of Catfish Town opened during 1995 and features a 250-seat entertainment lounge and sports bar, a 50-seat premium steakhouse, a 250-seat buffet/coffee shop and conference facilities. The second phase of Catfish Town, an approximately 50,000-square foot entertainment facility, opened in April 1996. This phase of the development features a climate-controlled, five-story glass atrium that hosts a variety of entertainment functions, including banquets, parties, festivals, concerts and live entertainment events. The third phase of the Catfish Town project will feature the build-out of approximately 150,000 square feet of leasable retail space adjacent to the atrium which is expected to feature a variety of entertainment-related tenants, including specialty restaurants and specialty retail stores, entertainment venues, nightclubs and a microbrewery. A 733-space parking garage and a leased 271-space surface parking lot are located adjacent to Catfish Town. The Company has entered into a letter of intent with Southern Hospitality Corporation ("SHC") for the ownership and construction of a 300-room hotel at Catfish Town. Pursuant to the terms of the agreement, the Company will have a 49% interest and SHC will have a 51% interest in a joint venture which will own, construct and operate the convention hotel. The Company will contribute the required land, building improvements, and the use of certain atrium areas in return for its equity interest. The Company is not, however, required to contribute any cash to fund the entity. SHC has agreed to contribute up to $7.0 million in equity. The agreement is subject to numerous conditions precedent including, but not limited to, SHC obtaining separate non-recourse project financing. LAWRENCEBURG CASINO, LAWRENCEBURG, INDIANA In June 1995, Indiana Gaming Company, L.P., a joint-venture subsidiary of the Company ("Indiana Partnership"), was awarded the right to develop and operate a riverboat casino and entertainment complex 2 in Lawrenceburg, Indiana, which is located approximately 15 miles west of Cincinnati, Ohio. The Company is the sole general partner of, and holds a 57.5% general partnership interest in, the Indiana Partnership. Conseco Entertainment L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited partnership interest and certain other investors, including H. Steven Norton, Chief Operating Officer of the Company, who brought the opportunity to the Company concurrent with his initial employment, hold the remaining 13.5% limited partnership interest in the Indiana Partnership. On December 10, 1996 the Indiana Partnership commenced operations at a temporary site with a leased vessel with approximately 20,500 square feet of gaming space. The vessel, which has a capacity of 1,600 passengers, features approximately 870 slot machines and 52 table games for a total of approximately 1,275 gaming positions. In addition, the Partnership leases, from the Company, an approximately 24,000 square foot floating entertainment and support facility which features ticketing and holding areas, a food court, two bars and a gift kiosk. Parking for the temporary facility is provided at a 1,400 space satellite lot. The Indiana Partnership provides free shuttle service from the parking lot to the temporary site. The Indiana Partnership operates pursuant to a partnership agreement entered into among the partners as of April 11, 1994, as amended and restated as of February 21, 1996. Under the provisions of this agreement, the Company manages the development, construction and operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA (as defined in the partnership agreement). Conseco receives a financial advisory fee of 5% of EBITDA. The Indiana Partnership is building what it believes to be one of the largest riverboat casinos in the United States, featuring approximately 74,300 square feet of gaming space on three levels. The permanent riverboat casino is expected to initially have approximately 2,800 gaming positions and accommodate approximately 4,400 passengers and crew members. In addition to the new riverboat casino, it is anticipated that the permanent facility will include a 300-room hotel, a 1,750-space parking garage, 2,000 additional surface parking spaces and a 120,000-square foot land-based entertainment pavilion and support facility featuring specialty restaurants, meeting and banquet rooms and an entertainment lounge. The Company estimates that the total cost to open the temporary facility and to construct the proposed permanent riverboat casino, land-based facilities and 300-room hotel will be approximately $225 million. Funding for the permanent casino is being provided by the Company and Conseco, 57.5% of which will be funded by the Company and 42.5% of which will be funded by Conseco. Any project costs in excess of $225 million must be funded solely by the Company. Under Indiana gaming laws the Indiana Partnership's permanent facility must be completed by December 10, 1997 as the Indiana Partnership may only operate at its temporary site for one year. The Company anticipates that the permanent vessel will be completed in the third quarter of 1997; however, numerous factors could result in the failure of the permanent land based facility to be fully completed by December 10, 1997, such as: construction delays, flooding along the Ohio River which has already occurred and which may reoccur this spring, failure to maintain permits previously issued by the U.S. Army Corps of Engineers, the discovery of historically significant artifacts which would cause a stoppage or slowdown in the construction or a work stoppage or strike at the site. The Company is unable to determine the consequences resulting from the failure to fully complete the permanent facility by December 10, 1997 due to the absence of specifity in Indiana gaming law as to what is required and the fact that there is no precedent for such event. The failure to fully complete the permanent facility by December 10, 1997 could have a material adverse effect on the financial condition and results of operations of the Company. BELLE OF SIOUX CITY, SIOUX CITY, IOWA The Company 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 the Company is a 70% general partner and Sioux City Riverboat Corp., Inc. is a 30% limited partner. The Company receives a 3 management fee of 4.5% of the facility's adjusted gross gaming revenues (as defined in the management agreement). The Company has leased to the partnership a 27,000-square foot, three-level historic themed riverboat casino with room for 1,400 passengers and crew. The Belle of Sioux City features approximately 12,500 square feet of gaming space with approximately 400 slot machines and 28 table games, for a total of approximately 620 gaming positions. The casino facility is complemented by an adjacent barge facility, which features buffet dining, a bar and a gift shop, and 274 surface parking spaces. POTENTIAL FUTURE PROJECTS OSCEOLA, IOWA In December 1996 the Company filed an application to develop a riverboat casino in Osceola, Iowa ("Osceola Project"). The proposed casino operation is subject to numerous conditions including approval and licensing by the Iowa Racing and Gaming Commission ("IRGC"). The Company currently estimates that the cost of developing the Osceola Project would range from $60-$70 million if the Osceola project is approved by the IRGC and the Company decides to pursue the development of the project. COMPETITION The Company's Alton Casino faces competition from four other riverboat casino facilities currently operating in the St. Louis area and expects a significant increase in the level of competition in the future. The most recent casino complex to open includes two independently owned facilities, each of which operate two dockside vessels. This casino complex, which increased gaming capacity in St. Louis by approximately 50%, opened in March of 1997. The Company's Riverside Casino faces competition from four casino companies in the Kansas City area that offer dockside gaming, two of which offer two gaming vessels each. The Company's Baton Rouge Casino faces competition from one casino located in downtown Baton Rouge, a nearby native American casino and multiple casinos throughout Louisiana. Currently, the Company faces competition in Sioux City, Iowa, from two land-based Native American casinos, slot machines at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in January 1996. The Indiana Partnership faces competition from one other riverboat casino in the Cincinnati market, which opened in October 1996. There could be further unanticipated competition in any market which the Company operates as a result of legislative changes or other events. The Company expects each market in which it participates, both current and prospective, to be highly competitive. EMPLOYEES As of December 31, 1996, the Company had approximately 3,460 full-time employees. Approximately 1,260 employees are represented by the Seafarers International Union of North America. The collective bargaining agreement with that union expires in June, 2001. Twelve employees are represented by the International Brotherhood of Electrical Workers. The Company has not experienced any work stoppages and believes its relations with its employees are generally satisfactory. LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT GENERAL On June 30, 1995, the Indiana Partnership, received a preliminary certificate of suitability from the Indiana Gaming Commission to develop and operate the Lawrenceburg Casino project. The Company is the sole general partner of, and holds a 57.5% general partnership interest in, Indiana Partnership. Conseco holds a 29% limited partnership interest and certain other investors, including H. Steven Norton, 4 Chief Operating Officer of the Company, who brought the opportunity to the Company concurrent with his initial employment, hold the remaining 13.5% limited partnership interests in the Indiana Partnership. The Indiana Partnership operates pursuant to a partnership agreement entered into among the partners as of April 11, 1994, as amended and restated as of February 21, 1996. The Indiana Gaming Company manages the partnership pursuant to a management agreement and as general partner, subject only to certain actions or major decisions requiring the consent of a majority in interest of the limited partners. Under the provisions of the partnership agreement and the management agreement, the Company will manage the development, construction and operation of the Lawrenceburg Casino project and will receive a management fee of 7.5% of EBITDA (as defined in the partnership agreement) and Conseco will receive a financial advisory fee of 5% of EBITDA. The Company estimates the total cost to open the temporary gaming facility and to construct the proposed permanent riverboat casino, land-based facilities and 300-room hotel will be approximately $225 million. PROJECT FUNDING It is currently anticipated that the budgeted $225 million total project cost will be funded as follows: (i) $52.5 million by capital contributions by the partners of which $16.75 million constitutes common equity and $35.75 million constitutes preferred equity. The Company has contributed 57.5% of the common equity, in the amount of approximately $9.6 million, and has contributed 57.5% of the preferred equity, in the amount of approximately $20.6 million. The remainder of the common and preferred equity has been contributed by Conseco. The remainder of the cost of the Lawrenceburg Casino is expected to be funded by third party financing and capital loans from the Company and Conseco. Any capital loans are to be funded 57.5% by the Company and 42.5% by Conseco, pursuant to agreements under which Conseco will fund both its and such other limited partners' share of such capital loans. Conseco is obligated to fund 42.5% of any capital loans until project costs exceed the $225 million total project cost. At December 31, 1996 approximately $56,529 of capital loans have been made to the Indiana Partnership by the Company and Conseco. For project costs in excess of $210 million, the Company and Conseco will make capital loans of up to $15 million in the aggregate, 57.5% of which will be funded by the Company and 42.5% by of which will be funded Conseco; provided that Conseco will receive an interest rate 700 basis points higher than the Company on the last $10 million contributed. Any project costs over $225 million will be funded solely by the Company without a return or compensation. PARTNER DISTRIBUTIONS The Lawrenceburg Casino partnership agreement sets forth the manner in which cash flow of the Indiana Partnership will be distributed. Pursuant to the agreement, principal on capital loans will be repaid on an eight-year amortizing schedule and cash flow (after repayment of principal of, and interest on, capital loans) will be distributed by the general partner not less frequently than quarterly: (i) first, to the partners pro rata for tax payments in an amount equal to their taxable net income for such period; (ii) second, to the partners as a prepayment of principal on capital loans to be applied in the inverse order of maturity, up to 75% of the remaining cash flow; (iii) third, in payment of a preferred return of 14% on any preferred equity contributed by the partners; (iv) fourth, as a return of the preferred equity contributed by the partners; (v) fifth, as a return of common equity contributed by the partners; and (vi) sixth, to the partners in accordance with their respective percentage interests. The partnership agreement provides that the net cash proceeds from a sale or refinancing are distributed by the general partner in the same order as cash flow except that the proceeds will be used to repay 100% of outstanding capital loans by the partners. 5 GENERAL PARTNER REMOVAL The Lawrenceburg Casino partnership agreement provides that the Company's wholly-owned subsidiary, The Indiana Gaming Company, can be removed as general partner of the partnership by the limited partners under certain limited circumstances, including: (i) a material breach (after notice and expiration of applicable cure periods) of certain material provisions of the partnership agreement dealing with such things as distributions to partners or the failure to obtain the required consent of the limited partners for certain major decisions; (ii) conviction of embezzlement or fraud; (iii) certain bankruptcy events; (iv) reduction in the Indiana Gaming Company's partnership interest to less than 40% due to sales or dilution for failure to pay required capital; (v) a final unappealable judgment against The Indiana Gaming Company in excess of $25 million which is uninsured and remains unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts constituting "gross mismanagement"; (vii) failure of The Indiana Gaming Company to fund project costs in excess of $215 million (after expiration of applicable notice and cure periods); and (viii) foreclosure by Trustee under the Notes on The Indiana Gaming Company's pledge of its partnership interest the Indiana Partnership. Upon removal as general partner, the general partnership interest of The Indiana Gaming Company becomes a "special limited partner" interest with rights to partner distributions but only limited voting rights on partnership matters. Also, if the reason for the removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii) above the limited partners may acquire all, but not less than all, of The Indiana Gaming Company's interest for the fair market value thereof determined by an appraisal process. LIMITED PARTNERS' SALE RIGHTS The Lawrenceburg Casino partnership agreement provides that: (i) after the third anniversary date of commencement of operations at the Lawrenceburg Casino, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests) or (ii) after a deadlock by the parties with respect to significant items in any annual operating budget of the partnership for budget year 1999 and thereafter, any partner has a right to sell its interest to the other partners (the limited partner pursuant to clause (i) and the partner desiring to sell pursuant to clause (ii) is hereinafter referred to as a "Selling Partner" and the non-selling partners are hereinafter referred to as the "Non-Selling Partners"). The partnership agreement provides that after the Selling Partner gives notice of its intent to sell the Selling Partner and Non-Selling Partners shall have 60 days to attempt in good faith to agree to a purchase price. If within such period of time no such agreement is reached, then the Selling Partner's interest shall be appraised pursuant to an appraisal process to determine the fair market value thereof. After the fair market value of the Selling Partner's interest is determined by the appraisal process, the Non-Selling Partners have 60 days to reject such sale at that price, and if the Non-Selling Partners decline to purchase the interest of the Selling Partner at the appraisal price then the general partner is to solicit bids and sell all of the assets of the partnership within twelve months to the highest bidder and the partnership will be dissolved within a 12-month period. No assurances can be given that The Indiana Gaming Company, if it is a Non-Selling Partner, will have or will be able to obtain sufficient funds to acquire any Selling Partner's interest in the circumstances provided for above and therefore the assets of the partnership would have to be sold to the highest bidder as provided above. In addition, the partnership agreement provides all partners with a right of first refusal on transfers of partnership interests. A foreclosure by the Trustee on the Company's pledge of its partnership interest shall be deemed a transfer giving rise to the right of first refusal. REGULATORY MATTERS ILLINOIS In February 1990, the State of Illinois pursuant to the Riverboat Gambling Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act authorizes riverboat gaming upon any navigable stream within or forming a boundary of the State of Illinois other than Lake Michigan. The Riverboat Act does 6 not, however, authorize riverboat gaming or the docking of a riverboat conducting gaming within a county having a population in excess of 3,000,000. The Riverboat Act grants the Illinois Gaming Board specific powers and duties, and all other powers which are necessary and proper to effectuate the Riverboat Act. The Illinois Gaming Board's jurisdiction extends to every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. The Riverboat Act authorized a five member Illinois Gaming Board to issue up to ten owner's licenses statewide. Each owner's license permits the operation of up to two boats as a part of a single riverboat gaming operation with a combined maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board). No person, firm or corporation may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner may hold up to 10% of a second riverboat gaming operation in Illinois. In addition to the ten owner's licenses which may be authorized under the Riverboat Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming and to conduct such gaming on a specified date or series of dates. Riverboat gaming under such a license may take place on a riverboat not normally used for riverboat gaming. An owner's license is issued for an initial period of three years (with a fee of $25,000 for the first year and $5,000 for each of the following two years) and must be renewed annually thereafter (with a fee of $5,000 for each year). The Company's Illinois gaming license is subject to renewal in October, 1997. An owner's license is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Gaming Board that the licensee continues to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board also requires that officers, directors and employees of a gaming operation be licensed. Licenses issued by the Illinois Gaming Board may not be transferred to another person or entity. All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Pursuant to its rule making authority under the Illinois Riverboat Act, the Illinois Gaming Board has adopted certain regulations that provide that any beneficial owner of the legal or beneficial interests of a gaming company may be required, and in the case of a beneficial owner of 5% or more of the legal or beneficial interests (a "5% Holder") is required, to furnish a detailed personal disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the personal disclosure form as the basis for its investigation to determine such holder's suitability as a stockholder of the company. In the case of a 5% Holder, the Illinois Gaming Board conducts such an investigation. The Illinois Gaming Board's decisions as to suitability are based on the same criteria used for a finding of preliminary suitability for licensure including character, reputation, experience and financial integrity of such holder. If the Illinois Gaming Board determines that a holder is not suitable, the holder is entitled to request a hearing; however, if no hearing is requested after such determination or such finding is upheld after a hearing, the holder is required to divest his shares of common stock of the company. After a holder is required to divest and until divestiture, the licensee is unable to distribute profits to such stockholder. The Illinois Gaming Board has adopted a regulation that provides that a licensee can only make distributions to shareholders to the extent such distributions would not impair the financial viability of the licensee. Factors which would be considered by the Illinois Gaming Board include working capital requirements, debt service requirements, requirements for repairs and maintenance and capital expenditure requirements. Illinois Gaming Board approval is required for certain changes, including, among other things, to the type of entity, debt and equity offerings by a company, issuances of debt, riverboat capacity or significant design changes, changes in the number of gaming positions and pro forma budgets and financial statements. Minimum and maximum wagers on games are set by the licensee. Wagering may not be conducted with money or negotiable currency. No person under the age of 21 is permitted to wager in Illinois, and wagers may only be taken from a person present on a licensed riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. 7 Under the Riverboat Act, vessels must have the capacity to hold a minimum of 500 persons if operating on the Mississippi River or the Illinois River south of Marshall County, and a minimum of 400 persons on any other waterway. In addition, all riverboats must be accessible to disabled persons, must be either a replica of a 19th century Illinois riverboat or be a casino cruise ship design and must comply with applicable federal and state laws, including but not limited to U.S. Coast Guard regulations. Gaming may only be conducted on a gaming excursion, which is limited to a maximum period of four hours. A gaming excursion is deemed to have started upon the commencement of gaming. For the purpose of orderly ingress of passengers to a riverboat, gaming is deemed to commence when the first passenger boards a riverboat for an excursion and may continue while other passengers are boarding for a period not to exceed thirty minutes, at which time the gangplank or its equivalent must be pulled up and further boarding is not permitted. For the purpose of orderly egress of passengers from a riverboat at the end of an excursion, gaming may continue for a period not to exceed thirty minutes after the gangplank or its equivalent is lowered. During this thirty minute period of egress, new passengers may not board a riverboat. These periods of time do not extend the four-hour maximum. Special event extended cruises may be authorized by the Illinois Gaming Board. Although the Riverboat Act provides that no gambling may be conducted while a riverboat is docked, an Illinois Gaming Board rule currently permits dockside gaming during the 30-minute time periods prior to and following a cruise. Furthermore, if the captain of the riverboat reasonably determines that for reasons of safety, although seaworthy, the riverboat should not leave the dock or should return immediately thereto due to inclement weather, mechanical or structural problems, or river icing, then a gaming excursion may commence or continue while the gang plank or its equipment is raised and remains raised, and ingress is prohibited until completion of the excursion, in which case the riverboat is not considered docked. If such a situation occurs, the holder of the owner's license must promptly file a report with the administrator of the Illinois Gaming Board detailing the basis for its decision not to cruise. Recent pronouncements by the Illinois Gaming Board indicate that the explanations for failure to cruise pursuant to the rule will be scrutinized and that any abuse of the rule will result in disciplinary actions, which may include, among other things, any of the following: cancellation of future cruises, penalties, fines, suspension and/or revocation of a license. The Riverboat Act imposes a 20% wagering tax on adjusted gross receipts from gambling games. The tax imposed is to be paid by the licensed owner to the Illinois Gaming Board on the day after the day when the wagers were made. A number of bills have been recently introduced in the Illinois legislature proposing various changes in the way riverboat gaming operations are taxed. Some of these bills seek to replace the current flat tax on gaming receipts with a graduated gaming tax that would impose a maximum tax on Illinois casinos far in excess of the current 20% wagering tax on adjusted gaming receipts. The Governor of Illinois has publicly supported such a graduated gaming tax and has proposed a state budget which is in part predicated on additional revenues being generated from an increase in gaming taxes. Other proposed bills seek to add a supplemental tax, or raise the flat tax rate on gaming receipts by 5-10%. Another proposed bill would allow a land based casino in southern Illinois. The proposed bills are still pending and no assurance can be given that one or a combination of these bills will not become law or that similar legislation will not be introduced in the future. The Riverboat Act also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. In addition, all use, occupancy and excise taxes that apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. The Company also pays $.20 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. 8 A holder of any license is subject to the imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit and in compliance with applicable laws of Illinois regarding administrative procedures and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Gaming Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interests of the public and the gaming industry. INDIANA In June 1993, the Indiana legislature adopted legislation permitting riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and Patoka Lake. The legislation granted authority to supervise gaming activities to the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission"). The Indiana Gaming Commission is empowered to administer, regulate and enforce the system of riverboat gaming established under Indiana's Riverboat Gambling Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all riverboat gaming operations in Indiana, as well as all persons on riverboats where gaming operations are conducted. The Indiana Gaming Commission has broad powers to regulate riverboat gaming operations and to approve the form of ownership and financial structure of not only riverboat owner licensees, but also their entity qualifiers, and intermediary and holding companies. Indiana is a new gaming jurisdiction and the emerging regulatory framework is not yet complete. The Indiana Gaming Commission has adopted certain final rules and has published others in proposed or draft form which are proceeding through the review and final adoption process. The Indiana Gaming Commission also has indicated its intent to publish additional proposed rules in the future. The Indiana Gaming Commission has broad rule making power and it is impossible to predict what effect, if any, the rules might have on the operations of the Lawrenceburg Casino. The following description reflects both adopted and proposed rules. Further, the Indiana General Assembly has the power to promulgate new laws and implement amendments to the Riverboat Gambling Act, which can materially affect the operation or economic viability of the gaming industry in Indiana. No one may operate a riverboat gaming operation in Indiana without holding a riverboat owner's license. The Indiana Gaming Commission has implemented strict regulations with respect to the suitability of riverboat license owners, their key personnel, and employees. The Indiana Gaming Commission utilizes a "class based" licensing structure that subjects all individuals associated with a riverboat licensee or a riverboat license applicant to varying degrees of background investigations. Under current Indiana law a maximum of 11 owner's licenses may be in effect at any time with an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to Lake Michigan, an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to the Ohio River and one license to be issued to an owner whose home port is a county contiguous to Lake Patoka. For counties contiguous to the Ohio River, the Indiana Gaming Commission may not issue a license unless an ordinance has been passed permitting the docking of a riverboat by the specified local entity and the voters of the county have approved riverboat gambling in the county. 9 A license holder is required to pay an initial license fee of $25,000, (which covers the first 5 years of operation), a renewal fee of $5,000 per year thereafter and post a bond to guaranty performance of the licensee's obligations under the legislation. Gaming will be permitted only on riverboats which (i) have a valid certificate of inspection from the U.S. Coast Guard for the carrying of at least 500 passengers, (ii) are at least 150 feet in length, and (iii) for riverboats operating on the Ohio River, replicate historic Indiana steamboat passenger vessels of the 19th century. No person or entity may simultaneously own an interest in more than two riverboat owner's licenses. A person or entity may simultaneously own up to 100% in one riverboat owner's license and no more than 10% in a second riverboat owner's license. A riverboat owner's licensee must possess a level of skill, experience, or knowledge necessary to conduct a riverboat gaming operation that will have a positive economic impact on the host site, as well as the entire State of Indiana. Additional representative, but not exclusive, qualification criteria with respect to the holder of a riverboat owner's license include character, reputation, financial integrity, the facilities or proposed facilities for the conduct of riverboat gaming including related non-gaming projects such as hotel development, and the good faith affirmative action plan to recruit, train and upgrade minorities and women in all employment classifications. The Indiana Gaming Commission shall require persons holding owner's licenses to adopt policies concerning the preferential hiring of residents of the city in which the riverboat docks for riverboat jobs. The Indiana Gaming Commission has broad discretion in regard to the issuance, renewal, revocation and suspension of licenses and approvals, and the Indiana Gaming Commission is empowered to regulate a wide variety of gaming and non-gaming related activities, including the licensing of suppliers to, and employees at, riverboat gaming operations, and effectively to approve the form of ownership and financial structure of not only riverboat owner and supplier licensees, but also their subsidiaries and affiliates. A riverboat owner's licensee or any other person may not lease, hypothecate, borrow money against or loan money against a riverboat owner's license. An ownership interest in a riverboat owner's license may only be transferred in accordance with the regulations promulgated under the Riverboat Gambling Act. An applicant for the approval of the transfer of a riverboat owner's license must comply with application procedures prescribed by the Indiana Gaming Commission and present evidence that it meets or possesses the standards, qualifications, and other criteria under Indiana gaming laws, and pay an investigative fee in the amount of $50,000 with the application. If the Indiana Gaming Commission denies the application to transfer an ownership interest, it shall issue notice of denial to the applicant. Unless specifically stated to the contrary, a notice of denial of an application for transfer shall not constitute a finding that the applicant is not suitable for licensure. A person who is served with notice of denial under this rule may request an administrative hearing. "Certificates of Suitability" are issued following selection by the Indiana Gaming Commission. The "Certificate of Suitability" is valid for 180 days unless extended by the Indiana Gaming Commission. During this period the prospective riverboat licensee must among other things: obtain a permit to develop the riverboat gaming operation from the United States Army Corps of Engineers; obtain a valid certificate of inspection from the United States Coast Guard for the vessel on which the riverboat gaming operation will be conducted; apply for and receive the appropriate permits or certificates from the Indiana Alcoholic Beverage Commission, fire marshall, and other appropriate local, state and federal agencies which issue permits including, but not limited to, health permits, building permits and zoning permits; closing the financing necessary to complete the development of the gaming operation; post a bond in compliance with the applicable law; obtain the insurance deemed necessary by the Indiana Gaming Commission; receive licensure for electronic gaming devices and other gaming equipment under applicable law; submit an emergency response plan in compliance with applicable laws; and take any other action that the Indiana Gaming Commission deems necessary for compliance under Indiana gaming laws. Further, the Indiana Gaming Commission may place restrictions, conditions or requirements on the permanent riverboat owner's license. An owner's initial license expires five years after the effective date of the license, and unless the owner's license is terminated, expires or is revoked, the owner's license may be renewed annually by the Indiana Gaming Commission upon satisfaction of certain conditions contained in the Riverboat Gambling Act. 10 Pursuant to rules promulgated by the Indiana Gaming Commission, any person (other than an institutional investor) who individually, or in association with others, acquires directly or indirectly the beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee, directly or indirectly, through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for finding of suitability within 45 days after acquiring the securities. Each institutional investor who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall notify the Indiana Gaming Commission within 10 days after the institutional investor acquires the securities and shall provide additional information and may be subject to a finding of suitability as required by the Indiana Gaming Commission. An institutional investor who would otherwise be subject to a suitability finding shall, within 45 days, after acquiring the interests submit information to the Indiana Gaming Commission including the following: a description of the institutional investor's business and a statement as to why the institutional investor satisfies the definitional requirements of an institutional investor under Indiana gaming rule requirements; a certification made under oath that the voting securities were acquired and are held for investment purposes only and were acquired and are held in the ordinary course of business as an institutional investor; the name, address, telephone number, social security number or federal tax identification number of each person who has the power to direct or control the institutional investor's exercise of its voting rights as a holder of voting securities of the riverboat licensee; the name of each person who beneficially owns 5% or more of the institutional investor's voting securities or equivalent; a list of the institutional investor's affiliates; a list of all securities of the riverboat licensee that are or were beneficially owned by the institutional investor or its affiliates within the preceding one year; a disclosure of all criminal and regulatory sanctions imposed during the preceding ten years; a copy of any filing made under 16 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; 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 Gaming Commission may in the future promulgate regulations with respect to the qualification of other financial backers, mortgagees, bond holders, holders of indentures or other financial contributors. The Riverboat Gambling Act imposes a tax on admissions to gaming excursions at a rate of $3.00 for each person admitted to the gaming excursion. This admission tax is imposed upon the license owner conducting the gaming excursion on a per-person basis without regard to the actual fee paid by the person using the ticket, with the exception that no tax shall be paid by admittees who are actual and necessary officials, employees of the licensee or other persons actually working on the riverboat. A tax is imposed on the adjusted gross receipts received from gaming games under the Riverboat Gambling Act at a rate of 11 twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted gross receipts is defined as the total of all cash and property (including checks received by a licensee), whether collected or not, received by a licensee from gaming operations less the total of all cash paid out as winnings to patrons including a provision for uncollectible gaming receivables as is further set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from time to time, impose other fees and assessments on riverboat owner licensees. In addition, all use, excise and retail taxes apply to sales aboard riverboats. In general, riverboat excursions are limited to a duration of at least two and no more than four hours, and no gaming may be conducted while the riverboat is docked, with the exception of (i) the 30 minutes during passenger embarkation and disembarkation and (ii) when weather, water or traffic prevent the riverboat from cruising. Minimum and maximum wagers on games are set by the licensee, and wagering may not be conducted with money or other negotiable currency. No person under the age of 21 is permitted to be present on a riverboat, and wagers may only be taken from a person present on a licensed riverboat. No riverboat licensee or riverboat license applicant may enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received as determined at the time the contract is executed. Any contract entered into by a riverboat licensee or riverboat license applicant that exceeds the total dollar amount of $50,000 shall be a written contract. A riverboat license applicant means an applicant for a riverboat owner's license that has been issued a certificate of suitability. Pursuant to Indiana Gaming Commission rules, riverboat licensees and riverboat license applicants must submit an internal control procedure regarding purchasing transactions which must contain provisions regarding ethical standards, compliance with state and federal laws, and prohibitions on the acceptance of gifts and gratuities by purchasing and contracting personnel from suppliers of goods or services. The rules also require any riverboat licensee or applicant to submit any contract, transaction or series of transactions greater than $500,000 in any 12-month period to the Indiana Gaming Commission within 10 days of execution, and to submit a summary of all contracts or transactions greater than $50,000 in any 12-month period on a quarterly basis. The rules provide that contracts submitted to the Indiana Gaming Commission are not submitted for approval, but grant the Indiana Gaming Commission authority to cancel or terminate any contract not in compliance with Indiana law and Indiana Gaming Commission rules. Indiana gaming laws provide that the opportunity for full minority and women's business enterprise participation in the riverboat industry in Indiana is essential to social and economic parity for minority and women business persons. The Indiana Gaming Commission has the power to review compliance with the goals of participation by minority and women business persons and impose appropriate conditions on licensees to insure that goals for such business enterprises are met. Under the Riverboat Gambling Act, a riverboat licensee or a riverboat license applicant shall designate certain minimum percentages of the value of its contracts for goods and services to be expended with minority business enterprises and womens' business enterprises such that 10% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with minority enterprises and 5% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with women's business enterprises. Expenditures with minority and women business enterprises are not mutually exclusive. Licensees are required to report the dollar value and percentage of contracts awarded to minority business enterprises and women's business enterprises annually. If the Indiana Gaming Commission determines that a licensee has not met these requirements, it may suspend, limit or revoke the owner's license or fine or impose appropriate conditions on the licensee. All licensees subject to the jurisdiction of the Indiana Gaming Commission have a continuing duty to maintain suitability for licensure. The Indiana Gaming Commission may initiate an investigation or disciplinary action or both against a licensee about whom the commission has reason to believe is not 12 maintaining suitability for licensure, is not complying with licensure conditions, and/or is not complying with Indiana gaming laws or regulations. The Indiana Gaming Commission may suspend, revoke, restrict or place conditions on the license of a licensee; require the removal of a licensee or an employee of a licensee; impose a civil penalty or take any other action deemed necessary by the Indiana Gaming Commission to insure compliance with Indiana gaming laws. The rapid expansion of gaming in Indiana has prompted some legislators to call for a moratorium on the legalization of new forms of gaming. Some legislators support a five year moratorium, while others propose waiting until a national survey on gaming has been completed. One bill, proposing a moratorium on the legalization of new forms of gaming or the expansion of the scope of existing gaming laws until the earlier of five years or the completion of the national survey, passed the Indiana Senate in February of 1997 and is currently being considered by the Indiana House of Representatives. There are other legislative measures which are being considered, including but not limited to, an increase in the admissions tax. IOWA In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and Missouri Rivers and certain other waterways located in Iowa. The Excursion Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa Commission") jurisdiction over all gambling operations. The legislation authorized the granting of licenses to conduct riverboat gaming to not-for-profit corporations which, in turn, are permitted to enter into operating agreements with persons who are licensed by the Iowa Commission to operate riverboat casinos. The number of licenses which may be granted is not limited by statute or regulation. Gaming is permitted only on riverboats which recreate, as nearly as practicable, Iowa's riverboat history and have a capacity for at least 250 persons with tickets. In addition the licensee must utilize Iowa resources, goods and services in the operation of the riverboat. An excursion gambling boat must operate at least one excursion each day for 100 days during the excursion season, (from April 1 through October 31). Excursions consist of a minimum two hours during the excursion season. While an excursion gambling boat is docked, passengers may embark or disembark at any time during its business hours. If during the excursion season it is determined that it would be unsafe to complete any portion of an excursion, or if mechanical problems prevent the completion of any portion of an excursion, the boat may be allowed to remain dockside. A gaming license will be issued for not more than three years and is subject to annual renewals thereafter. The Iowa Commission has broad discretion with regard to such renewals. The annual license fee to operate an excursion gambling boat shall be based on the passenger carrying capacity, including crew, for which the excursion gambling boat is registered. The annual fee shall be five dollars per person capacity. Licenses issued by the Iowa Commission may not be transferred to another person or entity. The Company must submit detailed financial and operating reports to the Iowa Commission. Iowa statute stipulates that a referendum must be held in 2002 to reaffirm gaming in each county that has gaming and further stipulates that similar referenda be held every eight years thereafter. Minimum and maximum wagers on games are set by the licensee. Wagering may only be conducted with chips, wagering debit cards or coins. Wagers may only be made by persons 21 years of age and older. A licensee shall not accept a credit card to purchase coins, tokens or other forms of credit to be wagered on gambling games. The legislation imposes a graduated tax based on adjusted gross receipts at a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any amount over $3 million. The tax is to be paid by the licensee within 10 days after the close of business of the day when the wagers were made. The legislation also permits the Iowa Commission to impose an admission fee for each person embarking on an excursion 13 vessel, and the city or county in which gaming is conducted is permitted to impose an admission fee of not greater than 50 cents. Pursuant to its rule making authority, the Iowa Commission requires officers, directors and certain key employees of the Company to be licensed by the Iowa Commission. In addition, anyone having a material relationship or involvement with the Company may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove a change in position by such officers or key employees and the power to require the Company to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Commission finds unsuitable to act in such capacities. Any contract in excess of $50,000 must be submitted to and approved by the Iowa Commission. The Iowa Commission may also require any individual who has a material relationship with the Company to be investigated and licensed or found suitable. Any person who acquires 5% or more of the Company's equity securities must be approved by the Iowa Commission prior to such acquisition. The applicant stockholder is required to pay all costs of such investigation. In November 1996, two referenda seeking to allow riverboat gaming in Dallas County, near DesMoines, and Muscatine County, on the Mississippi River, were defeated. Following the vote, Iowa Governor Terry Branstad proposed that the Iowa legislature impose a five-year moratorium on the expansion of gaming. LOUISIANA In July 1991, the Louisiana legislature adopted legislation permitting certain types of gaming activity on certain rivers and waterways in Louisiana. The legislation granted authority to supervise riverboat gaming activities to the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement Division of the Louisiana State Police (the "Louisiana Enforcement Division"). The Louisiana Riverboat Gaming Commission was authorized to hear and determine all appeals relative to the granting, suspension, revocation, condition or renewal of all licenses, permits and applications. In addition, the Louisiana Riverboat Gaming Commission was to establish rules providing for and determining, among other things, authorized routes, duration of excursions and the stops a riverboat may make, minimum levels of insurance, construction of riverboats, periodic inspections and procedures for negotiable instrument transactions involving patrons. The Louisiana Enforcement Division was authorized, among other things, to investigate applicants and issue licenses, investigate violations of the statute, conduct continuing reviews of gaming activities and exercise other broad oversight powers. In an April 1996 special session of the Louisiana legislature, Louisiana lawmakers passed a measure which established the Louisiana Gaming Control Board and provides that such board shall be the successor to all prior authorities, and the sole and exclusive authority, with regard to the regulation and supervision of gaming operations and activities in Louisiana except for the regulation of horse racing and offtrack betting and the conducting of charitable gaming operations. Effective May 1, 1996, the powers, duties, functions, and responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana Enforcement Division, including those with respect to riverboat gaming, are transferred to the Louisiana Gaming Control Board. The Department of Public Safety and Corrections, Office of State Police, retains certain enforcement powers and responsibilities relative to investigations, audits, and cruising procedures. The transfer of a license or permit or an interest in a license or permit is prohibited. The sale, purchase, assignment, transfer, pledge or other hypothecation, lease, disposition or acquisition (a "Transfer") by any person of securities which represents 5% or more of the total outstanding shares issued by a corporation that holds a license is subject to Louisiana Gaming Control Board disapproval. A security issued by a corporation that holds a license must disclose these restrictions. Prior Louisiana Gaming Control Board approval is required for the Transfer of any ownership interest of 5% or more in any 14 licensee or for the Transfer of any "economic interest" of 5% or more in any licensee or Affiliated Gaming Person. No such prior approval is required for the transfer of any ownership interest of 5% or more in any corporate licensee. An "economic interest" is defined for purposes of a Transfer as any interest whereby a person receives or is entitled to receive, by agreement or otherwise, a profit, gain, thing of value, loss, credit, security interest, ownership interest or other benefit. A licensee must notify the Louisiana Gaming Control Board in writing within five (5) days of the completion of the following transactions: 1. Withdrawal of capital in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 2. The granting of a loan or any other extension of credit in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 3. Any advance or other distribution of any type of asset in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; No prior approval of any such withdrawal, loan, advance or distribution is required, but such transaction is ineffective if subsequently disapproved by the Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board may issue an emergency order for not more than 10 days prohibiting payment of profits, income or accruals by, or investments in, a licensee. Riverboat gaming licensees and their Affiliated Gaming Persons are required to notify the Louisiana Gaming Control Board within 30 days after any such person applies for, receives or accepts a loan, or makes use of any cash, property, credit, loan or line of credit, or guarantees, or grants other form of security for a loan (a "Loan") unless such transaction involves publicly registered debt and securities (in which event such person shall file the registration statement and other materials with the Louisiana Gaming Control Board), unless more stringent conditions are imposed by the Louisiana Gaming Control Board, or the amount of the Loan is below certain specified thresholds. The Louisiana Gaming Control Board is required to investigate the reported Loan, and to either approve or disapprove the transaction. If disapproved, the Loan must be rescinded by the Licensee or Affiliated Gaming Person. Fees for conducting gaming activities on a riverboat include (i) $50,000 per riverboat for the first year of operation and $100,000 per year per riverboat thereafter; (ii) a state franchise fee of 15% of net gaming proceeds; (iii) a state license fee of 3.5% of net gaming proceeds; and (iv) a local fee of up to $2.50 per passenger. In April 1996, the Louisiana legislature approved legislation mandating local option elections to determine whether to prohibit or continue to permit three individual types of gaming in Louisiana on a parish-by-parish basis. The referendum was brought before the Louisiana voters at the time of the November 1996 presidential election. Voters elected to permit riverboat gaming in all parishes where it is presently conducted and to allow land-based casino gaming in Orleans Parish. Voters in 31 parishes elected to permit video draw poker devices, but in 33 parishes, including East Baton Rouge Parish, voters elected to prohibit the devices. Current operators of video poker devices in East Baton Rouge Parish (and the other parishes where voters elected to prohibit video poker) will be allowed to operate only until the end of their current license plus two extensions. Typically video poker licenses have a maximum one year duration. 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 15 number of licenses which may be granted is not limited by statute or regulation. The Missouri Gaming Law grants specific powers and duties to the Missouri Gaming Commission to supervise riverboat gaming and implement the Missouri Gaming Law and take any other action as may be reasonable or appropriate to enforce the Missouri Gaming Law. The Missouri Gaming Commission has discretion to approve permanently moored ("dockside") riverboat casinos if it finds that the best interest of Missouri and the safety of the public indicate the need for continuous docking of an excursion gambling boat. Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. If a company is granted a gaming license in Missouri, such company, any subsidiaries it may form and its officers, directors, significant shareholders and employees will be subject to regulations. The initial license and first subsequent license renewal of an excursion gambling boat operator shall be for a period of one year. Thereafter, license renewal periods shall be two years. However, the Missouri Gaming Commission may reopen license hearings at any time. In addition to the owners license and operators license for the riverboat, every individual participating in gaming operations in any capacity is required to have an occupational license from the Missouri Gaming Commission. Applicants and licensees are responsible to keep the application and any requested materials current at all times, and this responsibility shall continue throughout any period of licensure granted by the Missouri Gaming Commission. In addition, Missouri has extensive licensing disclosure requirements. The Missouri Gaming Commission may revoke or suspend gaming licenses and impose other penalties for violation of the Missouri Gaming Law and the rules and regulations which may be promulgated thereunder. Penalties include, but are not limited to, forfeiture of all gaming equipment used in the conduct of unauthorized gambling games and fines of up to three times a licensee's highest daily gross receipts derived from wagering on the gambling games, whether authorized or unauthorized, conducted during the preceding twelve months. In addition, the Missouri Gaming Commission requires 60 days notice of, and may disapprove or require delay pending further investigation of, transactions in excess of the greater of $500,000 or 30% of licensee's net worth, up to $1,000,000, which transactions involve or relate to the gaming licensee. The Missouri Gaming Law imposes operational requirements on riverboat operators, including a charge of two dollars per gaming customer per excursion that licensees must pay to the Missouri Gaming Commission, a minimum payout requirement of 80% for slot machines, a 20% tax on adjusted gross receipts, prohibitions against providing credit to gaming customers (except for the use of credit cards and cashing checks) and a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff necessary to protect the public on the licensee's riverboat. Licensees must also submit to the Commission on a quarterly basis an audit of compliance and of the financial transactions and condition of the licensee's total operations for the calendar quarter and pay the associated auditing fees. The Missouri Gaming Law provides for a loss limit of $500 per person per excursion. Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may be used for gaming, the Missouri Gaming Commission is empowered to impose such space limitations through the adoption of rules and regulations. Additionally, United States Coast Guard safety regulations could affect the amount of riverboat space that may be devoted to gaming. The Missouri Gaming Law also includes requirements as to the form of riverboats, which must resemble Missouri's riverboat history to the extent practicable and include certain non-gaming amenities. The licensee may receive wagers only from a person present on a licensed excursion gambling boat. Wagering shall not be conducted with money or other negotiable currency. A person under 21 years of age shall not make a wager on an excursion gambling boat and shall not be allowed in the area of the excursion boat where gambling is being conducted. 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. 16 Pursuant to its rule making authority, the Missouri Gaming Commission has adopted certain regulations which provide, among other things, that: (i) riverboat excursions are limited to a duration of four hours, and gaming may be conducted at any time during the excursion; (ii) no gaming licensee or occupational licensee may pledge, hypothecate or transfer in any way any license, or any interest in a license, issued by the Missouri Gaming Commission; (iii) without first notifying the Missouri Gaming Commission at least 60 days prior to such consummation of any of the following transactions (and during such period the Missouri Gaming Commission may disapprove the transaction or require the transaction to be delayed pending further investigation) (a) a gaming licensee or a holding company affiliated with a gaming licensee may not make a public issuance of debt, (b) a publicly held gaming licensee or a publicly held holding company may not make any issuance of an ownership interest equaling 5% or greater of the gaming licensee or holding company or (c) a person or entity may not pledge or hypothecate an ownership interest in a gaming licensee that is not a publicly held company or a holding company that is not a publicly held company provided that no such ownership interest may be transferred voluntarily or involuntarily pursuant to any pledge without separate notice to the Missouri Gaming Commission as required by the regulations; (iv) not later than 7 days after the consummation of any transfer of ownership interest in a publicly held gaming licensee, if such transfer would result in an entity or group of entities acting in concert owning, directly or indirectly, a total amount of ownership interest equaling 5% or greater of the ownership interest in the gaming licensee, the transferee must report such consummation to the Missouri Gaming Commission; (v) no withdrawals of capital, loans, advances or distribution of any type of assets in excess of 5% of accumulated earnings of a licensee to anyone with an ownership interest in the licensee may occur without prior Missouri Gaming Commission approval; and (vi) the Missouri Gaming Commission may take action against a licensee or other person who has been disciplined in another jurisdiction for gaming related activity. The Missouri Gaming Commission is authorized to enter the premises of excursion gambling boats, facilities, or other places of business of a licensee in Missouri to determine compliance with the Missouri Gaming Law and to investigate alleged violations of the Missouri Gaming Law or Missouri Gaming Commission rules, orders or final decisions. A holder of any license shall be subject to imposition of penalties, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees that is injurious to the public health, safety, morals, good order and general welfare of the people of the state of Missouri, or that would discredit the Missouri gaming industry or the state of Missouri. The Missouri Gaming Commission may waive any licensing requirement or procedure for any type of license if it determines that the waiver is in the best interests of the public. In addition, a supplier's license is required of persons who sell or lease gambling equipment, gambling supplies or both to any licensee. A licensee licensed to conduct gambling games shall acquire all gambling games or implements of gambling from a licensed supplier. On August 29, 1996, certain residents of St. Louis County (the "St. Louis Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and injunctive relief generally against the Missouri Gaming Commission and specifically against the granting of licenses by the Missouri Gaming Commission to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP ("Players") with respect to their casino development in Maryland Heights, Missouri. The suit alleged that (i) the Missouri legislature lacks the constitutional authority to authorize the Missouri Gaming Commission to license casinos except on excursion gambling boats and floating facilities "upon" the Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly construed a statute to permit it to grant gaming licenses to excursion gambling boats or floating facilities placed within artificial spaces and (iii) the Missouri Gaming Commission is not authorized to regulate gaming operations conducted upon floating facilities. The St. Louis Plaintiffs asserted that the enclosed basin being constructed by Harrah's and Players, on which they would float their casino barge facilities and which is not contiguous to the Missouri River, exceeds a Missouri constitutional limitation authorizing gaming only "upon" the Missouri and Mississippi Rivers. The St. Louis Plaintiffs also sought to declare unconstitutional those portions of Missouri law and actions of the Missouri Gaming Commission that permit casino gaming in artificially 17 constructed basins. Finally, the St. Louis Plaintiffs asserted that although the Missouri constitution grants the Missouri legislature the authority to authorize casino gaming on excursion gambling boats and floating facilities, when the Missouri legislature enacted its gaming law, it only authorized gaming on excursion gambling boats. Therefore, because the Harrah's/Players facility is within an enclosed basin that prevents excursions upon the Missouri River and will be conducted upon barge facilities that lack an engine or other means of propulsion, the Missouri Gaming Commission lacks the statutory authority to license the project. In December 1996, the Missouri court dismissed the St. Louis Plaintiffs' claim. The St. Louis Plaintiffs' appeal is currently pending in the Missouri Supreme Court. Although the St. Louis Plaintiffs' action relates specifically to the Harrah's/Players Maryland Heights casino project, if their claim is successful, it could have a material adverse effect on other Missouri casino operators, particularly those that conduct operations on floating barges from artificially constructed basins. The Company, however, conducts its gaming operations at the Argosy Casino in Riverside on a docked, excursion riverboat from a constructed harbor that is open to the Missouri River. The Company believes that, if necessary, it could modify its operations in Riverside so as to be in compliance with even the strictest construction of the St. Louis Plaintiffs' interpretation of Missouri gaming law. The Company is unable at this time to determine what effect, if any, this action would have on its business, results of operations, competitive position in the Kansas City and St. Louis markets or the merits of the St. Louis Plaintiffs' action. LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally prohibited form of lottery. In order to amend the Kansas constitution, two-thirds of the members of each house of the Kansas legislature and a majority of Kansas voters would have to approve a proposed amendment. Resolutions seeking to amend the Kansas constitution to authorize limited forms of gaming have been proposed. Although Kansas Governor Graves has stated that he is in favor of the legalization of slot machines at racing locations, in 1996 the legislature rejected attempts to legalize slot machines. Bills which would allow specified racetracks, including the Woodlands Racetrack in Kansas City, to install instant bingo dispensers that resemble slot machines are currently pending in the Kansas legislature. 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. The reservations on which these tribes propose to offer gaming in Kansas are located from approximately 120 to 150 miles from downtown Kansas City. KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally prohibited form of lottery. In order to amend the Kentucky constitution, three-fifths of the members of each house of the Kentucky legislature and a majority of Kentucky voters would have to approve a proposed amendment. Several Kentucky racetracks have publicly lobbied for the right to conduct casino games. OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited form of lottery. In order to amend the Ohio constitution, three-fifths of the members of each house of the Ohio legislature and a majority of Ohio voters would have to approve the proposed amendment. A voter petition drive placed a casino gaming referendum on the November 1996 ballot. The referendum would have legalized gaming and required the Ohio legislature to pass laws to facilitate the development and maintenance of an industry competitive with gaming in other areas of the country. This referendum was rejected by Ohio voters and casino gaming remains illegal in Ohio. 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. 18 FEDERAL AND NON-GAMING REGULATIONS The Company and its subsidiaries are subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in additional costs to the Company. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. All vessels operated by the Company must comply with U.S. Coast Guard requirements as to safety and must hold a Certificate of Seaworthiness. These requirements set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessel. Loss of the Certificate of Seaworthiness of a vessel would preclude its use as a riverboat. Every five years, vessels must be dry docked for an inspection of the outside of the hull resulting in a loss of service for a period of time. The Belle of Sioux City riverboat was removed from service on April 13, 1996 for such a hull inspection. The riverboat arrived at an approved dry docking facility on April 16, 1996, passed its inspection and returned to service on May 9, 1996. No interruption in gaming operations occurred in Sioux City as a result of the hull inspection process, as the Company temporarily transferred gaming operations to the original Alton Belle prior to removing the Belle of Sioux City from service. All shipboard employees of the Company employed on U.S. Coast Guard regulated vessels, including those who have nothing to do with the actual operation of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act which, among other things, exempts these employees from state limits on workers' compensation awards. The Company is subject to the provisions of the Americans With Disabilities Act but does not anticipate incurring significant expenses to bring its facilities or procedures into compliance with such Act. The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires banks, other financial institutions and casinos to monitor receipts and disbursements of currency in excess of $10,000 and report them to the United States Department of the Treasury (the "Treasury"). In management's opinion, the BSA may have resulted in a reduction in the volume of play by high level wagerers. The Treasury has proposed tentative amendments to the BSA which would apply solely to casinos and their reporting of currency transactions. The most significant proposed change in the BSA is a reduction in the threshold at which customer identification data must be obtained and documented by the casino, from $10,000 to $3,000 (which may include the aggregation of smaller denomination transactions). Additionally, the amendments would substantially increase the record-keeping requirements imposed upon casinos relating to customer data, currency and non-currency transactions. Management believes the proposed amendments, if enacted in their current form, could result in a further reduction in the volume of play by upper-and middle-level wagerers while adding operating costs associated with the more extensive record-keeping requirements. However, the effect on the Company's operations is not expected to be material. The permanent riverboat casino site in Lawrenceburg, Indiana is located in potential wetlands or other protected areas. Although the Company does not believe that the existence of wetlands or other protected areas will prohibit or have a significant adverse impact on the Company's ability to develop any of its current sites, there can be no assurance that such a claim or other claims relating to such matters may not arise in the future, which may have a material adverse effect on the costs of opening a casino at such sites or result in a material delay in opening a gaming facility at such sites. 19 ITEM 2. PROPERTIES The following is a list of the Company's principal properties as of December 31, 1996. Substantially all of the properties of the Company are subject to the lien of the Company's senior lenders under its $235 million First Mortgage Note Indenture dated June 5, 1996.
LEASE INTEREST FUNCTION EXPIRATION --------- --------------------------------------------- --------------- ALTON, ILLINOIS Office Building....................... Leased Executive Offices July 1997 Alton Belle II........................ Owned Riverboat Casino Argosy I.............................. Owned Riverboat Casino Support Barges........................ Owned Landing, ticketing and office facilities RIVERSIDE, MISSOURI Real Property......................... Owned Permanent Landing Site Real Property......................... Leased Landing rights Argosy IV............................. Owned Riverboat Casino Support Barges........................ Owned Employee, ticketing and staging facilities BATON ROUGE, LOUISIANA Real Property......................... Owned Vessel Access Argosy III............................ Owned Riverboat Casino Support Barge......................... Owned Staging Barge LAWRENCEBURG, INDIANA(1) Real Property......................... Owned Permanent Landing Site SIOUX CITY, IOWA Argosy V.............................. Owned Riverboat Casino Support Barge......................... Owned Staging Barge OTHER Spirit of America..................... Owned Temporary Lawrenceburg Staging Vessel Casino St. Charles.................... Leased Temporary Lawrenceburg May 1997 Riverboat Casino
- ------------------------ (1) 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. 20 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time a party to legal proceedings arising in the ordinary course of business. The Company does not believe that the results of such legal proceedings, even if the outcome were unfavorable to the Company, would have a material adverse impact on either its financial condition or results of operations. MARION COUNTY, INDIANA GRAND JURY DOCUMENT SUBPOENA On or after March 15, 1996, the Company, its partners in the Lawrenceburg casino project and certain other individuals and entities were served with document request subpoenas issued by the Office of the Prosecuting Attorney of Marion County, Indiana in connection with a grand jury investigation entitled: STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law requires that at the time a target of an investigation is determined, that entity or person must be so advised by the Office of the Prosecuting Attorney. On March 23, 1996 the Company was advised by the Marion County prosecutor that no target subpoenas had been issued by the grand jury in its investigation as of that date. However, there can be no assurance that targets will not be identified as further information and documents are obtained and considered by the grand jury. Due to the confidential nature of grand jury proceedings, the Company is not aware of the specific subject matter or matters of the investigation. The Company believes it has fully complied with its subpoena, and has been informed by its partners that they have done the same. The subpoenas requested information regarding the current or prior ownership interest in the Company and the partners of the Indiana Partnership by the individuals or entities described below. The subpoenas also requested that the Company and its partners produce a broad category of documents including documents regarding employment and other agreements, gifts, payments and correspondence between the Company and any of its partners on the one hand and several business entities and individuals, including an Indiana state legislator, certain Indiana lobbyists, and certain Lawrenceburg, Indiana city officials and businessmen on the other hand. The Company has learned that this legislator has served as an employee of a subsidiary of Conseco, Inc., the parent company of the 29% limited partner in the Indiana Partnership since September 1995. Additionally, the Company has learned that such state legislator has served since September 1993 as a consultant to a major Indiana engineering firm that is engaged in many state and local government funded construction projects. That engineering firm also serves as lead engineer for the Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative Ethics Committee voted to reprimand, but take no further action against, this legislator for failing to properly report the foregoing employment and consulting arrangements on his 1993, 1994 and 1995 statements of economic interests. On June 27, 1996, the legislator announced his resignation as chairman of the Indiana House Ways and Means Committee. The Company believes that neither it nor any entity controlled by or person employed by the Company has engaged, and has been informed by representatives of its partners that they have not engaged, in any unlawful conduct in the pursuit by or granting to the Indiana Partnership of the Lawrenceburg gaming license. Because the grand jury proceedings were unlikely to be concluded quickly, on March 25, 1996, a former U.S. Attorney and his law firm were retained to conduct, as special independent counsel (the "special independent counsel"), an internal investigation into the activities and actions of the Company and the entities controlled by any person employed by the Company with respect to (i) the hiring by Conseco, Inc. and the Indiana engineering firm of the state legislator, (ii) the endorsement of the Indiana Partnership by the City of Lawrenceburg and the financial affairs of certain Lawrenceburg officials with respect to such endorsement and the awarding of the certificate of suitability by the Indiana Gaming Commission, and (iii) their lobbying efforts in furtherance of the Indiana legislature's enactment of legislation authorizing gaming and limiting gaming licenses to one per county. A special committee of independent directors of the Company was appointed to supervise and coordinate the special independent counsel's investigation. The special independent counsel did not investigate Conseco, Inc. The Company was advised that Conseco, Inc. also retained independent counsel and such 21 counsel conducted its own internal investigation of matters that may be the subject of the grand jury proceedings and such investigation found no wrongdoing by Conseco, Inc. or any person or entity it controls, or is controlled by. From March 25 to April 15, 1996, the special independent counsel conducted its investigation and issued an interim report in which it concluded that it found no evidence that the Company or any entity controlled by or person employed by the Company had any involvement in, or knowledge of, the relationship between the state legislator and Conseco, Inc. or the Indiana engineering firm, or attempted to improperly influence any City of Lawrenceburg official, state legislator or Indiana Gaming Commission member or staff member in connection with the endorsement of the partnership by the City of Lawrenceburg and the awarding of the certificate of suitability to the Indiana Partnership with regard to lobbying, including the lobbying with respect to one gaming license per county legislation. The special independent counsel found no evidence that the Company or any entity controlled by or person employed by the Company attempted to unduly influence any legislator in any way. However, no investigation was made of any lobbyist's records, activities or expenditures, nor were any outside lobbyists interviewed. The special independent counsel also audited the Company's compliance with the lobbying disclosure statute in Indiana and found only technical errors in the Company's lobbying disclosure statements. No evidence was found that these technical errors were intentional or designed to hide any lobbying activity. In conducting its investigation, the special independent counsel, among other things, reviewed numerous boxes of documents produced by the executive and Lawrenceburg offices of the Company and extensively interviewed the nine Company officers and employees most closely related to the Lawrenceburg Casino project, as well as the principal of R.J. Investments, Inc., a 4% limited partner of the Indiana Partnership. No assurance can be given, however, that the nature and scope of the investigation conducted by the special independent counsel for the Company and Conseco, was sufficient to uncover conduct that might be considered unlawful. In the event that the Company, any entity controlled by the Company, any person employed by the Company, the Indiana Partnership or any of its partners is found by the Marion County prosecutor to have engaged in unlawful conduct, there is no assurance what effect such action would have on the Indiana Partnership's gaming license. In the event that a partner is determined by the Indiana Gaming Commission to be unsuitable for ownership of a gaming license, the terms of the Indiana Partnership's partnership agreement provide that the Indiana Partnership shall redeem 100% of such unsuitable partner's interest for an amount equal to 90% of the "appraised value" of that partner's interest, determined in accordance with the terms of the partnership agreement. The purchase price is payable in five annual installments, only from available cash flow or sale or financing proceeds of the partnership, and bears interest at "prime." If such event were to occur with respect to Conseco prior to the completion of the Lawrenceburg casino project, the Company would have to fund any remaining construction costs of the Lawrenceburg Casino project which were to have been funded by Conseco. No assurance can be given that the Company would be able to obtain funds sufficient for this purpose. Also, there can be no assurance that the Indiana Gaming Commission would not take other actions such as suspending, revoking or failing to renew the Indiana Partnership's gaming license. There can be no assurance that the grand jury investigation will not lead to events having a material adverse effect on the Company. DISPUTE WITH FORMER SHAREHOLDERS OF JAZZ ENTERPRISES, INC. On March 15, 1996, a judgment for approximately $2.2 million plus continuing interest, attorney's fees and court costs was rendered against Jazz in the cause of action entitled MARTHA MYATT BOWLUS ET. AL. V. JAZZ ENTERPRISES, INC. filed in the Nineteenth Judicial District Court, Parish of East Baton Rouge, State of Louisiana ("Bowlus Lawsuit"). The plaintiffs sued Jazz to recover amounts due under a promissory note issued by Jazz and secured by a mortgage on certain property owned by Jazz located several miles south of Catfish Town. The delay for filing for a new trial in the Bowlus Lawsuit has elapsed and under Louisiana law a suspensive appeal from a judgment must be filed within 30 days thereafter and any such appeal 22 requires the posting of an appeal bond in an amount at least equal to the amount of the judgment. The judgment rendered in the Bowlus Lawsuit has been recorded in the mortgage records of East Baton Rouge Parish, and therefore the judgment now constitutes a judicial mortgage on Jazz's immovable property located in East Baton Rouge Parish. Pursuant to the definitive acquisition documents, any and all amounts due by Jazz under the Bowlus Lawsuit are the obligations of the Former Jazz Shareholders. Prior to March 31, 1996, the Company requested, in writing, that the Former Jazz Shareholders satisfy the obligations and satisfy the judgment. Thereafter, Jazz was advised that the Former Jazz Shareholders hoped to settle the Bowlus Lawsuit prior to the expiration of the suspensive appeal delay and if not so settled, they intended to suspensively appeal the judgment. Since the former Jazz Shareholders were unable to post an adequate suspensive appeal bond to suspend the effect of the adverse judgment against Jazz, the Company paid the amount due under the judgment by funding and paying $2,292,033.81 ("Bowlus Settlement") to the plaintiffs on Monday, July 8, 1996 in full satisfaction of the judgment rendered in the Bowlus Lawsuit. By letter dated July 25, 1996, the Company advised the Former Jazz Shareholders that it had paid the judgment rendered in Bowlus Lawsuit by payment of the Bowlus Settlement to the plaintiffs and demanded that the Former Jazz Shareholders repay to the Company the Bowlus Settlement plus accumulated interest and all attorneys' fees incurred by the Company in settling the Bowlus Lawsuit. Due to the Former Jazz Shareholders' failure to repay Argosy for the Bowlus Settlement, the Company withheld scheduled payments of $337,500 each to the former Jazz Shareholders representing the March 31, 1996, the June 30, 1996, September 30, 1996 and December 31, 1996 quarterly installments of the deferred purchase price. Pursuant to the terms of the purchase agreement, the Company intends to withhold all future payments to the former Jazz Shareholders as an offset against the Bowlus Settlement plus accumulated interest and all attorneys' fees incurred by the Company in settling the Bowlus Lawsuit. The Bowlus Lawsuit is still pending on appeal, and the Bowlus plaintiffs are seeking to have the lower court's award for attorneys' fees increased, and Jazz (through the Former Jazz Shareholders) is seeking to have the judgment (which Argosy paid) reversed or reduced. The Company believes that withholding such payment, as well as withholding future payments, until the Former Jazz Shareholders satisfy the Bowlus Lawsuit is within the Company's rights as provided for in the definitive acquisition documents. In response to the Company's withholding of the March 31, 1996 payment, Mr. Steve Urie et al. has filed an action in District Court of East Baton Rouge seeking payment of the withheld amount and has threatened, among other things, to file a class action on behalf of the shareholders of the Company against the Company and its directors and officers for mismanagement. The Company believes such threatened claims are without merit and would vigorously pursue the defense of any lawsuit filed by the Former Jazz Shareholders. This suit seeking recovery of withheld quarterly installments has since been voluntarily dismissed, without prejudice, by Mr. Urie et. al. CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT On November 29, 1996, Schilling Casino Corporation d/b/a Empire Casino & Resort ("Empire"), an unsuccessful competing applicant for the riverboat owner's license in Lawrenceburg, Indiana that was awarded to the Indiana Partnership by the Indiana Gaming Commission (the "Commission"), filed with the Commission a purported "Request for Hearing" (the "Request") on the denial of Empire's application for the Lawrenceburg license. Empire's Request, which has been referred to an Administrative Law Judge (the "ALJ"), did not seek a stay of the award of the license to the Indiana Partnership or of the Indiana Partnership's commencement of regular gaming operations from its temporary gaming facility at Lawrenceburg, which commenced December 13, 1996. The Company and the Indiana Partnership were granted leave to intervene in the administrative proceedings on the Empire Request. The grounds asserted in the Empire Request include claims that (i) the application process followed by the Commission did not afford Empire due process and violated Indiana laws; (ii) the Indiana Partnership failed to comply with conditions in the certificate and failed to open the temporary gaming 23 facility in a timely fashion, (iii) the Indiana Partnership made misrepresentations to the Commission during the licensing hearings; (iv) the Commission could not lawfully have extended the certificate beyond June 30, 1996 (one year after the date of its initial award) without reconsidering all other applications; and (v) the endorsement of the Indiana Partnership by the City of Lawrenceburg was without legal authority and was given improper weight by the Commission. The Company and the Indiana Partnership have filed with the ALJ a motion for summary judgment and to dismiss Empire's Request; the Commission has filed with the ALJ a motion for partial summary judgement, on Empire's Request; and Empire has filed with the ALJ its "discovery plan" describing discovery it wishes to pursue in the matter, as to which the Company and the Indiana Partnership have filed a motion for protective order. Responsive and reply briefing by the parties has been completed, and the ALJ has set a hearing for April 30, 1997 on the pending motions and the Empire discovery plan. The Company and the Indiana Partnership believe the Request is without merit, and are contesting and intend to continue to contest the Request vigorously. The Commission is also opposing the Empire Request. No assurance can be given, however, as to (i) the ultimate recommendation the ALJ will make to the Commission on the Request; (ii) the ultimate action the Commission will take in response to that recommendation; or (iii) that Empire will not continue to take steps to seek revocation of the license awarded to the Indiana Partnership, including seeking judicial review of any ultimate administrative ruling by the Commission denying the Empire Request. CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL. In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House") filed a cause of action in the U.S. District Court of the Middle District of Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and Argosy obtained the gaming license for Baton Rouge based upon false and fraudulent pretenses and declarations and financial misrepresentations. The complaint alleges tortious conduct as well as violations of RICO and seeks damages of $130,900.00 plus court costs and attorneys' fees. The plaintiff was an applicant for a gaming license in Baton Rouge whose application was denied by the Louisiana Enforcement Division. The Company believes the allegations of the plaintiff are without merit and in tends to vigorously defend such cause of action. On June 7, 1995, the Company consummated its purchase of all of the outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company intends to seek indemnification from the Former Jazz Shareholders for any liability the Company, Argosy Louisiana or Jazz suffers as a result of such cause of action. As part of the consideration payable by the Company to the Former Jazz 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 off-set 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 off-set rights. The defendants filed a Motion to Dismiss, or alternatively to abstain and stay the action, pending resolution of certain Louisiana state court claims filed by Capitol House. The trial court decided in favor of the defendants and dismissed the suit without prejudice to the rights of plaintiff to revive the suit after the conclusion of the pending state court matters. The plaintiff appealed this dismissal to the U.S.Fifth Circuit Court of Appeals. While the appeal was pending, several of the Louisiana state court claims were resolved. On March 11, 1997, the U.S. Fifth Circuit Court of Appeals vacated the trial court's dismissal and remanded the case to the district court for further proceedings. The case is now back in the district court 24 and will proceed. The defendants intend to go forward with the previously filed motion to dismiss. No date has yet been set for hearing on the motion. H. STEVEN NORTON V. JOHN T. CONNORS, ET AL. In September, 1993, H. Steven Norton, who was then and is now the President of the Company, filed a cause of action against John T. Connors, a significant shareholder of the Company and a former officer of J. Connors Group Inc., a predecessor entity of the Company ("JCG"), seeking $50 million in damages. Mr. Norton alleged that Mr. Connors failed to fulfill his promise made in the summer of 1991 to establish a partnership with Mr. Norton in which each would have an equal 50% interest in JCG, which had a 25% partnership interest in the Company's predecessor entity that owned the Alton Belle casino. As a result of the reorganization effected immediately prior to its initial public offering, the Company succeeded to all the rights, properties and assets, and assumed all the liabilities, of all of its predecessor entities, including JCG. Subsequent to filing the lawsuit, Mr. Connors advised the Company that his dealings with Mr. Norton, which are the subject of the litigation, were in his capacity as an officer of JCG, and that the Company should assume the defense and reimburse Mr. Connors for the approximately $130,000 spent to date on legal fees, and that any liability resulting from the litigation was assumed by the Company as a result of the Company's reorganization. The Company responded to Mr. Connors that it believed that his actions and dealings with Mr. Norton were solely in his individual capacity as a shareholder of JCG, and the Company declined to assume the defense or reimburse him for previously incurred legal fees, and the Company denied that it has any liability with respect to such matter. If, however, JCG were to have been found liable to Mr. Norton as a result of the actions of Mr. Connors, then the Company could under certain circumstances be liable to Mr. Norton for any damages awarded against JCG. In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit against Mr. Connors and is again seeking $50 million in damages. The Company believes that Mr. Connors will again seek to cause the Company to indemnify and reimburse him from liability thereunder. Therefore, there can be no assurance that the lawsuit will not lead to events having a material adverse effect on the Company. GAMING INDUSTRY CLASS ACTIONS The Company was named, along with two gaming equipment suppliers, 41 of the country's largest gaming operators and four gaming distributors (the "Gaming Industry Defendants") in three class action lawsuits which were filed in Las Vegas, Nevada. The suits alleged 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 the extent to which there is actually an opportunity to win on any given play. The suits sought unspecified compensatory and punitive damages. On January 14, 1997, the Court consolidated all three actions under the case name WILLIAM H. POULOS, ETC. VS. CAESARS WORLD, INC., ET AL. The Gaming Industry Defendants are in the process of filing numerous motions to challenge the sufficiency of the plaintiffs' consolidated amended complaint. The Company is unable to determine what effect, if any, the suit would have on its business or operations. 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. PART II ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Proxy Statement, page 15, section entitled Market for Registrants Common Equity and Related Stockholder Matters. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from the Annual Report Page 19, entitled "Financial Highlights." ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Annual Report, pages 21-29 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 30-47, sections entitled "Consolidated Balance Sheets", "Consolidated Statements of Operations", "Consolidated Statements of Cash Flows", "Consolidated Statements of Stockholders' Equity", "Notes to Consolidated Financial Statements" and "Report of Independent Auditors". FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X. FINANCIAL STATEMENTS OF ALTON GAMING COMPANY Report of Independent Auditors 28 Balance Sheets 29 Statements of Income 30 Statements of Stockholder's Equity 31 Statements of Cash Flows 32 Notes to Financial Statements 33 FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY Report of Independent Auditors 37 Balance Sheets 38 Statements of Operations 39 Statements of Stockholder's Equity 40 Statements of Cash Flows 41 Notes to Financial Statements 42 26 CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC. Report of Independent Auditors 46 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Stockholder's Equity 49 Consolidated Statements of Cash Flows 50 Notes to Consolidated Financial Statements 51 FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM Report of Independent Auditors 57 Balance Sheets 58 Statements of Operations 59 Statements of Partners' Equity 60 Statements of Cash Flows 61 Notes to Financial Statements 62 FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC. Report of Independent Auditors 66 Balance Sheets 68 Statements of Operations 69 Statements of Stockholder's Equity 70 Statements of Cash Flows 71 Notes to Financial Statements 72 CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY Report of Independent Auditors 77 Consolidated Balance Sheets 78 Consolidated Statements of Operations 79 Consolidated Statements of Stockholder's Equity 80 Consolidated Statements of Cash Flows 81 Notes to Consolidated Financial Statements 82 FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P. Report of Independent Auditors 87 Balance Sheets 88 Statements of Operations 89 Statements of Partners' Equity 90 Statements of Cash Flows 91 Notes to Financial Statements 92 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. 27 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, 1996 and 1995, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alton Gaming Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois February 6, 1997 28 ALTON GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1996 1995 --------- --------- CURRENT ASSETS: Cash...................................................................................... $ 3,563 $ 3,873 Accounts receivable, net of allowance for doubtful accounts of $311 and $83, respectively............................................................................ 330 430 Deferred income taxes..................................................................... 631 687 Other current assets...................................................................... 521 916 --------- --------- Total current assets.................................................................. 5,045 5,906 --------- --------- Due from affiliates....................................................................... 10,592 10,929 Net property and equipment................................................................ 30,112 32,929 Other assets.............................................................................. 7 173 --------- --------- Total assets.......................................................................... $ 45,756 $ 49,937 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 1,547 $ 1,172 Accrued payroll and related expenses...................................................... 1,011 2,337 Slot club liability....................................................................... 956 1,319 Other accrued liabilities................................................................. 1,164 1,522 Accrued insurance......................................................................... 1,168 624 Income taxes payable to affiliate......................................................... 5,570 --------- --------- Total current liabilities............................................................. 5,846 12,544 --------- --------- OTHER LONG-TERM OBLIGATIONS--RELATED PARTY.................................................. 171 158 DEFERRED INCOME TAXES....................................................................... 3,494 2,953 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......................................................................... 35,988 34,025 --------- --------- Total stockholder's equity............................................................ 36,245 34,282 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 45,756 $ 49,937 --------- --------- --------- ---------
See accompanying notes to financial statements. 29 ALTON GAMING COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- --------- ---------- REVENUES: Casino........................................................................ $ 72,369 $ 81,413 $ 88,886 Admissions.................................................................... 7,115 Food, beverage and other...................................................... 7,817 7,849 7,334 --------- --------- ---------- 80,186 89,262 103,335 Less promotional allowances................................................... (2,253) (3,269) (7,055) --------- --------- ---------- Net revenues.................................................................... 77,933 85,993 96,280 --------- --------- ---------- COSTS AND EXPENSES: Casino........................................................................ 36,082 36,185 39,993 Food, beverage and other...................................................... 7,473 6,820 7,914 Other operating expenses...................................................... 5,706 5,437 5,246 Selling, general and administrative........................................... 12,226 10,818 10,399 Depreciation and amortization................................................. 4,206 4,288 3,911 Allocation of corporate costs--related party.................................. 4,193 3,742 4,444 --------- --------- ---------- 69,886 67,290 71,907 --------- --------- ---------- Income from operations.......................................................... 8,047 18,703 24,373 --------- --------- ---------- OTHER INCOME (EXPENSE): Interest income............................................................... 50 87 77 Interest expense.............................................................. (51) (178) (305) --------- --------- ---------- (1) (91) (228) --------- --------- ---------- Income before income taxes...................................................... 8,046 18,612 24,145 Income tax expense.............................................................. 3,198 7,399 9,658 --------- --------- ---------- Net income...................................................................... $ 4,848 $ 11,213 $ 14,487 --------- --------- ---------- --------- --------- ----------
See accompanying notes to financial statements. 30 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, 1993.............. 1,000 $ 1 $ 256 $ 8,325 $ 8,582 Net income............................ 14,487 14,487 -- ------- ----- -------- ------- Balance, December 31, 1994.............. 1,000 1 256 22,812 23,069 Net income............................ 11,213 11,213 -- ------- ----- -------- ------- Balance, December 31, 1995.............. 1,000 1 256 34,025 34,282 Net income............................ 4,848 4,848 Dividends............................. (2,885) (2,885) -- ------- ----- -------- ------- Balance, December 31, 1996.............. 1,000 $ 1 $ 256 $ 35,988 $ 36,245 -- -- ------- ----- -------- ------- ------- ----- -------- -------
See accompanying notes to financial statements. 31 ALTON GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................................... $ 4,848 $ 11,213 $ 14,487 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 4,206 4,288 3,911 Deferred income taxes........................................................ 597 1,612 176 Changes in operating assets and liabilities: Accounts receivable........................................................ 138 16 (225) Other current assets....................................................... 395 32 (536) Other assets............................................................... 166 327 Accounts payable........................................................... 273 (8) (1,068) Other accrued liabilities.................................................. (1,503) 1,799 171 Income taxes payable to affiliate.......................................... (5,570) (9,474) 9,482 --------- --------- ---------- Net cash provided by operating activities................................ 3,550 9,805 26,398 --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.......................................... (1,680) (1,566) (4,714) --------- --------- ---------- Net cash used in investing activities.................................... (1,680) (1,566) (4,714) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on installment contracts............................................ (976) Dividends paid............................................................... (2,885) Payments on long-term debt-related party..................................... (431) (3,901) Due from affiliate........................................................... 692 (6,548) (15,927) Increase (decrease) in other long term obligations -- related party.......... 13 (294) (154) --------- --------- ---------- Net cash used in financing activities.................................... (2,180) (7,273) (20,958) --------- --------- ---------- Net (decrease) increase in cash.......................................... (310) 966 726 Cash, beginning of year...................................................... 3,873 2,907 2,181 --------- --------- ---------- Cash, end of year............................................................ $ 3,563 $ 3,873 $ 2,907 --------- --------- ---------- --------- --------- ----------
See accompanying notes to financial statements. 32 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 1995 and 1994 amounts have been reclassified to conform to the 1996 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
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. Prior to 1995, admission revenue was recognized at the time the related service was performed. Beginning in 1995, the Company stopped charging customers an admission fee and therefore no longer recognizes any admissions revenue or related promotional expenses. The estimated cost of providing promotional allowances has been included in costs and expenses as follows:
1996 1995 1994 --------- --------- --------- Admissions....................................................... $ $ $ 2,532 Food, beverage and other......................................... 1,238 1,662 2,313
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $3,225, $3,089 and $3,176 for the years ended December 31, 1996, 1995 and 1994, 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. 33 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Leasehold and shore improvements................................................ $ 1,194 $ 1,771 Riverboat, dock and improvements................................................ 29,801 29,097 Furniture, fixtures and equipment............................................... 13,627 12,649 ---------- ---------- 44,622 43,517 Less accumulated depreciation and amortization.................................. (14,510) (10,588) ---------- ---------- Net property and equipment...................................................... $ 30,112 $ 32,929 ---------- ---------- ---------- ----------
3. INCOME TAXES Income tax expense for the years ended December 31, 1996, 1995 and 1994 consists of the following:
1996 1995 1994 --------- --------- --------- Current: Federal.................................................................. $ 2,273 $ 5,150 $ 8,376 State.................................................................... 328 637 1,106 --------- --------- --------- 2,601 5,787 9,482 --------- --------- --------- Deferred: Federal.................................................................. 526 1,419 128 State.................................................................... 71 193 48 --------- --------- --------- 597 1,612 176 --------- --------- --------- Income tax expense..................................................... $ 3,198 $ 7,399 $ 9,658 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1996, 1995 and 1994, differs from that computed at the Federal Statutory tax rate as follows:
1996 1995 1994 --------- --------- --------- Federal statutory rate...................................................... 35.0% 35.0% 35.0% State income taxes, net of federal benefit.................................. 4.7 4.5 4.8 Other....................................................................... .3 .2 --- --- --- 39.7% 39.8% 40.0% --- --- --- --- --- ---
34 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- Depreciation....................................................................... $ (3,524) $ (3,085) Start-up costs..................................................................... 30 132 Retirement benefit payable......................................................... 140 Other.............................................................................. 631 547 --------- --------- Net deferred tax liability......................................................... $ (2,863) $ (2,266) --------- --------- --------- ---------
4. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid $148, $5 and $226 for interest for the years ended December 31, 1996, 1995 and 1994 respectively, and $8,170 and $15,261 for income taxes in 1996 and 1995 to Argosy. There were no income tax payments made in the year ended 1994. 5. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1996, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1997.................................................................................. $ 525 1998.................................................................................. 400 1999.................................................................................. 352 2000.................................................................................. 339 2001.................................................................................. 209 Thereafter............................................................................ 207
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $565, $490 and $469 respectively. 6. 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 participates in Argosy's property, general liability, workers compensation and other insurance programs. The Company's estimated share of these costs is allocated directly to the Company by Argosy in the amount of $3,309, $2,154 and $702 for the years ended December 31, 1996, 1995 and 1994, respectively. Interest expense to related parties amounted to $32, $178 and $292 for the years ended December 31, 1996, 1995 and 1994 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. 35 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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. 7. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy sponsored 401(k) defined-contribution plan which was established in 1994 and covers substantially all of the Company's full-time employees. Participants can contribute a maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code, and the Company will match 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized under the Plan was $461, $461 and $412 for the years ended December 31, 1996, 1995 and 1994, respectively. 8. COMMITMENTS AND CONTINGENCIES 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 $12,600, including interest through December 31, 1996, 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. On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes") and retired an outstanding Credit Facility. The assets of the Company are pledged as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. 36 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, 1996 and 1995, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Missouri Gaming Company at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Kansas City, Missouri February 6, 1997 37 THE MISSOURI GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1996 1995 --------- --------- ASSETS CURRENT ASSETS: Cash...................................................................................... $ 6,143 $ 4,131 Accounts receivable....................................................................... 220 129 Other current assets...................................................................... 1,343 1,848 --------- --------- Total current assets.................................................................. 7,706 6,108 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 75,773 68,991 OTHER ASSETS: Deposits.................................................................................. 88 288 Prepaid rent.............................................................................. 1,917 2,917 Deferred income taxes..................................................................... 294 Other..................................................................................... 1,267 1,507 --------- --------- Total other assets.................................................................... 3,272 5,006 --------- --------- TOTAL ASSETS................................................................................ $ 86,751 $ 80,105 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable.......................................................................... $ 3,505 $ 7,159 Accrued payroll and related expenses...................................................... 1,299 1,104 Other accrued liabilities................................................................. 2,732 2,115 Income taxes payable to affiliate......................................................... 4,435 6,022 Installment contracts payable............................................................. 94 756 Deferred income taxes..................................................................... 119 --------- --------- Total current liabilities............................................................. 12,184 17,156 --------- --------- DUE TO AFFILIATES........................................................................... 56,345 45,570 DEFERRED INCOME TAXES....................................................................... 907 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......................................................................... 12,315 12,379 --------- --------- Total stockholder's equity............................................................ 17,315 17,379 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 86,751 $ 80,105 --------- --------- --------- ---------
See accompanying notes to financial statements. 38 THE MISSOURI GAMING COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- REVENUES: Casino....................................................................... $ 82,247 $ 86,443 $ 29,588 Admissions................................................................... 1,983 15,300 5,104 Food, beverage and other..................................................... 11,065 5,203 2,532 ---------- ---------- --------- 95,295 106,946 37,224 Less promotional allowances.................................................. (6,822) (12,888) (1,873) ---------- ---------- --------- Net revenues................................................................. 88,473 94,058 35,351 ---------- ---------- --------- COSTS AND EXPENSES: Casino....................................................................... 43,733 41,883 17,330 Food, beverage and other..................................................... 9,552 4,934 2,421 Other operating expenses..................................................... 5,263 4,199 2,163 Selling, general and administrative.......................................... 13,399 13,590 4,451 Depreciation and amortization................................................ 6,724 7,395 3,978 Preopening................................................................... 392 2,538 Lease termination............................................................ 3,508 ---------- ---------- --------- 82,571 72,001 32,881 ---------- ---------- --------- Income from operations......................................................... 5,902 22,057 2,470 ---------- ---------- --------- OTHER INCOME (EXPENSE): Interest income.............................................................. 40 8 Interest expense............................................................. (6,048) (3,626) (47) ---------- ---------- --------- (6,008) (3,626) (39) ---------- ---------- --------- Income (Loss) before income taxes.............................................. (106) 18,431 2,431 Income tax benefit (expense)................................................... 42 (6,875) (1,064) ---------- ---------- --------- Net (loss) income.............................................................. $ (64) $ 11,556 $ 1,367 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to financial statements. 39 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, 1993............................... 1,000 $ $ $5,000 $ (544) $ 4,456 Net income............................................. 1,367 1,367 ----- ----------- ----------- ----------- ------------ Balance, December 31, 1994............................... 1,000 5,000 823 5,823 Net income............................................. 11,556 11,556 ----- ----------- ----------- ----------- ------------ Balance, December 31, 1995............................... 1,000 5,000 12,379 17,379 Net loss............................................... (64) (64) ----- ----------- ----------- ----------- ------------ Balance, December 31, 1996............................... 1,000 $ $ 5,000 $ 12,315 $ 17,315 ----- ----------- ----------- ----------- ------------ ----- ----------- ----------- ----------- ------------
See accompanying notes to financial statements 40 THE MISSOURI GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................................................. $ (64) $ 11,556 $ 1,367 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization of fixed assets............................... 6,484 7,109 3,820 Amortization of other assets................................................ 240 286 158 Deferred income taxes....................................................... 1,320 734 (1,028) Lease termination costs..................................................... 1,941 Changes in operating assets and liabilities: Accounts receivable....................................................... (91) (92) (29) Other current assets...................................................... 505 182 (2,017) Accounts payable.......................................................... 947 5,232 1,927 Accrued liabilities....................................................... 812 601 2,604 Income taxes payable to affiliate......................................... (1,587) 4,230 1,792 Other assets.............................................................. 1,000 1,217 (5,868) ---------- ---------- ---------- Net cash provided by operating activities................................. 11,507 31,055 2,726 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......................................... (19,192) (31,496) (39,222) ---------- ---------- ---------- Net cash used in investing activities..................................... (19,192) (31,496) (39,222) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on installment contracts........................................... (797) (5,277) (664) Due from affiliate.......................................................... 10,294 4,762 35,273 Decrease in deposits........................................................ 200 6,960 ---------- ---------- ---------- Net cash provided by (used in) financing activities....................... 9,697 (515) 41,569 ---------- ---------- ---------- Net increase (decrease) in cash............................................. 2,012 (956) 5,073 Cash, beginning of year..................................................... 4,131 5,087 14 ---------- ---------- ---------- Cash, end of year........................................................... $ 6,143 $ 4,131 $ 5,087 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 41 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")) was incorporated in Missouri in March 1993. The Company was formed to develop and operate a riverboat casino and related facilities in Riverside, Missouri. The Company commenced operations on June 22, 1994, with the opening of the Argosy Casino Riverside, at a temporary facility. The Company offered games of skill from opening until December 9, 1994, when games of chance were legalized in Missouri. From the period of incorporation until June 22, 1994, the Company was engaged principally in organizational and preopening activities. All operating costs incurred during this period have been charged to expense as preopening costs. The Company began construction of a permanent facility during 1995. The permanent facility was opened to the public on January 15, 1996 and serves as a dining and entertainment outlet to the riverboat casino. 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. 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
CASINO REVENUES AND PROMOTIONAL ALLOWANCES The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, food and beverage which was provided to customers without charge, has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated cost of providing promotional allowances has been included in operating costs and expenses as follows:
1996 1995 1994 --------- --------- --------- Admissions................................................................... $ 315 $ 4,601 $ 938 Food, beverage and other..................................................... 1,902 522 65
42 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) ADMISSIONS REVENUE Admissions revenue is recognized at the time the related service is performed. The Company ceased charging customers an admission fee in the first quarter of 1996 and, therefore, no longer recognizes any admission revenue. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1996, 1995 and 1994 was $3,214, $2,619 and $1,043, 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. RECLASSIFICATIONS Certain amounts in prior years' financial statements have been reclassified to conform to the 1996 presentation. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------- 1996 1995 --------- ---------- Land and improvements............................................................ $ 14,815 $ 2,815 Buildings and improvements....................................................... 28,113 25 Riverboat, dock and improvements................................................. 23,740 30,827 Furniture, fixtures and equipment................................................ 18,680 13,305 Construction in progress......................................................... 32,329 --------- ---------- 85,348 79,301 Accumulated depreciation and amortization........................................ (9,575) (10,310) --------- ---------- Net property and equipment....................................................... $ 75,773 $ 68,991 --------- ---------- --------- ----------
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 being amortized over ten years using the straight-line method. The unamortized portion of these payments is included in other assets in the accompanying balance sheets. Under the terms of the Agreement, the Company leases its site from the City of Riverside. The $5,000 minimum rent due for the initial five-year term of the lease was paid in advance as required by the Agreement. In addition to minimum rent, during the initial five-year lease term, percentage rent is payable at 3% of adjusted gross receipts ("AGR"), as defined, over $100 million annually. The Company has the 43 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) option to extend the Agreement for three successive five-year terms. In all extension periods, there will be no minimum rent and percentage rent will be payable as follows: (i) 3% on the first $50 million of AGR; (ii) 4% on AGR between $50 million and $100 million; and (iii) 5% on AGR 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 benefit (expense) for years ended December 31, 1996, 1995 and 1994 consists of the following:
1996 1995 1994 --------- --------- --------- Current: Federal............................................................... $ 1,200 $ (5,419) $ (1,856) State................................................................. 162 (722) (236) --------- --------- --------- 1,362 (6,141) (2,092) --------- --------- --------- Deferred: Federal............................................................... (1,162) (646) 905 State................................................................. (158) (88) 123 --------- --------- --------- (1,320) (734) 1,028 --------- --------- --------- Income tax benefit (expense)............................................ $ 42 $ (6,875) $ (1,064) --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1996, 1995 and 1994 differs from that computed at the Federal Statutory corporate tax rate as follows:
1996 1995 1994 ----------- ----------- ----------- Federal Statutory rate................................................... (35.0)% 35.0% 35.0% State income taxes, net of Federal benefit............................... (4.8) 4.4 4.6 Nondeductible contributions.............................................. 3.0 Other.................................................................... (2.4) .4 ----------- --- --- (39.8)% 37.0% 43.0% ----------- --- --- ----------- --- ---
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- Start-up costs....................................................................... $ 565 $ 792 Depreciation......................................................................... (1,472) (351) Other, net........................................................................... (119) (147) --------- --------- Net deferred tax (liability) asset................................................... $ (1,026) $ 294 --------- --------- --------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment of $135, $1,681 and $5,016 in 1996, 1995 and 1994, respectively which was financed through installment contracts. 44 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The Company paid $8,043, $273 and $4 for interest and $225, $1,911 and $300 for taxes in 1996, 1995 and 1994 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 is allocated directly to the Company by Argosy in the amount of $2,853, $2,584 and $878 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company has outstanding long-term debt with Argosy in the amounts of $56,345 and $45,570 at December 31, 1996 and 1995, 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. Indirect costs incurred by Argosy, on behalf of the Company, are not allocated as they are immaterial. 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 maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code and the Company will match 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized by the Company under the Plan was $441, $490 and $89 for the years ended December 31, 1996, 1995 and 1994, respectively. 8. COMMITMENTS AND CONTINGENCIES The Company leases office space, warehouse space, gaming equipment and other equipment under various operating leases. Minimum rents due under such leases are approximately $157 in 1997, $62 in 1998, and $14 in 1999. Rent expense for the years ended December 31, 1996, 1995 and 1994 was $1,874, $3,447 and $1,023, respectively. The Company is restricted from making certain distributions to Argosy and other affiliates unless approved by state gaming authorities. On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). Substantially all of the assets of the Company are pledged as collateral, and the Company is a guarantor under terms of the Mortgage Notes. 9. LEASE TERMINATION In the second quarter of 1996 the Company determined that it no longer had a use for the temporary restaurant and entertainment barge. Accordingly, the Company expensed the remaining lease costs and any termination costs associated with the lease. 45 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, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Argosy of Louisiana, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New Orleans, Louisiana February 6, 1997 46 ARGOSY OF LOUISIANA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1996 1995 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................. $ 3,051 $ 5,201 Accounts receivable, net of allowance for doubtful accounts of $856 and $226 respectively............................................................................ 611 796 Deferred income taxes..................................................................... 427 179 Income taxes receivable from related party................................................ 879 696 Prepaid assets............................................................................ 686 Other current assets...................................................................... 859 190 --------- --------- Total current assets.................................................................... 5,827 7,748 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 49,021 64,715 OTHER ASSETS: Deposits.................................................................................. 13 82 Deferred lease acquisition cost, net...................................................... 1,915 2,051 Deferred licensing cost, net.............................................................. 278 741 --------- --------- Total other assets...................................................................... 2,206 2,874 --------- --------- TOTAL ASSETS................................................................................ $ 57,054 $ 75,337 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 1,127 $ 1,318 Accrued payroll and related expenses...................................................... 749 611 Other accrued liabilities................................................................. 2,168 1,140 Accrued gaming taxes...................................................................... 580 560 Notes payable and current maturities of long-term debt-related party...................... 5,578 390 --------- --------- Total current liabilities............................................................... 10,202 4,019 --------- --------- LONG-TERM DEBT-RELATED PARTY................................................................ 42,812 64,222 DEFERRED INCOME TAXES....................................................................... 1,160 1,974 MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................................... 3,174 3,319 STOCKHOLDER'S EQUITY: Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1 Retained earnings......................................................................... (295) 1,802 --------- --------- (294) 1,803 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 57,054 $ 75,337 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 47 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- REVENUES: Casino......................................................................... $ 51,007 $ 48,427 $ 19,952 Food, beverage and other....................................................... 7,641 4,945 1,024 --------- --------- --------- 58,648 53,372 20,976 Less promotional allowances.................................................... (5,228) (3,566) (660) --------- --------- --------- Net revenues..................................................................... 53,420 49,806 20,316 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 26,923 25,547 8,248 Food, beverage and other....................................................... 4,894 3,772 979 Other operating expenses....................................................... 4,757 4,013 3,584 Selling, general and administrative............................................ 10,939 10,164 1,954 Depreciation and amortization.................................................. 6,379 5,430 1,151 Preopening costs............................................................... 1,906 Referendum expenses............................................................ 1,347 --------- --------- --------- 55,239 48,926 17,822 --------- --------- --------- (Loss) income from operations.................................................... (1,819) 880 2,494 --------- --------- --------- INTEREST EXPENSE (INCOME) NET: Interest to related party...................................................... 1,603 Interest....................................................................... (119) 92 204 --------- --------- --------- (Loss) income before income taxes and minority interest.......................... (3,303) 788 2,290 Income tax benefit (expense)..................................................... 1,061 (333) (818) Minority interest................................................................ 145 36 (84) --------- --------- --------- Net (loss) income................................................................ $ (2,097) $ 491 $ 1,388 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 48 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
RETAINED COMMON EARNINGS SHARES STOCK (DEFICIT) TOTAL -------- -------- ----------- --------- Balance, December 31, 1993.............. 1,000 $ 1 $ (77) $ (76) Net income............................ 1,388 1,388 -------- --- ----------- --------- Balance, December 31, 1994.............. 1,000 1 1,311 1,312 Net income............................ 491 491 -------- --- ----------- --------- Balance, December 31, 1995.............. 1,000 1 1,802 1,803 Net income............................ (2,097) (2,097) -------- --- ----------- --------- Balance, December 31, 1996.............. 1,000 $ 1 $ (295) $ (294) -------- --- ----------- --------- -------- --- ----------- ---------
See accompanying notes to consolidated financial statements. 49 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income................................................................. $ (2,097) $ 491 $ 1,388 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation.................................................................... 5,780 4,951 1,151 Amortization.................................................................... 599 479 Preopening costs................................................................ 1,906 Minority interest............................................................... (145) (36) 84 Deferred income taxes........................................................... (1,062) 1,143 652 Changes in operating assets and liabilities: Accounts receivable........................................................... 185 (593) (202) Other current assets.......................................................... (166) (645) (231) Accounts payable.............................................................. (191) 282 1,036 Accrued payroll and related expenses.......................................... 138 (392) 1,002 Other accrued liabilities..................................................... 1,048 (469) 1,527 --------- --------- --------- Net cash provided by operating activities................................... 4,089 5,211 8,313 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................... (713) (13,914) (2,076) --------- --------- --------- Net cash used in investing activities....................................... (713) (13,914) (2,076) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in notes payable and long term debt........................... 8,160 4,546 Payments on notes payable and long-term debt...................................... (5,595) (3,048) (1,909) Notes receivable--affiliate....................................................... 2,801 (2,801) Decrease (increase) in other assets............................................... 69 (82) --------- --------- --------- Net cash (used in) provided by financing activities......................... (5,526) 7,831 (164) --------- --------- --------- Net (decrease) increase in cash and cash equivalents.............................. (2,150) (872) 6,073 Cash and cash equivalents, beginning of year...................................... 5,201 6,073 --------- --------- --------- Cash and cash equivalents, end of year............................................ $ 3,051 $ 5,201 $ 6,073 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 50 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS 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, a wholly owned subsidiary of Argosy Gaming Company (Argosy), is the 90% general partner of the Partnership, along with the 10% partner in commendam Jazz, which became a wholly owned subsidiary of Argosy in 1995. On September 21, 1994, Jazz contributed its Certificate of Preliminary Approval and certain leases with a fair value of $3,271 to the Company. On September 21, 1994, the Company's riverboat casino, Belle of Baton Rouge, commenced operations. On November 5, 1996 the voters of East Baton Rouge Parish voted to continue to allow riverboat gaming in the parish. Costs associated with the Partnership's efforts to pass this referendum have been reflected in the accompanying statement of operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany accounts and transactions have been eliminated. 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, 1996 and 1995. 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 result 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 $243 and $108 at December 31, 1996 and 1995, respectively. 51 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DEFERRED LICENSING COSTS Deferred licensing costs result from the contribution of the State of Louisiana Certificate of Preliminary Approval by Jazz to the Partnership. This cost is amortized on the straight-line method over three years. Accumulated amortization was $834 and $371 at December 31, 1996 and 1995, respectively. CASINO REVENUES AND PROMOTIONAL ALLOWANCES The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverages 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 cost of providing promotional allowances for food and beverages was $2,534, $2,166 and $402 in 1996, 1995 and 1994, respectively, and has been included in food and beverage costs and expenses. PREOPENING COSTS Preopening costs, which consist primarily of labor, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $1,527, $1,580 and $221 in 1996, 1995 and 1994 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. RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. 52 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------- 1996 1995 ---------- --------- Leasehold and shore improvements....................................... $ 6,948 $ 20,446 Riverboat, docks and improvements...................................... 36,051 33,923 Furniture, fixtures and equipment...................................... 17,136 16,450 Construction in progress............................................... 317 ---------- --------- 60,452 70,819 Less accumulated depreciation and amortization......................... (11,431) (6,104) ---------- --------- Net property and equipment............................................. $ 49,021 $ 64,715 ---------- --------- ---------- ---------
3. LONG-TERM DEBT-RELATED PARTY Notes payable and long term debt consists of the following:
DECEMBER 31, -------------------- 1996 1995 --------- --------- 8% unsecured note payable to related party in quarterly installments of $930,815, including interest, through July 2001............................................................... $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 1998............................... 1,844 Noninterest-bearing advances from related party, no stated maturity......................... 29,019 64,222 Other....................................................................................... 390 --------- --------- 48,390 64,612 Less current maturities..................................................................... (5,578) (390) --------- --------- $ 42,812 $ 64,222 --------- --------- --------- ---------
During 1996, the right to a note payable from the Partnership to the Company was assigned to Argosy. The carrying value of long term debt approximates fair value at December 31, 1996 and 1995. Maturities of long term debt, including scheduled payments under the notes payable to Argosy which were due prior to December 31, 1996 and which have not yet been paid are as follows: 1997............................................................... $ 5,578 1998............................................................... 4,689 1999............................................................... 3,082 2000............................................................... 3,337 2001............................................................... 2,685 Thereafter......................................................... 29,019
53 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax benefit (expense) consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Current: Federal........................................................ $ $ 718 $ (88) State.......................................................... 92 (26) --------- --------- --------- Total current.................................................... 810 (114) --------- --------- --------- Deferred: Federal........................................................ 934 (1,000) (615) State.......................................................... 127 (143) (89) --------- --------- --------- Total deferred................................................... 1,061 (1,143) (704) --------- --------- --------- Income tax benefit (expense)..................................... $ 1,061 $ (333) $ (818) --------- --------- --------- --------- --------- ---------
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- Tax over book depreciation............................................... $ (4,688) $ (2,495) Net operating loss carryforward.......................................... 3,131 Pre-opening.............................................................. 397 521 Other, net............................................................... 427 179 --------- --------- Net deferred tax liabilities............................................. $ (733) $ (1,795) --------- --------- --------- ---------
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Tax at U.S. statutory rates.................................. (35.0)% 35.0% 35.0% State income tax, net of federal tax benefit................. (3.9) 5.7 4.8 Nondeductible referendum expenses............................ 16.4 Prior year taxes............................................. (4.6) Targeted jobs tax credits, net............................... (3.3) (3.1) Other, net................................................... (5.0) 4.9 (1.0) ----- --- --- (32.1)% 42.3% 35.7% ----- --- --- ----- --- ---
5. RELATED PARTY TRANSACTIONS The Company leases, for a minimum of five years with six five-year renewal options, a docking site, office and warehouse space from Jazz. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts. 54 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz, the partners agreed that all rents from November 1, 1994 through the closing of the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to the closing of the Jazz purchase, the Partnership resumed its obligations under the lease with Jazz. Rent expense was approximately $3,539, $2,202 and $724 in 1996, 1995 and 1994, respectively. Approximately $3,091, $1,800 and $408 in 1996, 1995 and 1994, 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 $1,989, $2,183 and $1,100 in 1996, 1995 and 1994 respectively. Indirect costs incurred by Argosy, on behalf of the Company, are not allocated as they are immaterial. 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 can contribute a maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code, and the Company has matched 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized by the Company under the Plan was approximately $320, $503 and $7 in 1996, 1995 and 1994, respectively. 7. SUPPLEMENTAL CASH FLOW INFORMATION In 1995, the Company entered into capital lease obligations totaling $376 for the acquisition of property and equipment. During 1994, the Company acquired gaming equipment totaling $4,971 which was financed by equipment vendors. During 1994, other assets totaling $3,271 were contributed to the Company by Jazz. The Company paid interest of $2,811, $143 and $111 in 1996, 1995 and 1994, respectively. During 1994, Argosy transferred property and equipment to the Company with a fair value of $41,297, subject to an unsecured note payable to Argosy. Additionally, preopening costs of $2,035 were also financed through Argosy. During 1996, Argosy transferred property and equipment to the Company with a fair value of $1,844, subject to an unsecured note payable. During 1996, the Company transferred property and equipment to Jazz with a fair value of $12,471 and recorded a receivable from Jazz in the same amount. The rights to this receivable was assigned to Argosy and reduced the amounts due to Argosy from non-interest bearing advances. 8. COMMITMENTS On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional 55 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) passenger fee which is now $2.50 per passenger until actual construction of a hotel commences by Jazz or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1996, the Company has paid all admission payments due under the above agreements. The Company leases certain premises under noncancelable operating leases that expire in 1997. Future minimum lease payments under the noncancelable operating leases with initial terms of one year or more are $205 in 1997. On June 5, 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 Mortgage Notes. 56 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, 1996 and 1995, and the related statements of operations, partners equity and cash flows each for the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Catfish Queen Partnership in Commendam at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP New Orleans, Louisiana February 6, 1997 57 CATFISH QUEEN PARTNERSHIP IN COMMENDAM BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1996 1995 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................. $ 3,051 $ 5,201 Accounts receivable, net of allowance for doubtful accounts of $856 and $226.............. 611 796 Inventories............................................................................... 203 189 Prepaid insurance......................................................................... 494 Other current assets...................................................................... 320 193 --------- --------- Total current assets.................................................................... 4,185 6,873 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 48,704 51,192 OTHER ASSETS: Deposits.................................................................................. 13 82 Deferred lease acquisition cost, net...................................................... 1,915 2,051 Deferred licensing cost, net.............................................................. 278 741 --------- --------- Total other assets...................................................................... 2,206 2,874 --------- --------- TOTAL ASSETS................................................................................ $ 55,095 $ 60,939 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 1,127 $ 1,294 Accrued payroll and related expenses...................................................... 749 611 Other accrued liabilities................................................................. 2,748 1,859 Accrued interest--related party........................................................... 1,195 Notes payable and current maturities of long-term debt.................................... 5,578 7,889 --------- --------- Total current liabilities............................................................... 10,202 12,848 --------- --------- LONG-TERM DEBT.............................................................................. 13,793 14,576 PARTNERS' EQUITY............................................................................ 31,100 33,515 --------- --------- TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 55,095 $ 60,939 --------- --------- --------- ---------
See accompanying notes to financial statements. 58 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- REVENUES: Casino......................................................................... $ 51,007 $ 48,427 $ 19,952 Food, beverage and other....................................................... 7,641 4,945 1,024 --------- --------- --------- 58,648 53,372 20,976 Less promotional allowances.................................................... (5,228) (3,566) (660) --------- --------- --------- Net revenues..................................................................... 53,420 49,806 20,316 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 26,923 25,547 8,248 Food, beverage and other....................................................... 4,894 3,772 979 Other operating expenses....................................................... 4,757 4,013 3,584 Selling, general and administrative............................................ 10,786 9,954 2,357 Depreciation and amortization.................................................. 5,644 5,430 1,151 Referendum expenses............................................................ 1,347 Preopening costs............................................................... 2,035 --------- --------- --------- 54,351 48,716 18,354 --------- --------- --------- (Loss) income from operations.................................................... (931) 1,090 1,962 INTEREST EXPENSE (INCOME) (NET): Related parties................................................................ 1,603 1,603 392 Other.......................................................................... (119) 92 162 --------- --------- --------- 1,484 1,695 554 --------- --------- --------- Net (loss) income................................................................ $ (2,415) $ (605) $ 1,408 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 59 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
ARGOSY OF JAZZ TOTAL LOUISIANA, ENTERPRISES, PARTNERS' INC. INC. EQUITY ----------- ----------- --------- Contribution of assets in excess of liabilities on September 21, 1994 (date of commencement of operations)................................................. $ 29,441 $ 3,271 $ 32,712 Net income.................................................................. 1,267 141 1,408 ----------- ----------- --------- Partners' equity at December 31, 1994......................................... 30,708 3,412 34,120 Net loss.................................................................... (545) (60) (605) ----------- ----------- --------- Partners' equity at December 31, 1995......................................... 30,163 3,352 33,515 Net loss.................................................................... (2,173) (242) (2,415) ----------- ----------- --------- Partners' equity at December 31, 1996......................................... $ 27,990 $ 3,110 $ 31,100 ----------- ----------- --------- ----------- ----------- ---------
See accompanying notes to financial statements. 60 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income................................................................. $ (2,415) $ (605) $ 1,408 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation.................................................................... 5,045 4,951 1,151 Amortization.................................................................... 599 479 Preopening costs................................................................ 2,035 Changes in operating assets and liabilities: Accounts receivable........................................................... 185 (593) (202) Other current assets.......................................................... 353 (700) (175) Accounts payable.............................................................. (167) 257 1,036 Accrued payroll and related expenses.......................................... 138 (376) 987 Accrued interest to related parties........................................... (1,195) 803 392 Other accrued liabilities..................................................... 889 299 1,560 --------- --------- --------- Net cash provided by operating activities....................................... 3,432 4,515 8,192 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................... (713) (952) (2,076) --------- --------- --------- Net cash used in investing activities........................................... (713) (952) (2,076) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in advances from affiliates................................... (1,754) 1,754 Payments on notes payable and long-term debt...................................... (4,938) (2,487) (1,909) (Increase) decrease in other assets............................................... 69 (82) --------- --------- --------- Net cash used in financing activities........................................... (4,869) (4,323) (155) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.............................. (2,150) (760) 5,961 Cash and cash equivalents, beginning of period.................................... 5,201 5,961 --------- --------- --------- Cash and cash equivalents, end of period.......................................... $ 3,051 $ 5,201 $ 5,961 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 61 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") was formed to provide riverboat gaming and related entertainment in Baton Rouge, Louisiana. The Partnership is comprised of a 90% general partner, Argosy of Louisiana, Inc. ("General Partner"), a wholly owned subsidiary of Argosy Gaming Company ("Argosy"), and a 10% partner in commendam, Jazz Enterprises, Inc. ("Jazz") which became a wholly owned subsidiary of Argosy in 1995. On September 21, 1994, the General Partner contributed the riverboat, all passenger ramps, walkways, passenger moving systems, and certain tenant build-out and improvements with a fair value of $29,441 to the Partnership and Jazz contributed its Certificate of Preliminary Approval and certain leases with a fair value of $3,271 to the Partnership. On September 21, 1994, the Partnership's riverboat casino, Belle of Baton Rouge, commenced operations. On November 5, 1996 the voters of East Baton Rouge Parish voted to continue to allow riverboat gaming in the parish. Costs associated with the Partnership's efforts to pass this referendum have been reflected in the accompanying statement of operations. Net income (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. CASH AND CASH EQUIVALENTS The Partnership 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, 1996 and 1995. 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 cost results 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 $243 and $108 at December 31, 1996 and 1995, respectively. 62 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) DEFERRED LICENSING COSTS Deferred licensing cost results from the contribution by Jazz of the State of Louisiana Certificate of Preliminary Approval to the Partnership. This cost is amortized on the straight-line method over three years. Accumulated amortization was $834 and $371 at December 31, 1996 and 1995, respectively. CASINO REVENUES AND PROMOTIONAL ALLOWANCES The Partnership recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverage and other items which were provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated cost of providing promotional allowances for food and beverages and other items was $2,534, $2,166 and $402 in 1996, 1995 and 1994, respectively, and has been included in food and beverage costs and expenses. PREOPENING COSTS Preopening costs, which consist primarily of labor, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. ADVERTISING COSTS The Partnership expenses advertising costs as incurred. Advertising expense was $1,527, $1,580 and $221 in 1996, 1995 and 1994 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. RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. 2. PROPERTY EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- Leasehold and shore improvements................................................ $ 6,948 $ 6,933 Riverboat, docks and improvements............................................... 36,051 33,924 Furniture, fixtures and equipment............................................... 17,136 16,437 ---------- ---------- 60,135 57,294 Less accumulated depreciation and amortization.................................. (11,431) (6,102) ---------- ---------- Net property and equipment...................................................... $ 48,704 $ 51,192 ---------- ---------- ---------- ----------
63 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT Notes payable and long term debt consists of the following:
DECEMBER 31, -------------------- 1996 1995 --------- --------- 8% unsecured note payable to related party in quarterly installments of $930,815, including interest, through July 2001........................................... $ 17,527 $ 20,039 Noninterest-bearing unsecured note payable to related party in monthly installments of $84,799......................................................... 2,035 Noninterest-bearing unsecured note payable to Argosy due 1998..................... 1,844 Other............................................................................. 391 --------- --------- 19,371 22,465 Less current maturities........................................................... (5,578) (7,889) --------- --------- $ 13,793 $ 14,576 --------- --------- --------- ---------
The carrying value of long term debt approximates fair value at December 31, 1996 and 1995. Maturities of long term debt, including scheduled payments under the notes payable to Argosy which were due prior to December 31, 1996 and which have not yet been paid are as follows: 1997................................................ $ 5,578 1998................................................ 4,689 1999................................................ 3,082 2000................................................ 3,337 2001................................................ 2,685
4. RELATED PARTY TRANSACTIONS The Partnership leases, for a minimum of five years with six five-year renewal options, a docking site, office and warehouse space from Jazz. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts. Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz, the partners agreed that all rents from November 1, 1994 through the closing of the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to the closing of the Jazz purchase, the Partnership resumed its obligations under the lease with Jazz. Rent expense was approximately $3,539, $2,202 and $724 in 1996, 1995 and 1994, respectively. Approximately $3,091, $1,800 and $408 in 1996, 1995 and 1994, 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 share of these costs was approximately $1,989, $2,183 and $1,100 in 1996, 1995 and 1994 respectively. Indirect costs incurred by Argosy, on behalf of the Partnership, are not allocated as they are immaterial. 64 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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 can contribute a maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code, and the Partnership will match 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized by the Partnership under the Plan was approximately $320, $503 and $7 in 1996, 1995 and 1994, respectively. 6. SUPPLEMENTAL CASH FLOW INFORMATION In 1995, the Partnership entered into capital lease obligations totaling $376 for the acquisition of property and equipment. Amounts due to the General Partner decreased by $562 as a result of the transfer of certain fixed assets to the General Partner in 1995. During 1994, the Partnership acquired gaming equipment totaling $4,971 which was financed by equipment vendors. The Partnership paid interest of $2,811, $943 and $111 in 1996, 1995 and 1994, respectively. During 1994, the General Partner transferred property and equipment to the Partnership with a fair value of $20,039, subject to an unsecured note payable of $20,039 to the General Partner. In 1996, the General Partner assigned its rights to this note to Argosy. Additionally, preopening costs of $2,035 were financed by the General Partner. During 1994, property and equipment totaling $29,441 and other assets totaling $3,271 were contributed to the Partnership by the General Partner and Jazz, respectively. During 1996, Argosy transferred property and equipment with a fair value of $1,844, subject to an unsecured note payable to Argosy. 7. COMMITMENTS On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional passenger fee which is now $2.50 per passenger until actual construction of a hotel commences by Jazz or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1996, the Partnership has paid all admission payments due under the above agreements. The Partnership leases certain premises under noncancelable operating leases that expire in 1997. Future minimum lease payments under the noncancelable operating leases with initial terms of one year or more are $205 in 1997. On June 5, 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 Mortgage Notes. 65 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, 1996 and 1995, and the related statements of operations, stockholder's equity and cash flows for the year ended December 31, 1996 and for the seven months ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jazz Enterprises, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and the seven months ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois February 6, 1997 66 REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS JAZZ ENTERPRISES, INC. We have audited the accompanying statements of operations, stockholder's equity, and cash flows for the years ended February 28, 1995 and 1994 of Jazz Enterprises, Inc. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows for each of the two years in the period ended February 28, 1995 of Jazz Enterprises, Inc. in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP Reno, Nevada July 10, 1995 67 JAZZ ENTERPRISES, INC. BALANCE SHEETS (IN THOUSANDS)
COMPANY --------------------- DECEMBER 31, --------------------- 1996 1995 ---------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................ $ $ 32 Other current assets..................................................................... 78 168 ---------- --------- Total current assets................................................................... 78 200 ---------- --------- NET PROPERTY AND EQUIPMENT................................................................. 57,297 22,250 GOODWILL, NET.............................................................................. 20,519 21,115 NOTE RECEIVABLE............................................................................ 1,892 1,892 OTHER ASSETS: Deposits................................................................................. 196 196 Investment in partnership................................................................ 3,021 3,263 Other.................................................................................... 468 ---------- --------- Total other assets....................................................................... 3,685 3,459 ---------- --------- TOTAL ASSETS............................................................................... $ 83,471 $ 48,916 ---------- --------- ---------- --------- CURRENT LIABILITIES: Accounts payable and accrued liabilities................................................. $ 3,478 $ 3,080 Notes payable and current maturities of long-term debt................................... 399 ---------- --------- Total current liabilities.............................................................. 3,478 3,479 ---------- --------- LONG-TERM DEBT............................................................................. 81,485 45,392 STOCKHOLDER'S EQUITY: Common stock, no par value, 100,000 shares authorized, 200 shares issued and outstanding............................................................................ Retained (deficit) earnings.............................................................. (1,492) 45 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................. $ 83,471 $ 48,916 ---------- --------- ---------- ---------
See accompanying notes to financial statements. 68 JAZZ ENTERPRISES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
COMPANY PREDECESSOR COMPANY --------------------------- ------------------------------------------- SEVEN MONTHS THREE MONTHS YEAR ENDED ENDED ENDED MAY 30, YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 FEBRUARY 28, FEBRUARY 28, 1996 1995 (UNAUDITED) 1995 1994 ------------ ------------- --------------- ------------ ------------ REVENUES: Lease revenue.......................... $ 3,091 $ 1,786 $ $ 813 $ Rent revenue........................... 354 382 817 918 ------------ ------ ----- ------------ ------------ 3,445 2,168 1,630 918 ------------ ------ ----- ------------ ------------ COSTS AND EXPENSES: Operating expenses..................... 593 104 48 788 498 Selling, general and administrative.... 1,714 1,086 Depreciation and amortization.......... 1,382 405 Preopening costs....................... 100 597 5,642 2,283 ------------ ------ ----- ------------ ------------ 3,789 1,595 645 6,430 2,781 ------------ ------ ----- ------------ ------------ (Loss) income from operations............ (344) 573 (645) (4,800) (1,863) OTHER EXPENSE (INCOME): Interest expense....................... 951 490 94 282 Equity in loss of unconsolidated partnership.......................... 242 8 Interest income........................ (31) (83) (12) Gain on sale of assets................. (60) ------------ ------ ----- ------------ ------------ (Loss) income before income taxes........ (1,537) 75 (708) (4,939) (1,851) Income tax expense....................... (30) (65) (65) (38) ------------ ------ ----- ------------ ------------ Net (loss) income........................ $ (1,537) $ 45 $ (773) $ (5,004) $ (1,889) ------------ ------ ----- ------------ ------------ ------------ ------ ----- ------------ ------------
See accompanying notes to financial statements. 69 JAZZ ENTERPRISES, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL ---------------------- PAID-IN ACCUMULATED PREDECESSOR COMPANY SHARES AMOUNT CAPITAL DEFICIT TOTAL - ----------------------------------- -------- --------- ---------- ----------- ------- Balance at February 28, 1993....... 200 $ $ 100 $ (168) $ (68) Net loss......................... (1,889) (1,889) -- --- ---------- ----------- ------- Balance at February 28, 1994 200 100 (2,057) (1,957) Capital contributions............ 2,448 2,448 Net loss......................... (5,004) (5,004) -- --- ---------- ----------- ------- Balance at February 28, 1995....... 200 2,548 (7,061) (4,513) Capital contributions (unaudited).................... 646 646 Net loss (unaudited)............. (773) (773) -- --- ---------- ----------- ------- Balance at May 30, 1995 (unaudited)...................... 200 $ $3,194 $(7,834) $(4,640) -- -- --- ---------- ----------- ------- --- ---------- ----------- -------
RETAINED COMMON (DEFICIT) COMPANY SHARES STOCK EARNINGS TOTAL - -- ------ ------ ----------- ------- Balance, June 1, 1995... 200 $ $ $ Net loss... 45 45 -- ------ ----------- ------- Balance, December 31, 1995... 200 45 45 Net loss... (1,537) (1,537) -- ------ ----------- ------- Balance, December 31, 1996... 200 $ $(1,492) $(1,492) -- -- ------ ----------- ------- ------ ----------- -------
See accompanying notes to financial statements. 70 JAZZ ENTERPRISES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
COMPANY PREDECESSOR COMPANY --------------------------- ------------------------------------------- SEVEN MONTHS THREE MONTHS YEAR ENDED ENDED ENDED MAY 30, YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 FEBRUARY 28, FEBRUARY 28, 1996 1995 (UNAUDITED) 1995 1994 ------------ ------------- --------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income................................. $ (1,537) $ 45 $ (773) $ (5,004) $ (1,889) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization................... 1,382 405 35 104 36 Write down associated with real estate owned.... 1,386 Gain on sale of assets.......................... (60) Equity in losses of unconsolidated partnership................................... 242 8 (700) (315) Receivables..................................... (12) (36) Other current assets............................ 90 (4) Prepaid expenses................................ 9 (93) (78) Other assets.................................... 35 (235) Accounts payable and accrued liabilities........ 24 80 191 1,371 182 Increase in income taxes payable................ 65 27 38 ------------ ------------- ------ ------------ ------------ Net cash provided by (used in) operating activities................................ 201 534 (473) (2,946) (2,297) ------------ ------------- ------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Goodwill.......................................... (9,388) Increase (decrease) in bank overdraft............. (234) 234 Proceeds from sale of assets...................... 101 Decrease (increase) in escrow deposit............. 255 (255) Capital expenditures.............................. (22,988) (2,538) (85) (5,331) (13,143) Loans and advances to related parties............. (31) (1,054) (807) ------------ ------------- ------ ------------ ------------ Net cash used in investing activities....... (22,988) (11,926) (350) (5,795) (14,205) ------------ ------------- ------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings-- related party......................................... 7,879 Proceeds from issuance of long-term debt........ 52 15,348 Principal payments on long-term debt............ (2,191) (184) (400) Advances from and (payments to) affiliate....... 25,414 11,608 180 935 (438) Increase in other assets........................ (468) Contributed capital............................. 647 1,869 Increase (decrease) in construction related payable....................................... (2,132) 2,132 ------------ ------------- ------ ------------ ------------ Net cash provided by financing activities..... 22,755 11,424 827 8,603 16,642 ------------ ------------- ------ ------------ ------------ Net increase (decrease) in cash and cash equivalents................................. (32) 32 4 (138) 140 Cash and cash equivalents at beginning of period.......................................... 32 2 140 ------------ ------------- ------ ------------ ------------ Cash and cash equivalents at end of period........ $ $ 32 $ 6 $ 2 $ 140 ------------ ------------- ------ ------------ ------------ ------------ ------------- ------ ------------ ------------
See accompanying notes to financial statements. 71 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 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. In July 1993, the Company entered into a partnership with Argosy of Louisiana, Inc., (a wholly owned subsidiary of Argosy Gaming Company ("Argosy")) ("ALI") in which the Company owns 10% and ALI owns 90%, to operate a riverboat casino in Baton Rouge, Louisiana, which opened September 30, 1994. The Company contributed its Certificate of Preliminary Approval and certain leases to the partnership. On December 5, 1994, the stockholders of Jazz entered in an agreement to sell 100% of the common stock of Jazz to Argosy. The transaction was consummated on May 30, 1995 and was accounted for as a purchase, therefore establishing a new basis of accounting. Terms of the transaction allowed Argosy to acquire Jazz's 10% limited partnership interest in the Baton Rouge casino and all of Jazz's interest in the Catfish Town real estate development. Under terms of the purchase agreement, Argosy made initial cash payments to Jazz totalling $8,500 and is required to make additional payments to the former shareholders of Jazz of $1,350 annually for ten years, and payments of $500 annually for the following ten years. The net present value of these additional payments was approximately $9,400 assuming a discount rate of 10.5%, and is included in long-term debt at December 31, 1996 and 1995. In addition, Argosy forgave loans to Jazz and its principals of approximately $20,700, assumed certain construction obligations, ordinary course accounts payable and other liabilities totalling approximately $7,300 and paid expenses of approximately $900. Under terms of the Purchase Agreement substantially all other obligations of Jazz existing at the time of the purchase remain the responsibility of the former owners of Jazz. In the accompanying financial statements, "Predecessor Company" refers to Jazz prior to its purchase by Argosy and "Company" refers to Jazz subsequent to its purchase by Argosy. The financial statements of the Predecessor Company are not comparable to the financial statements of the Company. 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. CASH AND CASH EQUIVALENTS The Company and Predecessor 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, 1995. GOODWILL Goodwill represents the cost in excess of fair value of net assets acquired, and is amortized over 40 years. Accumulated amortization is $348 and $944 at December 31, 1996 and 1995, respectively. 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. 72 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 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
RENTAL INCOME Rental income is recognized over the life of the associated lease. Minimum future rents to be received under operating leases are $341 in 1997 and $85 in 1998, respectively. PREOPENING COSTS Preopening costs, which consist primarily of labor, training and marketing costs incurred by the Predecessor Company and the Company, are expensed as incurred. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $53, $0, $27, $66 and $93 for 1996, the seven months ended December 31, 1995, the three months ended May 30, 1995 and the years ended February 28, 1995 and 1994, 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. Income taxes for the Predecessor Company were recorded in accordance with the liability method specified by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." RECLASSIFICATIONS Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. INTERIM FINANCIAL STATEMENTS The financial statements of the Predecessor Company for the three months ended May 30, 1995 are unaudited; however, in the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Predecessor Company's financial position and results of operations for such periods have been included. The results for the three months ended May 30, 1995 are not necessarily indicative of the results to be expected for future periods. 73 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following: December 31,
1996 1995 --------- --------- Land.................................................................... $ 8,187 $ 8,187 Buildings and improvements.............................................. 48,192 Furniture, fixtures and equipment....................................... 2,444 488 Construction in progress................................................ 50 13,632 --------- --------- 58,873 22,307 Less accumulated depreciation and amortization.......................... (1,576) (57) --------- --------- Net property and equipment.............................................. $ 57,297 $ 22,250 --------- --------- --------- ---------
3. LONG-TERM DEBT Notes payable and long term debt consists of the following:
DECEMBER 31, -------------------- 1996 1995 --------- --------- Notes payable to former owner, principal and interest due quarterly through September 2015, discounted at 10.5%........................... $ 7,011 $ 9,202 Noninterest bearing advances from related party, no stated maturity..... 74,474 36,589 --------- --------- 81,485 45,791 Less current maturities................................................. (399) --------- --------- $ 81,485 $ 45,392 --------- --------- --------- ---------
The carrying value of long term debt approximates fair value at December 31, 1996. Maturities of long term debt, are as follows: 1997............................................................... $ 0 1998............................................................... 259 1999............................................................... 531 2000............................................................... 589 2001............................................................... 653 Thereafter......................................................... 79,453
74 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax expense consists of the following:
COMPANY PREDECESSOR COMPANY -------------------------------- ----------------------------------------------------- YEAR ENDED SEVEN MONTHS THREE MONTHS DECEMBER 31, ENDED DECEMBER 31, ENDED MAY 31, FEBRUARY 28, FEBRUARY 28, 1996 1995 1995 (UNAUDITED) 1995 1994 ------------ ------------------ ------------------- --------------- --------------- Current: Federal........................ $ $ 30 $ $ $ State.......................... 65 65 38 ------------ ------- --- --- --- Total current.................... 30 65 65 38 ------------ ------- --- --- --- Income tax expense............... $ $ 30 $ 65 $ 65 $ 38 ------------ ------- --- --- --- ------------ ------- --- --- ---
The tax effects of significant temporary differences of the Company representing deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- Tax over book depreciation................................................. $ (440) $ (202) Preopening................................................................. 833 833 Effects of NOL Carryforward................................................ 728 164 Other, net................................................................. 34 25 --------- --------- 1,155 820 Valuation allowance........................................................ (1,155) (820) --------- --------- Net deferred tax assets.................................................... $ $ --------- --------- --------- ---------
The Company 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 $1,800 which expire from 2008 through 2011. 5. RELATED PARTY TRANSACTIONS The Company leases, for a, minimum of five years with six five-year renewal options, a docking site, office and warehouse space to the partnership. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts, as defined. Approximately $3,091 and $1,786 in 1996 and for the seven months ended December 31, 1995 respectively resulted from this lease with the partnership. The Predecessor Company received lease fees of $413 for the period September 30 through October 31, 1994. As a result of the sale of 100% of the common stock of the Predecessor Company to Argosy, the lease fees were suspended from November 1994 until the closing of the purchase. Subsequent to the closing of the sale of the Company to Argosy, the partnership resumed its obligations under the lease with the Company. Indirect costs incurred by Argosy, on behalf of the Company, are not allocated as they are immaterial. 6. SUPPLEMENTAL CASH FLOW INFORMATION During 1996, the Company received property and equipment with a fair value of $12,471 from Argosy and this amount increased the noninterest bearing advances from related parties. 75 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) The Company paid interest of $951 and $490 in 1996 and for the seven months ended December 31, 1995, respectively. During the years ended February 28, 1995 and 1994, the Predecessor Company acquired equipment financed by vendors totaling $19 and $7, respectively. In the year ended February 28, 1995, the Predecessor Company's stockholders paid $578 to reduce amounts due to affiliates. During the year ended February 28, 1995, construction costs and other payables in the amount of $3,352 were paid on behalf of the Predecessor Company by Argosy. During the year ended February 28, 1995, land in the amount of $425 was exchanged for notes payable by the Predecessor Company. During the year ended February 28, 1995, the Predecessor Company paid cash for interest and state income taxes in the amount of $6 and $38 respectively. No interest or taxes were paid during the three months ended May 30, 1995 or the year ended February 28, 1994. 7. COMMITMENTS On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and the Predecessor Company entered into an agreement which required the Predecessor Company and the partnership to pay to the City-Parish $2.50 per passenger. Additionally, the Predecessor Company agreed to pay to the City-Parish an additional passenger fee which is now $2.50 per passenger until actual construction of a hotel commences by the Company or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1996, the partnership has paid all admission payments due under the above agreements. The Company leases certain premises under noncancelable operating leases. Future minimum lease payments under the noncancelable operating leases with initial terms of one year or more are as follows: 1997................................................................ 213 1998................................................................ 213 1999................................................................ 213 2000................................................................ 202 2001................................................................ 202 Thereafter.......................................................... 15,144
Rent expense for the year ended December 31, 1996, the seven months ended December 31, 1995, the three months ended May 30, 1995, the year ended February 28, 1995 and the year ended February 28, 1994 was $283, $265, $48, $788 and $498, respectively. On June 5, 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 Mortgage Notes. 76 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, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Indiana Gaming Company at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana February 6, 1997 77 THE INDIANA GAMING COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, --------------------- 1996 1995 ---------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................ $ 9,216 $ 2 Accounts receivable, net................................................................. 138 Prepaid insurance........................................................................ 107 Other current assets..................................................................... 1,706 92 ---------- --------- Total current assets................................................................... 11,060 201 ---------- --------- NET PROPERTY AND EQUIPMENT................................................................. 69,392 11,070 OTHER ASSETS: Deposits................................................................................. 5 1,052 Cash and cash equivalents--restricted.................................................... 14,919 Intangible assets, net of accumulated amortization of $61 in 1996........................ 31,459 4,405 ---------- --------- Total other assets..................................................................... 46,383 5,457 ---------- --------- TOTAL ASSETS............................................................................... $ 126,835 $ 16,728 ---------- --------- ---------- --------- CURRENT LIABILITIES: Accounts payable......................................................................... $ 3,115 $ 1,840 Accrued payroll and related expenses..................................................... 912 73 Accrued interest and dividends payable--related parties.................................. 2,198 Installment contracts payable............................................................ 3,252 Other accrued liabilities................................................................ 1,452 2 Current maturities of long-term debt--related parties.................................... 2,900 Current maturities of other long-term obligations........................................ 5,169 ---------- --------- Total current liabilities.............................................................. 18,998 1,910 ---------- --------- LONG-TERM DEBT--RELATED PARTIES............................................................ 86,612 15,225 OTHER LONG-TERM OBLIGATIONS................................................................ 15,000 MINORITY INTERESTS......................................................................... 14,490 1,709 STOCKHOLDER'S EQUITY Common stock - $.01 par value, 1,000 shares authorized issued and outstanding Accumulated deficit.................................................................................. (8,265) (2,121) ---------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................. $ 126,835 $ 16,728 ---------- --------- ---------- ---------
See accompanying notes to consolidated financial statements. 78 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- REVENUES: Casino........................................................................... $ 3,930 $ $ Admissions....................................................................... 776 Food, beverage and other......................................................... 167 ---------- --------- --------- 4,873 Less promotional allowances...................................................... (462) ---------- --------- --------- Net revenues....................................................................... 4,411 ---------- --------- --------- COSTS AND EXPENSES: Casino........................................................................... 2,116 Food, beverage and other......................................................... 149 Other operating expenses......................................................... 711 Selling, general and administrative.............................................. 783 Depreciation and amortization.................................................... 378 Management fees--related parties................................................. 38 Preopening....................................................................... 11,036 2,143 839 ---------- --------- --------- 15,211 2,143 839 ---------- --------- --------- Loss from operations............................................................... (10,800) (2,143) (839) ---------- --------- --------- OTHER INCOME (EXPENSE): Interest income.................................................................. 127 Interest expense................................................................. (192) ---------- --------- --------- (65) ---------- --------- --------- Net loss before minority interests................................................. (10,865) (2,143) (839) Minority interests................................................................. 4,721 906 357 ---------- --------- --------- Net loss........................................................................... $ (6,144) $ (1,237) $ (482) ---------- --------- --------- ---------- --------- ---------
See accompanying notes to consolidated financial statements. 79 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL COMMON ACCUMULATED STOCKHOLDER'S SHARES STOCK DEFICIT DEFICIT ----------- --------- ------------ ------------ Balance, December 31, 1993....................................... 1,000 $ $ (402) $ (402) Net loss....................................................... (482) (482) ----- --------- ------------ ------------ Balance, December 31, 1994....................................... 1,000 (884) (884) Net loss....................................................... (1,237) (1,237) ----- --------- ------------ ------------ Balance, December 31, 1995....................................... 1,000 (2,121) (2,121) Net loss....................................................... (6,144) (6,144) ----- --------- ------------ ------------ Balance, December 31, 1996....................................... 1,000 $ $ (8,265) $ (8,265) ----- --------- ------------ ------------ ----- --------- ------------ ------------
See accompanying notes to consolidated financial statements. 80 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss........................................................................ $ (6,144) $ (1,237) $ (482) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................... 453 20 Minority interests.......................................................... (4,721) (906) (357) Changes in operating assets and liabilities: Accounts receivable......................................................... (138) 238 (235) Other current assets........................................................ (941) (201) Accounts payable............................................................ 1,630 1,965 (1,327) Accrued interest payable.................................................... 656 Accrued liabilities......................................................... 2,289 75 ---------- ---------- --------- Net cash used in operating activities......................................... (6,916) (46) (2,401) ---------- ---------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow................................................ (14,919) Purchases of property and equipment........................................... (52,879) (7,566) (3,949) Payments under development agreement and other infrastructure improvements.... (6,946) (4,405) ---------- ---------- --------- Net cash used in investing activities......................................... (74,744) (11,971) (3,949) ---------- ---------- --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Increase in advances from affiliates.......................................... 50,438 10,535 4,565 Payments on installment contracts............................................. (1,805) Proceeds from contributed capital............................................. 19,044 1,484 1,785 Proceeds from long-term debt.................................................. 23,197 ---------- ---------- --------- Net cash provided by financing activities....................................... 90,874 12,019 6,350 ---------- ---------- --------- Net increase in cash............................................................ 9,214 2 Cash, beginning of year......................................................... 2 ---------- ---------- --------- Cash, end of year............................................................... $ 9,216 $ 2 $ ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 81 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 1/2% general partner in the Partnership, together with, three limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ Investments, Inc., a 4% limited partner. On December 10, 1996, the Company commenced operations at a temporary site and ceased being in the development stage. The Company is constructing its permanent site which it expects to open in December 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. All significant intercompany transactions have been eliminated. 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: Temporary site improvements....................... 1 year Leasehold and shore improvements.................. 5-31 years Furniture, fixtures and equipment................. 5-10 years
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents represents funds placed into an escrow account which may only be used to fund progress payments related to the construction of the Company's permanent landing facility. LICENSE APPLICATION FEES--License application fees associated with obtaining a gaming license have been capitalized and are a part of intangible assets at December 31, 1996. These costs are being amortized over the life of the gaming license, which is five years. Total amortization expense was $11 for the year ended December 31, 1996. REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated cost of providing promotional allowances has been included in costs and expenses as follows:
1996 --------- Admissions............................................................................ $ 190 Food, beverage and other.............................................................. 4
82 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, are expensed as incurred. ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $503, $112 and $5 for the years ended December 31, 1996, 1995 and 1994, 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, -------------------- 1996 1995 --------- --------- Land........................................................................................ $ 16,015 $ 6,591 Leasehold and shore improvements............................................................ 5,892 Furniture, fixtures and equipment........................................................... 9,367 114 Construction in progress.................................................................... 38,534 4,389 --------- --------- 69,808 11,094 Less accumulated depreciation and amortization.............................................. (416) (24) --------- --------- Net property and equipment.................................................................. $ 69,392 $ 11,070 --------- --------- --------- ---------
3. LONG-TERM DEBT--RELATED PARTIES Long-term debt consists of the following at December 31, 1996 and 1995:
1996 1995 --------- --------- Capital loans payable to Argosy, noninterest bearing, no stated due date.................... $ 66,315 $ 15,225 Capital loans payable to partner interest at prime plus 6% (14.25% at December 31, 1996) principal paid in quarterly installments over eight years................................. 23,197 --------- --------- 89,512 15,225 Less current maturities..................................................................... (2,900) --------- --------- $ 86,612 $ 15,225 --------- --------- --------- ---------
Interest expense on the capital loans from the partner compounds quarterly to the extent unpaid. Principal on the capital loans is amortized over eight years with equal annual payments of principal. 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 Partner, pro rata, in relation to their principal balance of the respective Capital Loans then outstanding. Interest expense to the partner amounted to $192 (net of $1,680 capitalized) in the year ended December 31, 1996. 83 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES The tax effects of significant temporary differences representing deferred tax assets at December 31, 1996 and 1995 are as follows:
1996 1995 --------- --------- Preopening............................................................... $ (5,670) $ (1,545) NOL carryforward......................................................... (104) Other, net............................................................... (9) --------- --------- (5,783) (1,545) Valuation allowance...................................................... 5,783 1,545 --------- --------- $ $ --------- --------- --------- ---------
The Company has recorded a valuation allowance against all of its deferred tax assets due to the uncertainty of realization. The Company has a net operating loss carryforward for income tax purposes of approximately $260 which expires in 2011. 5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $5,056 in 1996 which was financed through installment contracts. The Company paid $207 of interest for the year ended December 31, 1996. No interest was paid in 1995 or 1994. 6. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year, including related party leases, as of December 31, 1996, are as follows: YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------- 1997................................................................ $ 4,767 1998................................................................ 362 1999................................................................ 285 2000................................................................ 107
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $2,837, $148 and $11 respectively. 7. OTHER 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. 84 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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 has entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals are approximately $500 for these facilities. Total expense recognized under the subleases was $2,462 in 1996. Argosy provides certain services for the Company, primarily, centralized reservations and insurance. Reimbursement of these expenses has been recorded by the Company as due to affiliates. 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 $133 in 1996. 8. EMPLOYEES BENEFIT PLAN The Company participates in an Argosy sponsored 401(k) defined-contribution plan which was established in 1994 and covers substantially all of the Company's full-time employees. Participants can contribute a maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code, and the Company has matched 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized under the Plan was $52, $5 and $0 for the years ended December 31, 1996, 1995 and 1994. 9. COMMITMENTS AND CONTINGENCIES CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with the terms of the 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 has agreed to pay 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, 1996. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the Development Agreement. Total amortization expense was $50 for the year ended December 31, 1996. Included in other long term obligations is $20,169 representing the remaining grants and infrastructure payments due by the Company under the terms of the Riverboat Gaming Development Agreement with the City of Lawrenceburg ("Development Agreement"). Upon the final completion of the permanent site $8,000 is due. The remaining $12,169 is payable as follows: $5,169 ratably over the first year subsequent to opening of the temporary site, $5,000 ratably over the second year subsequent to the opening of the temporary site and $2,000 ratably over the third year subsequent to the opening of the temporary site. COMPLETION OF PERMANENT FACILITY--Provisions of the partnership agreement stipulate that capital contributions, including partner loans up to a total project cost, as defined, of $225 million will be made 57 1/2% by the Company and 42 1/2% by the limited partners with any excess project cost being the sole responsibility of the Company. 85 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The Company may only operate at its temporary site for one year. The completion of the permanent facility is subject to the satisfaction of numerous conditions including weather conditions and the receipt of numerous permits and licenses. There can be no assurance that the permanent facility will be open within one year of the opening of the temporary facility. 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. PERMANENT RIVERBOAT CASINO--The Partnership has entered into an agreement for the construction of its permanent riverboat facility. Total estimated costs of this contract is approximately $39 million. As of December 31, 1996, the Company had made approximately $23.3 million in progress payments. TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the partnership agreement, after the third anniversary date of commencement of operations each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests). In the event of this occurrence, if the partners cannot agree on a selling price, the Partnership will be sold in its entirety. GUARANTY OF PARENT OBLIGATIONS--On June 5, 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, and its rights to certain payments from the Partnership, as collateral, under terms of the Mortgage Notes. Additionally, the Company is a guarantor of the Mortgage Notes. 86 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, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indiana Gaming Company, L.P. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana February 6, 1997 87 INDIANA GAMING COMPANY, L.P. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, --------------------- 1996 1995 ---------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................ $ 9,216 $ 2 Accounts receivable, net................................................................. 138 Prepaid insurance........................................................................ 107 Other current assets..................................................................... 1,706 92 ---------- --------- Total current assets................................................................... 11,060 201 ---------- --------- NET PROPERTY AND EQUIPMENT................................................................. 68,349 10,949 OTHER ASSETS: Deposits................................................................................. 5 1,052 Cash and cash equivalents--restricted.................................................... 14,919 Intangible assets, net of accumulated amortization of $61 in 1996........................ 31,459 4,405 ---------- --------- Total other assets..................................................................... 46,383 5,457 ---------- --------- TOTAL ASSETS............................................................................... $ 125,792 $ 16,607 ---------- --------- ---------- --------- CURRENT LIABILITIES: Accounts payable......................................................................... $ 3,464 $ 1,840 Accrued payroll and related expenses..................................................... 912 73 Accrued interest and preferred equity return............................................. 5,240 Installment contracts payable............................................................ 3,252 Other accrued liabilities................................................................ 1,452 2 Due to affiliates........................................................................ 777 125 Current maturities of long-term debt-related parties..................................... 7,066 Current maturities of other long-term obligations........................................ 5,169 ---------- --------- Total current liabilities.............................................................. 27,332 2,040 ---------- --------- LONG-TERM DEBT-RELATED PARTIES............................................................. 49,463 OTHER LONG-TERM OBLIGATIONS................................................................ 15,000 PARTNERS' EQUITY: General partner.......................................................................... 19,549 12,858 Limited partners......................................................................... 14,448 1,709 ---------- --------- Total partners' equity................................................................. 33,997 14,567 ---------- --------- TOTAL LIABILITIES AND PARTNERS' EQUITY..................................................... $ 125,792 $ 16,607 ---------- --------- ---------- ---------
See accompanying notes to financial statements. 88 INDIANA GAMING COMPANY, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- REVENUES: Casino........................................................................... $ 3,930 $ $ Admissions....................................................................... 776 Food, beverage and other......................................................... 167 ---------- --------- --------- 4,873 Less promotional allowances...................................................... (462) ---------- --------- --------- Net revenues....................................................................... 4,411 ---------- --------- --------- COSTS AND EXPENSES: Casino........................................................................... 2,116 Food, beverage and other......................................................... 149 Other operating expenses......................................................... 711 Selling, general and administrative.............................................. 685 Depreciation and amortization.................................................... 378 Management fees--related parties................................................. 94 Preopening....................................................................... 10,979 2,131 839 ---------- --------- --------- 15,112 2,131 839 ---------- --------- --------- Loss from operations............................................................... (10,701) (2,131) (839) OTHER INCOME (EXPENSE): Interest income.................................................................. 127 Interest expense................................................................. (534) ---------- --------- --------- (407) ---------- --------- --------- Net loss prior to preferred equity return.......................................... (11,108) (2,131) (839) Preferred equity return............................................................ (3,726) ---------- --------- --------- Net loss attributable to common equity partners.................................... $ (14,834) $ (2,131) $ (839) ---------- --------- --------- ---------- --------- ---------
See accompanying notes to financial statements. 89 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, 1993................. $ (402) $ (297) $ (699) $ $ $ $ (699) Capital contributions.................... 4,565 1,785 6,350 6,350 Net loss................................. (482) (357) (839) (839) ----------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1994................. 3,681 1,131 4,812 4,812 Capital contributions.................... 5,066 1,484 6,550 5,336 5,336 11,886 Net loss................................. (1,225) (906) (2,131) (2,131) ----------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1995................. 7,522 1,709 9,231 5,336 5,336 14,567 Capital contributions.................... 3,850 3,850 15,220 15,194 30,414 34,264 Net loss prior to preferred equity return................................. (6,387) (4,721) (11,108) (11,108) Preferred equity return.................. (2,142) (1,584) (3,726) 2,184 1,542 3,726 Accrued preferred equity distribution.... (2,184) (1,542) (3,726) (3,726) ----------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1996................. $ (1,007) $ (746) $ (1,753) $ 20,556 $ 15,194 $ 35,750 $ 33,997 ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- --------- -----------
See accompanying notes to financial statements. 90 INDIANA GAMING COMPANY, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net loss.................................................................... $ (14,834) $ (2,131) $ (839) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................................. 453 20 Accrued preferred equity dividends........................................ 3,726 Changes in operating assets and liabilities: Accounts receivable....................................................... (138) 238 (235) Other current assets...................................................... (941) (201) Accounts payable.......................................................... 1,977 1,965 (1,327) Accrued interest payable.................................................. 1,514 Accrued liabilities....................................................... 2,289 75 ---------- ---------- ---------- Net cash used in operating activities................................... (5,954) (34) (2,401) ---------- ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow.............................................. (14,919) Purchases of property and equipment......................................... (51,955) (7,445) (3,949) Payments under development agreement and other infrastructure improvements.............................................................. (6,946) (4,405) ---------- ---------- ---------- Net cash used in investing activities................................... (73,820) (11,850) (3,949) ---------- ---------- ---------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Payments on installment contracts........................................... (1,805) Proceeds from contributed capital........................................... 34,264 11,886 6,350 Proceeds from long-term debt................................................ 56,529 ---------- ---------- ---------- Net cash provided by financing activities............................... 88,988 11,886 6,350 ---------- ---------- ---------- Net increase in cash.......................................................... 9,214 2 Cash, beginning of year....................................................... 2 ---------- ---------- ---------- Cash, end of year............................................................. $ 9,216 $ 2 $ ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 91 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 effective April 11, 1994 to provide riverboat gaming and related entertainment in Lawrenceburg, Indiana. The Partnership is comprised of a 57.5% general partner, The Indiana Gaming Company ("General Partner"), a wholly owned subsidiary of Argosy Gaming Company, ("Argosy"), and three limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ Investments, Inc., a 4% limited partner. Net income (loss) is allocated to the partners based on their respective ownership interests. On December 10, 1996, the Partnership commenced operations at a temporary site and ceased being in the development stage. The Partnership is constructing its permanent site which it expects to open in December 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. 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: Temporary site improvements....................... 1 year Leasehold and shore improvements.................. 5-31 years Furniture, fixtures and equipment................. 5-10 years
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents represents funds placed into an escrow account which may only be used to fund progress payments related to the construction of the Partnership's permanent landing facility. LICENSE APPLICATION FEES--License application fees associated with obtaining a gaming license have been capitalized and included in the balance sheet as a part of intangible assets at December 31, 1996. These costs are being amortized over the life of the gaming license, which is five years. Total amortization expense was $11 for the year ended December 31, 1996. REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, 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 cost of providing promotional allowances has been included in costs and expenses as follows:
1996 --------- Admissions............................................................................ $ 190 Food, beverage and other.............................................................. 4
PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, are expensed as incurred. ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $503, $112 and $5 for the years ended December 31, 1996, 1995 and 1994, respectively. 92 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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, -------------------- 1996 1995 --------- --------- Land.................................................................... $ 16,015 $ 6,591 Leasehold and shore improvements........................................ 5,892 Furniture, fixtures and equipment....................................... 9,367 114 Construction in progress................................................ 37,491 4,268 --------- --------- 68,765 10,973 Less accumulated depreciation and amortization.......................... (416) (24) --------- --------- Net property and equipment.............................................. $ 68,349 $ 10,949 --------- --------- --------- ---------
3. LONG-TERM DEBT--RELATED PARTIES Long-term debt consists of the following at December 31, 1996: Capital loans payable to partners, interest at prime plus 6% (14.25% at December 31, 1996), principal paid in quarterly installments over eight years.................................... $ 56,529 Less current maturities............................................ (7,066) --------- $ 49,463 --------- ---------
Interest expense on the capital loans from the partners compounds quarterly to the extent unpaid. Principal on the capital loans is amortized over eight years with equal annual payments of principal. 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. Interest expense to related parties amounted to $636 (net of $874 capitalized) in the year ended December 31, 1996. 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. 5. SUPPLEMENTAL CASH FLOW INFORMATION The Partnership acquired equipment in the amount of $5,056 in 1996 which was financed through installment contracts. 93 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The Partnership paid $207 interest for the year ended December 31, 1996. No interest was paid in 1995 or 1994. 6. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year, including related party leases, as of December 31, 1996, are as follows: Years ending December 31, 1997.............................................................. $ 4,767 1998.............................................................. 362 1999.............................................................. 285 2000.............................................................. 107
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $2,837, $148 and $11 respectively. 7. OTHER RELATED PARTY TRANSACTIONS The Partnership has entered into a Management Agreement, as amended ("Management Agreement"), with the General Partner, as the sole and exclusive manager of all operations of the Partnership. The term of the Management Agreement is twenty years, however, the term may be extended in the event that the term of the Partnership is extended beyond the year 2014. The Partnership will pay to the General Partner a Management Fee in the amount of 12.5% of the operating profit of the Partnership, as defined. Under a separate financial advisory agreement the General Partner has agreed to pay Conseco a financial advisory fee equal to 40% of the Management Fee. The partnership agreement stipulates that the Partnership shall distribute excess cash flow, as defined, to the partners at least quarterly, in the following order: (i) partner tax distributions, (ii) prepayment of principal on capital loans, (iii) accrued preferred equity return, (iv) return of preferred equity and, (v) return of common equity. The Partnership has entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals are approximately $500 for these facilities. Total expense recognized under the subleases was $2,462 in 1996. Argosy provides certain services for the Partnership, primarily, centralized reservations and insurance. Reimbursement of these expenses has been recorded by the Partnership as due to affiliates. 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 $133 in 1996. 8. EMPLOYEES BENEFIT PLAN The Partnership participates in an Argosy sponsored 401(k) defined-contribution plan which was established in 1994 and covers substantially all of the Partnership's full-time employees. Participants can contribute a maximum of 10% of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code, and the Partnership has matched 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized under the Plan was $52, $5 and $0 for the years ended December 31, 1996, 1995 and 1994. 94 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 9. COMMITMENTS AND CONTINGENCIES CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with the terms of the Development Agreement, the Partnership entered into a lease with the City of Lawrenceburg for docking privileges for its riverboat casino. The initial term of the lease is for six years and thereafter automatically extends for up to nine renewal term periods of five years each, unless terminated by the Partnership. Under the terms of the Development Agreement, the Partnership pays an annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross Receipts, as defined, with a minimum of $6 million per year. The Partnership has agreed to pay 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, 1996. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the Development Agreement. Total amortization expense was $50 for the year ended December 31, 1996. Included in other long term obligations is $20,169 representing the remaining grants and infrastructure payments due by the Partnership under the terms of the Riverboat Gaming Development Agreement with the City of Lawrenceburg ("Development Agreement"). Upon the final completion of the permanent site $8,000 is due. The remaining $12,169 is payable as follows: $5,169 ratably over the first year subsequent to opening of the temporary site, $5,000 ratably over the second year subsequent to the opening of the temporary site and $2,000 ratably over the third year subsequent to the opening of the temporary site. COMPLETION OF PERMANENT FACILITY--Provisions of the partnership agreement stipulate that capital contributions, including partner loans up to a total project cost, as defined, of $225 million will be made 57 1/2% by the General Partner and 42 1/2% by the limited partners with any excess project cost being the sole responsibility of the General Partner. The Partnership may only operate at its temporary site for one year. The completion of the permanent facility is subject to the satisfaction of numerous conditions including weather conditions and the receipt of numerous permits and licenses. There can be no assurance that the permanent facility will be open within one year of the opening of the temporary facility. 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. PERMANENT RIVERBOAT CASINO--The Partnership has entered into an agreement for the construction of its permanent riverboat facility. Total estimated costs of this contract is approximately $39 million. As of December 31, 1996, the Partnership had made approximately $23.3 million in progress payments. TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership Agreement, after the third anniversary date of commencement of operations 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. 95 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 96 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. 97 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, 1996 and 1995. Consolidated Statements of Operations--years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Stockholders' Equity--years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. The financial statement schedules of the Company have been omitted because they are not required or not applicable or the required information is shown in the financial statement or notes thereto. 3. The exhibits listed on the "Index to Exhibits" on page 99 are filed with this Form 10-K or incorporated by reference as set forth below. 98 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company (previously filed with the Securities and Exchange Commission ("SEC") as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 4.1 Form of the Company's 13 1/4% First Mortgage Notes due 2004 issued on June 5, 1996 in the aggregate principal amount of $235,000,000 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.2 Form of Guarantee issued on June 5, 1996 by Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.3 Indenture dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and the Guarantors named therein, for the Company's $235,000,000 of 13 1/4% First Mortgage Notes due 2004 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.4 Registration Rights Agreement dated as of June 5, 1996 by and among the Company, the Guarantors named therein and the Initial Purchasers named therein (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.5 Cash Collateral and Disbursement Agreement dated June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and LaSalle National Trust, N.A., as disbursement agent (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.6 Form of Security Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and the Company, as Grantor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.7 Form of Subsidiary Security Agreements dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company, each as a Grantor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and the Company, as Pledgor (previously filed with the SEC as an
99
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
100
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997. 10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.8 Argosy Gaming Company Savings Plan (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 10, 1994 and incorporated herein by reference). 10.9 Letter Agreement dated as of January 28, 1993 by and between L. Thomas Lakin and the Alton Riverboat Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.10 Letter Agreement dated as of January 28, 1993 by and between the Alton Riverboat Gambling Partnership and H. Steven Norton (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference.) 10.11 Letter Agreement dated March 29, 1995 by and between Floyd C. Warmann and the Company (previously filed with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 dated March 31, 1995 and incorporated herein by reference). 10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 10, 1994 and incorporated herein by reference). 10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana Gaming Company as amended by Amendment No. 1 to Management
101
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- Agreement dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino--New York, Inc. and The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K dated March 31, 1995 and incorporated herein by reference). 10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as obligee with USF&G, as surety. 13 Portions of the 1996 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of Contents as incorporated by reference herein. 21 List of Subsidiaries 24.1 Consent of Ernst & Young LLP 24.2 Consent of Grant Thornton LLP 25 Powers of Attorney of directors
- ------------------------ (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, 1996: None (c) The Exhibits filed herewith, if any, are identified on Exhibit index 102 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 28th day of March, 1997. ARGOSY GAMING COMPANY By: /s/ GEORGE L. BRISTOL ----------------------------------------- George L. Bristol ACTING 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/ GEORGE L. BRISTOL - ---------------------------------------- Acting Chief Executive Officer March 28, 1997 George L. Bristol and Director /s/ JOSEPH G. URAM Chief Financial Officer - ---------------------------------------- (Principal Accounting March 28, 1997 Joseph G. Uram 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/ GEORGE L. BRISTOL ------------------------- George L. Bristol Attorney-in-Fact March 28, 1997 103 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 1996 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents............................................................... $ 14,516 $ 886 Marketable securities................................................................... 126 1,952 Income taxes receivable................................................................. 11,111 2,197 Receivables............................................................................. 828 651 Other current assets.................................................................... 2,772 312 ---------- ---------- Total current assets.............................................................. 29,353 5,998 Net property and equipment.............................................................. 15,475 9,629 Restricted cash......................................................................... 69,632 Investment in and advances to consolidated subsidiaries................................. 297,601 244,163 Other assets............................................................................ 12,422 5,878 Deferred taxes.......................................................................... 8,743 ---------- ---------- Total assets........................................................................ $ 433,226 $ 265,668 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities............................................ $ 10,525 $ 6,648 Long-term debt............................................................................ 350,000 160,500 Deferred income taxes..................................................................... 980 Stockholders' equity: Common stock, $.01 par; 60,000,000 shares authorized;--24,333,333 shares issued and outstanding in 1996 and 1995............................................................ 243 243 Capital in excess of par.................................................................. 71,865 71,865 Retained earnings......................................................................... 593 25,432 ---------- ---------- 72,701 97,540 ---------- ---------- Total liabilities and stockholders' equity.............................................. $ 433,226 $ 265,668 ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 104 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, --------------------------------- 1996 1995 1994 ---------- ---------- --------- REVENUES Management fees and other...................................................... $ 4,875 $ 4,071 $ 4,844 COSTS AND EXPENSES General and administrative..................................................... 15,208 13,101 6,399 Development and preopening costs............................................... 835 1,060 3,122 ---------- ---------- --------- 16,043 14,161 9,521 ---------- ---------- --------- Loss from operations........................................................... (11,168) (10,090) (4,677) Net interest expense........................................................... (22,177) (8,964) (6,620) Equity in net (loss) income of consolidated subsidiaries....................... (6,769) 18,042 16,413 ---------- ---------- --------- (Loss) income before income taxes and extraordinary expenses................... (40,114) (1,012) 5,116 Income tax benefit............................................................. 16,165 7,965 4,519 ---------- ---------- --------- Net (loss) income before extraordinary item.................................... (23,949) 6,953 9,635 ---------- ---------- --------- Extraordinary loss on extinguishment of debt (net of income tax benefit of $594)........................................................................ (890) ---------- ---------- --------- Net (loss) income.............................................................. $ (24,839) $ 6,953 $ 9,635 ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to financial statements. 105 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------------------ 1996 1995 1994 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income....................................................... $ (24,839) $ 6,953 $ 9,635 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation............................................................ 1,671 1,437 479 Amortization............................................................ 1,761 1,568 382 Extraordinary item...................................................... 890 Deferred income taxes................................................... (8,596) 486 119 Changes in operating assets and liabilities: Other current assets.................................................. (11,683) (825) (408) Accounts payable and accrued liabilities.............................. 2,866 4,500 751 ----------- ---------- ----------- Net cash (used in) provided by operating activities................. (37,930) 14,119 10,958 ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of marketable securities.......................................... 1,952 548 4,250 Purchases of marketable securities...................................... (126) Investment in and advances to subsidiaries.............................. (52,719) (54,592) (125,660) Restricted cash held by trustee......................................... (69,632) Purchases of property and equipment..................................... (7,641) (5,509) (1,017) Deposits................................................................ (58) (194) (160) ----------- ---------- ----------- Net cash used in investing activities................................. (128,224) (59,747) (122,587) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit............................................ 44,500 49,500 44,400 Retirement of line of credit............................................ (90,000) (4,000) (44,400) Proceeds from sale of convertible subordinated notes.................... 115,000 Proceeds from the issuance of long term debt............................ 235,000 Increase in other assets................................................ (180) (25) Increase in deferred finance costs...................................... (9,716) (2,441) (4,775) ----------- ---------- ----------- Net cash provided by financing activities............................. 179,784 42,879 110,200 ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents........................ 13,630 (2,749) (1,429) Cash and cash equivalents, beginning of year................................ 886 3,635 5,064 ----------- ---------- ----------- Cash and cash equivalents, end of year...................................... $ 14,516 $ 886 $ 3,635 ----------- ---------- ----------- ----------- ---------- -----------
See accompanying notes to financial statements. 106 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) BASIS OF PRESENTATION The accompanying condensed financial information of Argosy Gaming Company ("Argosy") includes the accounts of Argosy, and on an equity basis, the subsidiaries which it controls. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements of Argosy. 107 EX-10.3(B) 2 EXHIBIT 10.3(B) Exhibit 10.3(b) TO: BOARD OF DIRECTORS FROM: J. THOMAS LONG DATE: January 13, 1997 Gentlemen: Upon much reflection and through over my services to the company since 1990, I have come to the conclusion that it is time for me to direct my energies and efforts towards some other business interests that I have in the banking sector. It has been a pleasure and a privilege serving the company and the members of the board, and I am proud of what we have built together. We should never forget that there are almost 3,800 men and women who helped us build the company to its position in the industry today, and my friendship and heartfelt thanks goes out to each and every one of them; and I ask that they provide loyal support and creative ideas to whomever succeeds me in the privledge of serving as C.E.O. of Argosy Gaming Company. I have nothing but the deepest respect for each and every one of you, and I have valued the past years as one of the premier opportunities of my life. I look forward to our long and continued friendship as I hope to continue to serve our company as you may call upon me in the future. Therefore, I ask to be released from my current day to day duties and as a member of the Board of Directors so that I may move on to other opportunities that I have subject to the terms and conditions of the agreements we negotiated today which are attached hereto as Exhibit A and by this reference made a part hereof. If I can ever be of service to any of you or Argosy in the future, please don't hesitate to contact me. My warmest regards, /s/ J. Thomas Long LETTER AGREEMENT THIS LETTER AGREEMENT is an addendum to that certain agreement reached between J. THOMAS LONG and the Board of Directors of ARGOSY GAMING COMPANY, and is referred to as Exhibit A to his letter to the Board dated January 13, 1997. 1. The Board of Directors or Argosy Gaming Company ("Board") agrees that all of the terms and conditions contained in the agreement of employment ("Contract") with J. Thomas Long currently in effect will remain in full force and effect for its entire term, said Contract being hereby incorporated by reference and made a part hereof. 2. For and in consideration of Long's extending the covenant not to compete in contained in said Contract, the Board hereby retains Long as a consultant to the company from January 1, 1998 through December 31, 1999, at an annual fee equal to $175,000,000 per annum. Long's consulting duties shall be mutually agreed upon between the Chairman of the Board and Long, on a reasonable basis and in no event shall be considered a full time commitment. 3. Long and the Board agree to execute full and mutual releases for the entire time Long was employed by Argosy Gaming Company and served as a member of the Board of Directors of Argosy for all lawful acts. 4. The Board of Directors through Argosy Gaming Company shall fully and completely. indemnify Long for his services as a director and officer of Argosy and its predecessors. Long shall be entitled to receive from Argosy "tall" Directors and Officer's coverage to the extent said coverage is required to fully and adequately protect Long up to such levels as the Board provides Directors and Officer's insurance for itself. 5. Long shall be entitled to all furniture, computers and personal files which are currently in his office or maintained by his Administrative Assistant with the delivery of all those items to be at the Company's expense to premises designated by Long. Long is to also have the services of his Administrative Assistant to gather his personal files, pack said files and delivery thereof for a smooth transition from the Company to Long's next office. The Corporate Secretary is directed to provide to Long his personal files as director in the course of his service with the company. Long and the Chairman of the Board of Argosy shall draft a mutual press release which will be relayed to the public. 6. Long shall provide full cooperation and consulting through the transition to his successor in office and agrees to fully cooperate through such transition. 7. For and in consideration of being paid the sums stated herein, Long agrees to extend the terms of the covenant not to compete contained in his Contract through December 31, 2000. 8. Long's contract with the Board of Directors shall be through Lance Callis. 9. The terms contained herein shall be set forth in a formal agreement with the Board of Directors to be completed and fully executed within seven days from the date hereof. Having mutually agreed to the covenants and conditions contained herein, the parties have signed this letter agreement this 13th day of January, 1997. ARGOSY GAMING COMPANY BOARD OF DIRECTORS By /s/ William F. Cellini /s/ J. Thomas Long ------------------------------- ------------------------------------ William F. Cellini J. Thomas Long EX-13 3 EXHIBIT 13 ARGOSY [LOGO] GAMING COMPANY 219 Piasa Street Alton, Illinois 62002-6232 BUILDING STRENGTH 219 Piasa Alton, IL 62002-6232 1996 Annual Report Est. 1991 Annual year ending 123196 Riverside, Missouri Alton, IL - Riverside, MO - Sioux City, IA - Baton Rouge, LA - Lawrenceburg, IN - -------------------------------------------------------------------------------- RIVERSIDE, MISSOURI [PHOTO] AN 85,000-SQUARE-FOOT LAND-BASED ENTERTAINMENT PAVILION AND CONFERENCE CENTER, COMPLETED IN EARLY 1996, REPRESENTS A MAJOR INVESTMENT IN THE ARGOSY CASINO AT RIVERSIDE. FULL STEAM AHEAD WITH REDEVELOPMENT AND REVITALIZATION OF THE HISTORIC DISTRICT, THE BELLE OF BATON ROUGE AT CATFISH TOWN IS EMERGING AS ONE OF THE LARGEST ENTERTAINMENT AND RIVERBOAT CASINO COMPLEXES. [PHOTO] BATON ROUGE, LOUISIANA - -------------------------------------------------------------------------------- [ page 1: Letter to Shareholders | page 13: Blueprint for Strength | page 18: Financial Section | Inside Back Cover: Casino Locations ] 62002-6232 Letter to Shareholders 219 Piasa Alton, IL 62002-6232 Alton, IL - Riverside, MO - Sioux City, IA - Baton Rouge, LA - Lawrenceburg, IN Est. 1991 ARGOSY GAMING COMPANY Annual year ending 123196 Pg.01 WE SELECTED THE CONCEPT OF "BUILDING STRENGTH" AS THE THEME FOR THIS YEAR'S ANNUAL REPORT TO SHAREHOLDERS AS AN ACCURATE DESCRIPTION OF THE PAST YEAR FOR ARGOSY GAMING COMPANY. DURING 1996, THE COMPANY BUILT ON THE MOMENTUM OF OUR EXPANDED OPERATIONS, STRENGTHENED OUR REPUTATION AS A LEADING RIVERBOAT CASINO DEVELOPER AND SOLIDIFIED OUR CAPITAL STRUCTURE. OUR OPERATING RESULTS IN 1996, HOWEVER, DID NOT MEET OUR EXPECTATIONS. For the year ended December 31, 1996, Argosy reported decreased net revenues of $244.8 million, compared with net revenues of $252.7 million the prior year. Casino revenue, which excludes admissions, food and beverage, and promotional allowances at our various properties, decreased to $228.4 million last year, compared with casino revenue of $237.6 million the year before. Our financial results for fiscal 1996 were diminished by a combination of factors, primarily delays in opening our Indiana casino and competition in existing markets. Casino revenues at our Alton, Illinois; Riverside, Missouri; and Sioux City, Iowa, properties were inhibited by the effects of significant capacity increases from new competitors. To respond to the challenges of competing casino projects, which in certain cases cost in excess of three times our projects, we focused on building stronger customer relationships. Specifically, we increased selling and direct marketing expenses to confront intensified competition and promotions offered by competitors. Argosy incurred a net loss for the 1996 year of $24.8 million, or $1.02 per share, compared with net income of $7.0 million, or $0.29 per share, the prior year. Earnings before interest, taxes, depreciation and amortization (EBITDA), a widely used measure of operating performance in the gaming industry, decreased to $11.7 million in 1996, compared with EBITDA of $48.1 million the previous year. The decline in net income was affected significantly by increased interest expense to fund the "jewel" of our Pg.02 - -------------------------------------------------------------------------------- Skilled marine professionals [PHOTO] Mediterranean seaport decor [PHOTO] Live sporting events [PHOTO] Roulette tables [PHOTO] operations -- Lawrenceburg, Indiana -- and from extraordinary items, one-time charges, pre-opening costs and referendum expenses which had an aggregate after-tax impact on net income of $9.3 million, or $0.38 per share. These charges related to the early extinguishment of a bank credit facility, the write-off of lease fees and related capitalized leasehold improvements at Riverside, pre-opening costs in conjunction with the Lawrenceburg project, and expenses associated with the riverboat casino referendum in Baton Rouge, Louisiana. Before the effect of these charges, EBITDA was $29.5 million and the net loss was $15.5 million for the year. While the Company's financial results were disappointing, we made substantial progress in other key areas. We began the year firmly focused on specific objectives for Argosy --implementing a more permanent capital structure, shifting to the New York Stock Exchange, completing the permanent land-based support facility at Riverside and the entertainment facility at Baton Rouge, defending a gaming referendum in Louisiana and opening Phase I of our Lawrenceburg property. We have successfully achieved each of these goals. Last year, we put in place a more permanent capital structure that will help ensure the Company's long-term viability. The key component of this structure was the private placement of $235 million of 13 1/4 percent first mortgage notes due 2004. Proceeds from this offering are Pg.03 - -------------------------------------------------------------------------------- Slot machines [PHOTO] Casual buffet dining [PHOTO] Friendly hospitality [PHOTO] Land-based attractions [PHOTO] being used to fund our share of the construction costs at the Lawrenceburg property, to repay all outstanding indebtedness on our revolving secured line of credit, and for general corporate purposes. During 1996, the Company's stock and notes were listed and began trading on the New York Stock Exchange (NYSE). At midyear, the Company's common stock and 12 percent convertible subordinated notes began trading under the symbols "AGY" and "AGY 01," respectively, followed in mid-October by the 13 1/4 percent first mortgage notes under the "AGY 04" symbol. While we had been well served by the Nasdaq Stock Market and market makers in the financial community, we concluded that listing our securities on the NYSE would better serve the interests of the holders of our stock and notes. In late 1996, we solidified our position as a major multi-jurisdictional developer, owner and operator of riverboat casinos and related entertainment facilities when we opened the Phase I Lawrenceburg casino. And we further enhanced the Company's leadership in an industry underscored by increasing public acceptance and intensifying competition. The U.S. casino entertainment industry continues its pattern of steady growth, with total revenue more than doubling in the last five years to an estimated $20.3 billion in 1995. During that same time frame, revenue of so-called Pg.04 ----- BUILDING STRENGTH new casino destinations, which include riverboat casino operations such as Argosy's, grew from $1.0 billion to $9.6 billion. This consistent revenue growth reflects growing acceptance of gaming by the American public. Today, acceptance of casino entertainment is stronger than ever with a significant majority of over nine out of 10 adults stating that casino gaming is an acceptable form of entertainment for themselves or others. As acceptance and accessibility increase, so do market penetration and number of visits. In 1995, nearly one-third of U.S. households visited a casino, and the total number of casino visits rose to 154 million, up 23 percent over the prior year. Household visits to new casino destinations, including riverboat casinos, jumped to 90 million in 1995 -- a 38 percent increase over the year before. Today, casino visits trail only major sporting events in total attendance, and exceed amusement parks, and Broadway/touring shows and symphony concerts. Gaming households are visiting more frequently, as well, with an average of 4.5 trips to casinos in 1995 -- an increase of 67 percent since 1990. Of particular significance to Argosy, the greatest share of casino visits continues to be claimed by the North Central and South census regions, as additional casinos open in America's heartland. These two regions -- home to all five of the Company's properties -- accounted for 77 percent of industry attendance growth in 1995. Against this backdrop, Argosy continues to build on its presence in the industry as a leading multi-jurisdictional operator -- and remains the only gaming company licensed in all cruising states. The Company believes that this diversification strategy of operating in multiple jurisdictions reduces its exposure to risk and mitigates the impact of external forces within any given market, such as weather and the regulatory climate. During 1996, Argosy served 8.1 million customers aboard its five properties, drawing from a collective Pg.05 ------ 1996 ANNUAL REPORT population base estimated at 14.9 million. These operations offer a combined passenger capacity of 7,276, 5,407 gaming positions and 119,693 square feet of gaming space. A more detailed statistical breakdown of each property is contained in the foldout overview beginning on page 13. ALTON, ILLINOIS -- The Alton Belle Casino, the first gaming facility in the St. Louis marketplace and in the state of Illinois, observed its fifth anniversary in September 1996. This longevity has enabled the property to develop a solid base of repeat customers, allowing our flagship operation to remain competitive despite mounting competition from larger gaming operations. Throughout 1996, the Alton Belle faced stiff competition from four other St. Louis metro area casinos. An additional competing casino complex, which will include a total of four dockside gaming vessels and approximately 120,000 square feet of gaming space, is scheduled to open in early 1997. To confront the heightened competition, the Alton Belle continues to bolster its marketing and promotional activities. The property is gaining recognition as an entertainment destination with the addition of well-known, Las Vegas-style performers including the Association, the Tokens and the Ozark Mountain Daredevils. Another effort aimed at building food and beverage sales is the tropical-themed Argosy Island dockside summer entertainment venue, which opened in the spring of 1996 and quickly became a popular area night spot. Renamed Eagles View Lodge, the original open-air facility has been extended to a wintertime venue. In addition, we are continuing a remodeling of the casino which will help us remain competitive. RIVERSIDE, MISSOURI -- In mid-January 1996, we opened our new 85,000-square-foot entertainment pavilion and conference center at the Argosy Casino at Riverside. Featuring a Mediterranean seaport decor, the pavilion offers a variety of food and beverage service including fine dining, Pg.06 Fine dining [PHOTO] Fast-paced craps [PHOTO] Dockside development [PHOTO] Sports lounges [PHOTO] casual dining and entertainment, full-service buffet and coffee shop. The conference center provides five versatile conference and banquet rooms accommodating up to 600 persons, plus a boardroom with multi-media capabilities. This new facility, which also houses the property's administrative offices, is supported by garage and surface parking for over 2,000 vehicles. The new entertainment pavilion and conference center, together with a proposed 150-room hotel adjacent to the casino, are instrumental in our efforts to attract additional tourist business and build a local customer base. This is essential, since Kansas City ranks among the most competitive markets for its size in the country. In less than a year, the market has expanded from three operators and four casinos to five operators and seven casinos. As the only existing or planned casino in the western Kansas City metro area, our Riverside site continues to enjoy a distinct competitive advantage -- being located farther west on the Missouri River than other competing operations and more accessible to customers from Kansas. To strengthen this advantage, we are enhancing our reputation for service, plus increasing our marketing activities with monthly promotions and major sporting events including live professional boxing. The Argosy Casino at Riverside, which had operated as a dockside facility since August 1995, was granted permanent dockside status in mid-April 1996 by the Pg.07 Blackjack [PHOTO] Nightly live entertainment [PHOTO] Souvenir shopping [PHOTO] Prompt, courteous service [PHOTO] Missouri Gaming Commission. We subsequently moved the riverboat gaming vessel into a newly constructed mooring basin alongside the pavilion. Additionally, we continue to evaluate expansion opportunities at this property, including the possibility of adding a second dockside gaming facility, which would provide additional gaming positions and improve customer convenience with staggered boarding times. BATON ROUGE, LOUISIANA -- Our Baton Rouge property is quickly evolving into a multi-faceted food/beverage/entertainment/gaming facility. In April 1996, we completed the second phase of our Catfish Town historic district development project, adjacent to the Belle of Baton Rouge riverboat casino, with a new 50,000-square-foot, climate-controlled, five-story atrium festival center. As the city's newest attraction, the Argosy Festival Atrium is producing increased levels of food and beverage revenues from major events including concerts, festivals, sporting events, private parties, and corporate receptions and dinners. Also, we are proceeding with construction of the next phase of our Catfish Town project, an entertainment complex surrounding and enclosing the atrium with 150,000 square feet of leasable retail space. Initial tenants have committed to operating an array of entertainment concepts at the complex -- a New Orleans-style coffee house and wine bar, a microbrewery and sports bar, a restaurant featuring home cooking and Louisiana's largest bourbon bar, plus a variety of specialty kiosks. Pg.08 ------ BUILDING STRENGTH The broad entertainment appeal of the entire complex is helping build business for our gaming operations. The proposed development of a convention-style hotel would serve as an additional draw. These attractions will help the Belle of Baton Rouge meet competitive pressures from a riverboat casino in downtown Baton Rouge, as well as a nearby land-based Native American casino. Argosy's successful efforts to pass the riverboat gaming referendum eliminated the uncertainty surrounding our Louisiana property. In November 1996, voters of East Baton Rouge Parish, Louisiana, approved a proposition allowing riverboat gaming to continue in their parish. Had the voters defeated riverboat gaming, the Company would have been required to cease operations when our current gaming license expired in September 1999. SIOUX CITY, IOWA -- The Belle of Sioux City continues to operate in its relatively small niche market. The Company is the 70 percent general partner in this operation and, additionally, receives a management fee based on adjusted gross gaming revenues. Competition throughout the region intensified in early 1996 with the opening of two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska, market and with the expansion of the nearby Native American casino. The Company will focus its marketing strategy on attracting motor coach and local customers. During 1996, we completed the enhancement of our adjacent restaurant facilities with a buffet restaurant and steak house. LAWRENCEBURG, INDIANA -- Argosy is jointly developing what is expected to be America's largest riverboat casino and entertainment complex on the Ohio River in Lawrenceburg. The Company is the general partner and owns a 57.5 percent interest in the partnership. Years of intense effort came to a successful conclusion in late 1996 when we received a permit from the U.S. Army Corps of Engineers for a permanent site and were granted a gaming license by the Indiana Gaming Commission. Pg.09 ----- 1996 ANNUAL REPORT In mid-December 1996, we launched Phase I of operations at the Argosy Casino Lawrenceburg. A leased vessel, accommodating approximately 1,600 passengers, provides 20,559 square feet of gaming space and a total of 1,275 gaming positions on three levels. A newly renovated floating entertainment facility provides a site for ticketing, dining, beverage and other support services. In addition, we are utilizing off-site parking and shuttle-bus service to transport passengers between parking areas and our current facilities. In conjunction with the opening, we launched an aggressive marketing campaign aimed specifically at developing brand recognition and establishing a loyal customer base. With operations at Lawrenceburg up and running, we are moving ahead with the next phase of this massive casino and entertainment project. Phase II will include a 300-room luxury hotel; a 120,000-square-foot entertainment pavilion featuring restaurants, banquet and meeting rooms, sports bar and entertainment lounge, retail gift shops and kiosks; a total of 3,750 surface and garage parking spaces; and one of the largest riverboat casinos in America. Now under construction, this 408-foot by 100-foot gaming vessel, Argosy VI, will accommodate approximately 4,000 passengers, offer an estimated 2,800 gaming positions and dramatically increase the Company's total gaming space. The Lawrenceburg site has been widely considered the country's preeminent available riverboat gaming market and potentially among the most lucrative licenses in gaming. Situated just 15 miles from downtown Cincinnati, Ohio, our property draws from major population centers in three states -- Cincinnati, Columbus and Dayton, Ohio; Indianapolis, Indiana; and Louisville and Lexington, Kentucky -- with a combined population base of 7.0 million within 100 miles. We anticipate limited direct competition for this new property since Indiana law limits the total number of Pg.10 Popular gaming options [PHOTO] Big Six wheel [PHOTO] Authentic historic decor [PHOTO] World-class service [PHOTO] gaming licenses, including no more than five on the Ohio River and no more than one in any county. Our nearest current competitor is 20 minutes farther away from the primary market of Cincinnati. Furthermore, neither Ohio nor Kentucky currently permit casino gaming. As Argosy enters fiscal 1997, we anticipate a challenging year and have developed our strategic objectives for the months ahead. We will proceed aggressively with the construction of the second phase of Lawrenceburg, so that our shareholders may realize the full potential of this property. We expect the entertainment pavilion to open in December 1997. We will intensify our efforts to improve our operating performance and profitability by reducing costs and controlling expenses, at both our corporate offices and our casino properties. At Alton and Riverside, in particular, we must more effectively manage our operations to meet expected downsized revenues in order to minimize the effect of the new competition. We will confront the heightened competition in these two principal markets with stronger marketing, increased promotions and expanded entertainment. Also, we will evaluate the facilities required to remain competitive in those markets, including possibly adding a second casino at Riverside and expanding or further enhancing facilities at Alton. Pg.11 H. Steven Norton - President and Chief Operating Officer [PHOTO] Joseph G. Uram - Executive Vice President and Chief Financial Officer [PHOTO] Patsy S. Hubbard - Corporate Secretary [PHOTO] We will continue to explore opportunities for growth, in both existing and new markets. At year-end, we applied for a gaming license for a proposed site in Osceola, Iowa, approximately 40 minutes south of Des Moines. The proposed $70 million project would include in excess of 1,100 gaming positions. We will closely monitor potential regulatory revisions and their impact on our operations. The Missouri Gaming Commission, for instance, has recommended the removal of loss limits and simulated cruise schedules to the state legislature; if approved, the less restrictive regulations would affect the Kansas City and St. Louis markets. As we pursue our operational and financial objectives, we remain committed to our customers, our communities and our shareholders -- to offering customers the finest entertainment experience and value, to our active involvement in the communities where we operate, and to continue to strengthen the foundation of shareholder assets. We remain confident that our combination of dedication and hard work, careful planning and prudent investment will solidly position Argosy to continue building strength and gaining momentum. - -------------------------------------------------------------------------------- President and Chief Operating Officer H. STEVEN NORTON - --- --- Signature /s/ H. STEVEN NORTON - -------------------------------------------------------------------------------- February 24,1997 Pg.12 BLUEPRINT FOR STRENGTH 219 Piasa Alton, IL 62002-6232 Alton, IL - Riverside, MO - Sioux City, IA - Baton Rouge, LA - Lawrenceburg, IN Est. 1991 ARGOSY GAMING COMPANY Annual year ending 123196 Pg.13 ARGOSY VI CONSTRUCTION Currently under construction and expected to be operating no later than December 1997, the Argosy Casino Lawrenceburg will enable the Company to take full advantage of what is widely considered to be the nation s preeminent available riverboat gaming market.
- ---------------------------------------------------------------------------------------------------------------------------- View View Item Item Item GAMING VESSEL FRONT ELEVATION LAUNCH DATE VESSEL SIZE PASSENGERS - ---------------------------------------------------------------------------------------------------------------------------- By December 1997 408' x 100' 4,000 Capacity (est.) Vessel Sq. Ft. [GRAPHIC] The vessel will be Three-level side-wheel Will increase fleet ARGOSY VI 92,000 one of the largest riverboat will capture capacity by 33 percent. Location riverboat casinos in the feel of the 1800s. LAWRENCEBURG, IN the United States. - ---------------------------------------------------------------------------------------------------------------------------- View Item Item Item SIDE ELEVATION GAMING SQ. FT. GAMING POSITIONS EMPLOYEES - ---------------------------------------------------------------------------------------------------------------------------- 74,300 2,800 (est.) 1,400 (est.) Will represent a Phase II of the devel- 28 percent increase opment could create [GRAPHIC] for the fleet. over 400 additional new jobs. - ---------------------------------------------------------------------------------------------------------------------------- View Item FIRST LEVEL FOOTPRINT ADDITIONAL FACILITIES - ---------------------------------------------------------------------------------------------------------------------------- Already under construction, the land-based entertainment pavilion will [GRAPHIC] feature a variety of dining, entertainment and shopping attractions. - ----------------------------------------------------------------------------------------------------------------------------
Scale 1" = 150' EXCITING PLANS FOR PHASE II OF THE LAWRENCEBURG CASINO/ENTERTAINMENT COMPLEX INCLUDE A 300-ROOM LUXURY HOTEL; A 120,000-SQUARE-FOOT ENTERTAINMENT PAVILION FEATURING RESTAURANTS, BANQUET AND MEETING ROOMS, SPORTS/ENTERTAINMENT LOUNGE, RETAIL GIFT SHOPS AND KIOSKS; 3,750 SURFACE AND GARAGE PARKING SPACES -- AND ONE OF THE LARGEST RIVERBOAT CASINOS IN AMERICA, LONGER THAN A FOOTBALL FIELD. Pg. 14 VESSEL OPERATIONS DATA Argosy is strengthening its presence in the U.S. gaming industry as the only gaming company licensed in all cruising states -- a diversification strategy aimed at reducing exposure to risk and mitigating the impact of external forces within a given market.
- -------------------------------------------------------------------------------------------------------------------------------- View View Item Item GAMING VESSEL FIRST LEVEL FOOTPRINT LAUNCH DATE VESSEL SIZE - -------------------------------------------------------------------------------------------------------------------------------- September 1991 222' x 66' Vessel Sq. Ft. ARGOSY II 35,174 [GRAPHIC] First gaming facility in the Three-deck, contemporary Location St. Louis market and in styled cruise liner replaced ALTON, IL the state of Illinois. original Argosy I. - -------------------------------------------------------------------------------------------------------------------------------- Vessel Sq. Ft. June 1994 246' x 77' ARGOSY IV 50,033 [GRAPHIC] First gaming facility to Riverboat styled as a Location open in the Kansas City turn-of-the-century RIVERSIDE, MO market. paddle-wheel steamboat. - -------------------------------------------------------------------------------------------------------------------------------- Vessel Sq. Ft. September 1994 268' x 77' ARGOSY III 46,177 [GRAPHIC] First riverboat gaming Three-level, antebellum Location facility in the Baton Rouge themed riverboat. BATON ROUGE, LA market. - -------------------------------------------------------------------------------------------------------------------------------- Vessel Sq. Ft. October 1994 220' x 46' ARGOSY V 26,845 [GRAPHIC] Continues to be the only Three-level, historic themed Location riverboat gaming facility stern-wheel riverboat. SIOUX CITY, IA in Sioux City. - -------------------------------------------------------------------------------------------------------------------------------- Vessel Sq. Ft. December 1996 367' x 59' TEMPORARY 40,648 [GRAPHIC] Temporary vessel being Three-level, turn-of-the- Location leased until permanent century paddle-wheel LAWRENCEBURG, IN site opens. steamboat. - -------------------------------------------------------------------------------------------------------------------------------- Scale 1"= 150'
Pg. 15 CASINO/VENUE OPERATIONS DATA Argosy continues to build strength and gain momentum as a major multi-jurisdictional developer, owner and operator of riverboat casinos and related entertainment facilities. Currently, the Company operates gaming facilities in distinct markets in five states.
- ---------------------------------------------------------------------------------------------------------------------------------- Item Item Item Item VENUE PASSENGERS GAMING SQ. FT. GAMING POSITIONS - ---------------------------------------------------------------------------------------------------------------------------------- Venue Total ARGOSY II - THE ALTON BELLE CASINO 1,321 Capacity 22,800 953 [GRAPHIC] Boarded 2.3 million Includes 652 slot machines passengers last year. and 39 table games. - ---------------------------------------------------------------------------------------------------------------------------------- Venue Total 1,600 Capacity 35,863 1,437 ARGOSY IV - THE ARGOSY CASINO AT RIVERSIDE In 1996, hosted Includes 955 slot machines [GRAPHIC] 3.6 million customers. and 60 table games. - ---------------------------------------------------------------------------------------------------------------------------------- Venue Total 1,555 Capacity 27,971 1,122 ARGOSY III - THE BELLE OF BATON ROUGE More than 1.3 million Includes 774 slot machines [GRAPHIC] guests were served and 43 table games. last year. - ---------------------------------------------------------------------------------------------------------------------------------- Venue Total 1,200 Capacity 12,500 620 ARGOSY V - THE BELLE OF SIOUX CITY Boarded a total of Includes 399 slot machines [GRAPHIC] 0.8 million passengers and 28 table games. during 1996. - ---------------------------------------------------------------------------------------------------------------------------------- Venue Total 1,600 Capacity 20,559 1,275 ARGOSY - TEMPORARY VESSEL Boarded 0.1 million pas- Includes 869 slot machines [GRAPHIC] sengers in December and 52 table games. after casino opened December 13, 1996. - ---------------------------------------------------------------------------------------------------------------------------------- Scale in millions Total Gaming Sq. Ft. 1" = 150' Number of Passengers 119,693 Growth in Gaming Positions [GRAPH] [GRAPH] - Alton - Riverside - Existing Venues - Baton Rouge - Sioux City - Temporary Lawrenceburg Venue - Lawrenceburg - Permanent Lawrenceburg Venue Pg. 16 - ------------------------------------------------------------------------------------------------------------------------------------ Item Item Item Item MARKET AREAS POPULATION EMPLOYEES ADDITIONAL FACILITIES - ------------------------------------------------------------------------------------------------------------------------------------ Metro Area 100-Mile Radius 2.5 million 3.7 million 816 A 37,000-square-foot, three-level floating [MAP] entertainment pavilion features a sports/ Located on the Mississippi River Full-time employees entertainment lounge, buffet and fine dining 100-Mile Radius approximately 20 miles from 719 restaurants, food court, conference facilities downtown St. Louis; draws from and the market's only off-track betting parlor. Missouri and Illinois. Part-time employees 97 - ------------------------------------------------------------------------------------------------------------------------------------ Metro Area 100-Mile Radius 100-Mile Radius 1.6 million 2.5 million 876 A new 85,000-square-foot land-based entertainment pavilion offers specialty [MAP] Situated five miles from Full-time employees and buffet restaurants, sports/entertainment downtown Kansas City on 760 lounge, and 14,000 square feet of banquet/ the Missouri River; draws conference facilities; a 150-room hotel is from Kansas and Missouri. Part-time employees under consideration for development. 116 - ------------------------------------------------------------------------------------------------------------------------------------ Metro Area 100-Mile Radius* 0.5 million 0.7 million 724 Adjacent Catfish Town development includes [MAP] a 50,000-square-foot festival atrium, Located on the Mississippi River Full-time employees entertainment/sports lounge, steak house and in downtown Baton Rouge, 590 buffet/coffee shop, and conference facilities; Louisiana's state capital. additional retail space and a convention-style Part-time employees hotel are being considered for development. 134 - ------------------------------------------------------------------------------------------------------------------------------------ Metro Area 100-Mile Radius 0.1 million 1.0 million 359 An adjacent support facility features buffet 100-Mile Radius dining and steak house, bar and gift shop. Situated in downtown Sioux City Full-time employees [MAP] on the Missouri River; draws 317 from Iowa, Nebraska and South Dakota. Part-time employees 42 - ------------------------------------------------------------------------------------------------------------------------------------ Metro Area 100-Mile Radius 1.6 million 7.0 million 955 As part of the initial phase of operations, [MAP] a newly renovated entertainment facility is Located approximately 15 miles Full-time employees being utilized as a site for ticketing, dining, 100-Mile Radius from Cincinnati on the Ohio 941 beverage and other support services. River; draws from Indiana, Kentucky and Ohio. Part-time employees 14 - ------------------------------------------------------------------------------------------------------------------------------------ in millions Population Base Number of Employees [GRAPH] [GRAPH] - Metro Area - 100-Mile Radius* - Alton - Riverside * 40-mile radius to avoid inclusion - Baton Rouge - Sioux City of New Orleans area - Lawrenceburg
Pg. 17 HISTORICAL FINANCIAL DATA During 1996, Argosy built on the momentum of its expanded operations, strengthened its reputation as a leading casino developer and solidified its capital structure. Operating results for the year, however, did not meet the Company's expectations. - -------------------------------------------------------------------------------- $ in millions TOTAL REVENUES [GRAPH] Argosy's total revenues, including casino revenues, admissions, food, beverage and other, decreased to $260.4 million in 1996, primarily due to increased competition in the Kansas City and St. Louis markets. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $ in millions CASINO REVENUES [GRAPH] The decline in the Company's casino revenues in fiscal 1996, resulting from new competition, was partially offset by the Phase I opening of the Lawrenceburg casino. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $ in millions TOTAL ASSETS [GRAPH] Argosy's total assets have grown dramatically, up 72 percent in fiscal 1996 to $532.2 million, primarily reflecting major investments in the Baton Rouge, Riverside and Lawrenceburg properties. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $ in millions STOCKHOLDERS' EQUITY [GRAPH] Total stockholders' equity decreased nearly 26 percent to $72.7 million as a result of the net loss in 1996 -- the Company's first year to post a loss. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $ in millions EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION & AMORTIZATION (EBITDA) [GRAPH] EBITDA decreased $36.4 million. Incremental 1996 pre-opening, referendum and one-time charges amounted to $12.1 million of this change over the 1995 amount. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- per share amounts NET INCOME (LOSS) & PRO FORMA NET INCOME [GRAPH] Excluding 1996 pre-opening, referendum and one-time charges of $0.38 per share, the Company's net loss was $0.64. - - Pro Forma Net Income (for change in tax status) - - Net Income (Loss) - -------------------------------------------------------------------------------- Pg. 18 Argosy Gaming Company ------- FINANCIAL HIGHLIGHTS
Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Income statement data: Net revenues $ 244,817 $ 252,691 $ 153,045 $ 67,525 $ 58,019 Income (Loss) from operations (10,751) 27,662 22,994 14,327 23,434 Net income (loss) (24,839) 6,953 9,635 10,825 15,214 Net income (loss) per share (1.02) 0.29 0.40 Common shares outstanding 24,333,333 24,333,333 24,333,333 - ---------------------------------------------------------------------------------------------------------------------------------- Pro forma net income data (unaudited):(1) Pro forma net income (loss) 5,712 5,393 9,105 7,414 Pro forma net income per share 0.23 0.22 0.38 0.36 Pro forma, shares outstanding 24,333,333 24,333,333 23,763,513 20,551,798 - ---------------------------------------------------------------------------------------------------------------------------------- Balance sheet data (at end of period): Total assets 532,159 309,882 232,831 94,635 21,022 Long-term debt, including current maturities 380,208 169,702 115,431 4,332 4,693 Total stockholders' equity 72,701 97,540 90,587 80,952 2,812 - ----------------------------------------------------------------------------------------------------------------------------------
(1) From their inception until a reorganization that was effected on February 25, 1993, certain predecessor entities of the Company elected to be treated as S-Corporations under the Internal Revenue Code and were not generally subject to corporate income taxes. The pro forma net income amount for the years ended December 31, 1992 and 1993 has been determined assuming the reorganization had occurred on January 1, 1992, resulting in the Company being treated as a C-Corporation for tax purposes as of that date and to reflect the use of a portion of the net proceeds of the Company's initial public offering to retire debt. The pro forma tax provision for 1993 has been computed using an effective tax rate of 39 percent. The pro forma tax provision for 1992 has been computed using an effective tax rate of 51 percent, which differs from the statutory rate principally due to an assumed difference between book and tax treatment of amortization of the $8.5 million accommodation fee paid to a stockholder of a predecessor entity of the Company. In addition, pro forma net income per share for the years ended December 31, 1995 and 1994 reflects the Company's June 7, 1995 acquisition of Jazz Enterprises, Inc. (the "Jazz Acquisition") as if the Jazz Acquisition had occurred on January 1, 1994. See Note 11 of the Notes to Consolidated Financial Statements. Pg.19 1996 FINANCIAL REVIEW - -------------------------------------------------------------------------------- [ page 21: Management's Discussion and Analysis of Financial Condition and Results of Operations | page 30: Consolidated Financial Statements ] [ page 35: Notes to Consolidated Financial Statements | page 47: Report of Independent Auditors | page 48: Additional Corporate Information ] Pg.20 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company opened its first riverboat casino, the Alton Belle Casino, in Alton, Illinois in September 1991. Subsequently, the Company opened the Argosy Casino in Riverside, Missouri in June 1994; the Belle of Baton Rouge in Baton Rouge, Louisiana in September 1994; and the Belle of Sioux City in Sioux City, Iowa in October 1994. In addition, the Company, through its 57.5% equity interest in Indiana Gaming Company, L.P., opened a temporary casino in Lawrenceburg, Indiana on December 10, 1996 and expects to open the permanent gaming facility in December 1997. The anticipated opening date of the permanent Lawrenceburg facility is a forward looking statement that involves certain risk and uncertainties and there can be no assurance that the projected opening date will be met, as the opening is subject to numerous conditions, including licensing, permitting and construction. The results of operations for the year ended December 31, 1994 reflect a full year of operations of the Alton Belle casino, and reflect operations from the Argosy Casino in Riverside, Belle of Baton Rouge and Belle of Sioux City from their respective opening dates. The results of operations for the years ended December 31, 1995 and 1996 reflect full years of operations for each of the Company's existing gaming properties, except that 1996 reflects the operations of the Lawrenceburg casino from December 10, 1996 through December 31, 1996. The Company's results of operations for the year ended December 31, 1996 were adversely affected by increased competition at its Alton, Riverside and Sioux City properties, and the Company expects to face further increased competition in the St. Louis and Kansas City areas. The increased competition has resulted in the Company reporting decreased revenues at its Alton and Riverside properties in 1996 and an overall increase in operating expenses as it expanded its operations at each property in response to competition. The Company believes that it will continue to be difficult to sustain historical levels of operating revenues and profitability at these properties. Increasing competitive pressures have also resulted in the Company eliminating, in January 1996, admissions fees at all of its gaming operations, except Lawrenceburg. In addition, the Company is incurring significant costs and capital expenditures in developing the Lawrenceburg casino project. These increased costs, competitive pressures on revenues and the increased interest expense associated with the issuance, in June 1996, of $235 million of First Mortgage Notes ("Mortgage Notes"), will continue to adversely affect the Company's results of operations. The Company is in a net operating loss carryforward position at December 31, 1996. Should additional operating losses be generated in 1997, the Company may be precluded, under the provisions of SFAS No. 109, from recording a tax benefit on such losses. 21 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATIONAL INFORMATION The following table highlights the results of operations for the Company's operating subsidiaries (amounts in thousands):
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994(7) ----------- -------- --------- GROSS REVENUES Alton Belle Casino . . . . . . . . . . . . . . . $ 80,186 $ 89,262 $104,038 Argosy Casino Riverside. . . . . . . . . . . . . 95,295 106,946 37,224 Belle of Baton Rouge Casino. . . . . . . . . . . 58,648 53,371 20,976 Belle of Sioux City Casino . . . . . . . . . . . 20,636 22,500 Argosy Casino Lawrenceburg . . . . . . . . . . . 4,873 ---------- -------- -------- Total Properties. . . . . . . . . . . . . . . . $ 259,638 $272,079 $162,238 ---------- -------- -------- ---------- -------- -------- NET REVENUES Alton Belle Casino . . . . . . . . . . . . . . . $ 77,933 $ 85,992 $ 96,983 Argosy Casino Riverside. . . . . . . . . . . . . 88,473 94,058 35,351 Belle of Baton Rouge Casino. . . . . . . . . . . 53,420 49,805 20,319 Belle of Sioux City Casino . . . . . . . . . . . 19,887 21,994 Argosy Casino Lawrenceburg . . . . . . . . . . . 4,412 ---------- -------- -------- Total Properties. . . . . . . . . . . . . . . . $ 244,125 $251,849 $152,653 ---------- -------- -------- ---------- -------- -------- INCOME FROM OPERATIONS(1) Alton Belle Casino . . . . . . . . . . . . . . . $ 12,240 $ 22,446 $ 28,817 Argosy Casino Riverside(3) . . . . . . . . . . . 9,410 22,057 2,472 Belle of Baton Rouge Casino(4),(5) . . . . . . . 3,507 2,875 1,962 Belle of Sioux City Casino . . . . . . . . . . . 295 3,137 Argosy Casino Lawrenceburg(6). . . . . . . . . . 334 ---------- -------- -------- Total Properties . . . . . . . . . . . . . . . $ 25,786 $ 50,515 $ 33,251 ---------- -------- -------- ---------- -------- -------- EBITDA(1),(2) Alton Belle Casino . . . . . . . . . . . . . . . $ 16,446 $ 26,734 $ 32,728 Argosy Casino Riverside(3) . . . . . . . . . . . 16,134 29,452 6,450 Belle of Baton Rouge Casino(4),(5) . . . . . . . 9,151 8,305 3,113 Belle of Sioux City Casino . . . . . . . . . . . 1,141 3,610 Argosy Casino Lawrenceburg(6). . . . . . . . . . 712 ---------- -------- -------- Total Properties. . . . . . . . . . . . . . . . $ 43,584 $ 68,101 $ 42,291 ---------- -------- -------- ---------- -------- --------
(1) Income from operations and EBITDA are presented before consideration of any management fees paid to the Company and in the case of the Belle of Sioux City and the Argosy Casino Lawrenceburg before the 30% and 42.5% minority interests, respectively. (2) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization and is presented before any management fees paid to Argosy. EBITDA should not be construed as an alternative to operating income, or net income (as determined in accordance with generally accepted accounting principles), as an indicator of the Company's operating performance, or as an alternative to cash flows generated by operating, investing and financing activities (as determined in accordance with generally accepted accounting principles) as an indicator of cash flow or a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it is a widely used measure of operating performance in the gaming industry and for companies with a significant amount of 22 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) depreciation and amortization. The Company has other significant uses of cash flows, including interest and capital expenditures, which are not reflected in EBITDA. (3) Excludes $3,508 for the year ended December 31, 1996 related to lease termination costs in connection with assets formerly used at the Riverside temporary facility. (4) Excludes operating loss of approximately $3,677 and $1,212 for the years ended December 31, 1996, and 1995, respectively, primarily depreciation, amortization and operating expenses related to the Catfish Town land-based development in Baton Rouge. (5) Excludes operating expenses of $1,347 for the year ended December 31, 1996 related to referendum costs. (6) Excludes pre-opening expenses of $10,979 for the year ended December 31, 1996. (7) The operations of the Belle of Sioux City have not been included in 1994 as they are not material. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 CASINO--Casino revenues for the year ended December 31, 1996 decreased to $228.4 million from $237.6 million for the year ended December 31, 1995. Alton casino revenues decreased from $81.4 million to $72.4 million due to severe weather conditions in January and February 1996, and the impact of increased competition. This decrease is also attributed to flooding in 1995 as Alton benefitted when two competing riverboat casinos were temporarily closed in the St. Louis area. Riverside casino revenues decreased to $82.2 million from $86.4 million due to additional competition in the Kansas City market, which was partially offset by the opening of the Company's permanent land-based entertainment pavilion on January 15, 1996. Baton Rouge casino revenues increased $2.6 million from $48.4 million to $51.0 million. Sioux City casino revenues decreased $2.1 million to $18.8 million due to the effects of increased competition from two riverboat casinos which opened in January 1996, and from expanded operations at nearby Native American casinos. These decreases were partially offset by $3.9 million of casino revenues in Lawrenceburg. Casino expenses increased to $121.0 million for the year ended December 31, 1996 compared to $117.3 million for the year ended December 31, 1995 due primarily to $2.1 million of casino expenses in Lawrenceburg and $1.0 million of increased admission taxes in Riverside. In addition, admission taxes increased by $1.25 per passenger in Baton Rouge on October 1, 1996. ADMISSIONS--Admissions revenue (net of complimentary admissions) decreased from $8.0 million for the year ended December 31, 1995 to $2.6 million for the year ended December 31, 1996. This decrease is due to the Company's elimination of admission fees in January 1996 in Riverside in reaction to competitive pressures in the Kansas City market. FOOD, BEVERAGE AND OTHER--Food, beverage and other revenues increased $10.7 million to $29.2 million for the year ended December 31, 1996 primarily due to increased food, beverage and other sales at the expanded Riverside and Baton Rouge facilities. Riverside revenues increased from $5.2 million to $11.1 million 23 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) while Baton Rouge revenues increased from $4.9 million to $7.6 million. Food, beverage and other revenues remained stable with the year ended December 31, 1995 in Alton and Sioux City. Food beverage and other net profit margin improved $4.1 million to $5.4 million for the year ended December 31, 1996 due primarily to improved operating efficiencies in the Company's food and beverage operations. OTHER OPERATING EXPENSES--Other operating expenses increased $3.5 million to $19.1 million for the year ended December 31, 1996. This increase is primarily due to the opening of the permanent land based entertainment pavilion at Riverside, the opening of the Catfish Town development atrium in Baton Rouge, the addition of expanded entertainment facilities in Sioux City, and the additional services required to operate during the severe weather conditions experienced in January and February 1996 at the Alton, Riverside and Sioux City casinos. SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative expenses increased from $47.5 million in 1995 to $52.0 million for the year ended December 31, 1996. Selling and marketing expenses increased $3.6 million due primarily to increases in advertising and promotional expenses necessitated by increased competition in Alton and Riverside, and for the opening of the Riverside permanent facility. Additionally, general and administrative expenses increased as the Company recorded a charge in 1996 of approximately $1.5 million, for professional and other fees related to its response to a Marion County, Indiana grand jury document subpoena and the related termination of a private placement of first mortgage notes. These increases were offset somewhat by the extinguishment of lease fees in connection with the temporary site in Riverside. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $2.0 million from $20.4 million for the year ended December 31, 1995 to $22.4 million for the year ended December 31, 1996. This increase is primarily due to increased depreciation in Riverside in connection with the Company's land-based entertainment pavilion which opened on January 15, 1996 at an approximate cost of $45 million, and increased depreciation at the Catfish Town development in Baton Rouge. DEVELOPMENT AND PREOPENING COSTS--Development and preopening costs increased from $3.4 million for the year ended December 31, 1995 to $12.4 million for the year ended December 31, 1996. The increase is primarily due to expenses related to developing the casino in Lawrenceburg, Indiana, which opened at its temporary site on December 10, 1996. INTEREST EXPENSE--Net interest expense increased from $14.3 million in 1995 to $30.6 million for the year ended December 31, 1996. The increase is attributable to interest expense on the increased borrowings under the $100 million line of credit, which was used to fund the Company's expansion and development program through June 5, 1996, and interest expense related to the $235 million First Mortgage Notes issued June 5, 1996. NET INCOME (LOSS)--Net income decreased from $7.0 million for the year ended December 31, 1995 to a net loss of $24.8 million for the year ended 1996 primarily for the reasons discussed above. In addition the Company recorded a pretax charge of $3.5 million related to lease termination costs in connection with assets formerly used at its temporary facility in Riverside. Further, the Company recorded an extraordinary loss of $.9 million (net of tax) related to the write off of deferred finance costs associated with the early extinguishment of its line of credit in 1996 and a $1.3 million charge related to referendum costs in Baton Rouge. In 1995, the 24 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Company recorded a pretax charge of approximately $3.5 million primarily related to loans made pursuant to a lease option related to the development of a downtown St. Louis casino site. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Consolidated net revenues rose from $153.0 million for the year ended December 31, 1994 to $252.7 million for the year ended December 31, 1995. Net revenues in Alton decreased from $97.0 million to $86.0 million due primarily to the full year effect of increased competition in the St. Louis market beginning in May 1994 and by the addition of slot machines in Missouri casinos in December 1994. Additionally, due to competitive circumstances the Company eliminated its admission fees in Alton in November 1994. Admission revenue in Alton was $7.1 million during the year ended December 31, 1994. Net revenues in Riverside increased $58.7 million to $94.1 million, as the casino was open for a full year with full scale gaming as opposed to only offering games of skill in 1994. Net revenues contributed by Baton Rouge and Sioux City were $49.8 million and $22.0 million, respectively, for the year ended December 31, 1995 versus $20.3 million in 1994. CASINO -- Casino revenues for the year ended December 31, 1995 increased to $237.6 million from $138.4 million for the year ended December 31, 1994. Riverside, Baton Rouge and Sioux City contributed casino revenues of $86.4 million, $48.9 million and $20.9 million, respectively, for the year ended December 31, 1995 verses a combined $49.6 million in 1994. Alton casino revenues decreased from $88.9 million to $81.4 million due to increased competition in the St. Louis area. Casino and other operating expenses increased approximately $59.2 million over 1994 due to the operating expenses of the Riverside, Baton Rouge and Sioux City casinos. Gaming taxes and admission taxes increased $18.9 million and $8.8 million, respectively, which is proportionate with the increases in casino revenues and customer boardings. Casino and other operating expenses were $17.5 million and $7.6 million in Baton Rouge and Sioux City, respectively for the year ended December 31, 1995. Casino operating expenses at Riverside increased $11.7 million to $22.7 million as a result of the casino being open for a full year in 1995 versus six months in 1994. FOOD, BEVERAGE AND OTHER -- Food, beverage and other revenues increased $6.5 million over the prior year to $18.5 million. Alton's food, beverage and other revenues remained relatively constant at $7.8 million as compared to $8.1 million for the year ended December 31, 1994. Riverside, Baton Rouge and Sioux City generated $5.2 million, $3.5 million and $1.6 million, respectively, for the year ended December 31, 1995 verses a combined $3.5 million in 1994. Food, beverage and other net profit margin improved from $0.2 million for the year ended December 31, 1994 to $1.3 million for the year ended December 31, 1995. SELLING, GENERAL AND ADMINISTRATIVE -- Selling, general and administrative expenses increased $22.6 million to $47.5 million for the year ended December 31, 1995. The increase is due to the Company's operation of three additional casinos for a full year in 1995 and other costs associated with the Company's substantial growth during this period. DEPRECIATION AND AMORTIZATION -- Depreciation and amortization expense increased from $9.8 million to $20.4 million primarily as a result of opening the three new casinos in 1994. 25 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DEVELOPMENT, PREOPENING AND RELATED COSTS -- Development and preopening costs decreased from $9.8 million to $3.4 million for the year ended December 31, 1995 due primarily to costs related to the opening of the three new casinos in 1994. Preopening costs for the year ended December 31, 1994 for Riverside and Baton Rouge were $2.5 million and $2.6 million, respectively. Additionally during the year ended December 31, 1995 the Company recorded a $3.5 million charge primarily related to loans made pursuant to a lease option related to the development of a downtown St. Louis riverside casino site. INTEREST EXPENSE -- Net interest expense increased to $14.3 million for the year ended December 31, 1995 compared to $7.1 million for the year ended December 31, 1994. The primary reason for the increase was the issuance of the 12% Convertible Subordinated Notes in May 1994 and increased borrowings on the line of credit in the year ended December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES In the year ended December 31, 1996, the Company used cash flows from operating activities of $7.5 million, compared to generating cash flow of $49.6 million in 1995. The decrease in cash flow is primarily attributed to decreased operating income, principally at its Riverside and Alton facilities, increased interest expense, and further, significantly increased preopening and development expenses in 1996 compared to 1995. In the year ended December 31, 1996, the Company used cash flows for investing activities of $179.8 million versus $86.6 million for the year ended December 31, 1995. The primary uses of funds in 1996 were the placement into a disbursement account of $94.3 million of the proceeds from the Mortgage Notes to fund the cost of developing the Lawrenceburg casino project and the investment of $97.4 million in property and equipment. The Company made capital expenditures in Riverside, Lawrenceburg and the Catfish Town facility at Baton Rouge of $20.0 million, $52.0 million and $13.6 million, respectively, for the year ended December 31, 1996. The primary use of funds for the year ended December 31, 1995 were capital expenditures of $71.9 million and the acquisition of Jazz. During the year ended December 31, 1996, the Company generated $209.4 million in cash flows from financing activities compared to $34.9 million of cash flows from financing activities in 1995. The primary sources of cash flows in 1996 were $235.0 million of proceeds from the Company's First Mortgage Note Offering and $42.2 million in capital contributions and loans from the Company's partner in Lawrenceburg, offset by the repayment of $90.0 million on the company's senior secured line of credit which was terminated on June 5, 1996. As of December 31, 1996, the Company had approximately $38.4 million of cash, cash equivalents, and marketable securities, including approximately $9.2 million held at the Indiana Partnership, which can be used for general working capital purposes. In addition, the Company has $69.6 million in a disbursement account to be used to fund the Company's portion of the remaining Lawrenceburg construction costs. The $69.6 million cannot be used for any other purpose. Further, the Company anticipates receiving tax refunds of approximately $11.1 million. On June 5, 1996 the Company issued $235 million of Mortgage Notes which are due June 2004. Additionally, the Company has $115 million of Convertible Subordinated Notes outstanding which were issued in June 1994 and are due June 2001. 26 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company has made a significant investment in property and equipment and plans to make significant additional investments at certain of its existing properties, particularly Lawrenceburg, Indiana and potentially into additional jurisdictions. As a result of its June 1995 acquisition of Jazz, the Company is now the developer of the Catfish Town real estate project in Baton Rouge, Louisiana. The Company estimates that the completion of the Catfish Town project will cost an additional $2 to $5 million (primarily tenant allowance) as of December 31, 1996. Further, if the Predecessor's status as an S-Corporation, which has been asserted as an issue by the IRS during an ongoing audit, is successfully challenged, the Company currently estimates that it would require up to approximately $12.6 million (excluding penalties) to fund the potential income tax liability. The Company currently estimates that the total costs of the Lawrenceburg Casino and entertainment project will approximate $225 million. This is a forward looking statement that involves certain risks and uncertainties, and this amount is subject to numerous factors including weather and other construction risks. As of December, 31, 1996, approximately $109.0 million had been expended by the partnership, on the project, including preopening costs. Of the remaining Lawrenceburg construction costs, approximately $25 million is anticipated to be funded through equipment financing from third party lenders and the balance will be funded by the Company and a partner, 57.5% of which will be funded by the Company and 42.5% of which will be funded by its partner. In the event project costs exceed $210 million, the Company and its partner will fund such costs on the same percentages to a total project cost of $225 million. Any project costs in excess of $225 million must be funded by the Company. The Company currently believes that as a result of its recent offering of Mortgage Notes, cash on hand will be sufficient to fund its current operations and its obligations with respect to the Lawrenceburg casino development. If there are events which negatively impact the sources or uses of cash such as an overrun in the project costs related to the Lawrenceburg Casino, a material deterioration in the Company's existing operations, an adverse IRS ruling, or if the Company should fail to be able to open the permanent facility in Lawrenceburg within a 12 month period, the Company's ability to meet its debt service requirements could be significantly impaired. In December 1996 the Company filed an application to develop a riverboat casino in Osceola, Iowa ("Osceola Project"). This proposed casino operation is subject to numerous conditions including approval and licensing by the Iowa Racing and Gaming Commission ("IRGC"). The Company currently estimates that the cost of developing the Osceola Project would range from $60-$70 million. If the Osceola Project is approved by the IRGC and if the Company decides to pursue the development of the project, the Company would be required to raise additional capital. There is no assurance that any such financing will be available on terms acceptable to the Company. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE", "BELIEVE", "ESTIMATE" AND "EXPECT" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, 27 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 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) DELAYS AND INCREASES IN EXPECTED COSTS IN OPENING OF THE PERMANENT LAWRENCEBURG CASINO, (IV) DELAYS OR COST-OVERRUNS WITH RESPECT TO THE LAWRENCEBURG CASINO WHICH COULD SIGNIFICANTLY IMPAIR THE ABILITY OF THE COMPANY TO MEET ITS DEBT SERVICE REQUIREMENTS, (V) THE EFFECT OF FUTURE LEGISLATION OR REGULATORY CHANGES ON THE COMPANY'S OPERATIONS, AND (VI) 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. 28 ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands except share data) DECEMBER 31, -------------------------- 1996 1995 ------------ ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................ $ 38,284 $ 16,159 Marketable securities.................... 126 1,952 Accounts receivable, net of allowance for doubtful accounts of $1,271 and $346, respectively.......... 1,918 3,197 Income taxes receivable.................. 11,111 2,197 Deferred income taxes.................... 1,372 Other current assets..................... 7,402 3,615 ----------- ----------- Total current assets................... 58,841 28,492 ----------- ----------- NET PROPERTY AND EQUIPMENT.................... 314,480 239,480 ----------- ----------- OTHER ASSETS: Restricted cash and cash equivalents..... 84,551 Notes receivable......................... 1,893 1,893 Deposits................................. 627 2,051 Prepaid rent............................. 1,917 2,917 Deferred finance costs, net of accumulated amortization of $2,386 in 1996 and $1,813 in 1995............. 12,096 5,404 Goodwill, net of accumulated amortization of $945 in 1996 and $349 in 1995........................... 22,923 23,519 Deferred income taxes.................... 1,631 Other intangible assets.................. 33,200 6,126 ----------- ----------- TOTAL OTHER ASSETS 158,838 41,910 ----------- ----------- TOTAL ASSETS $532,159 $309,882 ----------- ----------- ----------- ----------- See accompanying notes to consolidated financial statements. 29 ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands, except share data) DECEMBER 31, ------------------------- 1996 1995 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable........................ $ 15,293 $ 16,921 Accrued payroll and related expenses.... 6,772 6,684 Other accrued liabilities............... 14,655 7,960 Installment contracts payable........... 3,346 1,147 Slot club liability..................... 2,000 2,060 Current maturities of long-term debt.... 2,900 399 ----------- ----------- Total current liabilities....... 44,966 35,171 ----------- ----------- LONG TERM DEBT............................... 377,308 169,303 DEFERRED INCOME TAXES........................ 5,167 OTHER LONG-TERM OBLIGATIONS.................. 20,340 158 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES............................ 16,844 2,543 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 13).................................... STOCKHOLDERS' EQUITY: Common stock, $.01 par; 60,000,000 shares authorized; 24,333,333 shares issued and outstanding in 1996 and 1995........................ 243 243 Capital in excess of par................ 71,865 71,865 Retained earnings....................... 593 25,432 ----------- ----------- Total stockholders' equity....... 72,701 97,540 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $532,159 $309,882 ----------- ----------- ----------- ----------- See accompanying notes to consolidated financial statements. 30 ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ----------- ------------ REVENUES: Casino......................... $ 228,388 $ 237,613 $ 138,425 Admissions..................... 2,759 15,300 12,177 Food, beverage and other....... 29,212 18,537 12,036 ----------- ----------- ----------- 260,359 271,450 162,638 Less promotional allowances.... (15,542) (18,759) (9,593) ----------- ----------- ----------- Net revenues........................ 244,817 252,691 153,045 ----------- ----------- ----------- COSTS AND EXPENSES: Casino......................... 121,004 117,284 65,176 Food, beverage and other....... 23,769 17,242 11,876 Other operating expenses....... 19,111 15,616 8,486 Selling, general and administrative................ 52,048 47,549 24,906 Depreciation and amortization.................. 22,416 20,450 9,846 Development and preopening costs.............. 12,365 3,411 9,761 Notes receivable write-off..... 3,477 Lease termination costs........ 3,508 Referendum expenses............ 1,347 ------------ ----------- ----------- 255,568 225,029 130,051 ------------ ----------- ----------- (LOSS) INCOME FROM OPERATIONS (10,751) 27,662 22,994 ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest income................ 4,235 436 1,081 Interest expense............... (34,842) (14,708) (8,182) ----------- ----------- ----------- (30,607) (14,272) (7,101) ----------- ----------- ----------- (Loss) income before income taxes, minority interests and extraordinary item (41,358) 13,390 15,893 Income tax benefit (expense) 14,418 (6,621) (6,453) Minority interests 2,991 184 195 ----------- ----------- ----------- Net (loss) income before extraordinary item................. (23,949) 6,953 9,635 Extraordinary loss on extinguishment of debt (net of income tax benefit of $594)........ (890) ----------- ----------- ----------- Net (loss) income $ (24,839) $ 6,953 $ 9,635 ----------- ----------- ----------- ----------- ----------- ----------- (Loss) income before extraordinary item per share....... $(.98) $.29 $.40 Extraordinary loss on extinguishment of debt per share (net of income tax benefit of $.02)................... (.04) ----------- ----------- ----------- Net (loss) income per share $(1.02) $.29 $.40 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 31 ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
YEARS ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 -------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................... $ (24,839) $ 6,953 $ 9,635 Adjustments to reconcile net (loss) income to net cash (used in) provided from operating activities: Depreciation............................... 21,501 19,593 9,728 Amortization............................... 2,660 2,287 724 Deferred income taxes...................... (5,426) 4,381 830 Notes receivable write-off................. 3,477 Gain on sale of assets..................... (153) Minority interests......................... (2,991) (184) Lease termination costs.................... 1,941 Extraordinary item......................... 890 Changes in operating assets and liabilities (net of the effects of the purchase of Jazz Enterprises, Inc. in 1995).................................. Accounts receivable....................... 1,279 (289) (2,387) Other current assets...................... (2,803) (699) (1,198) Deposits.................................. 770 Accounts payable.......................... 3,011 12,058 1,761 Accrued liabilities....................... 5,614 2,810 5,405 Income taxes receivable................... (8,914) (823) 285 ----------- ----------- ----------- Net cash (used in) provided from operating activities................... (7,460) 49,564 24,783 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of marketable securities............. 1,952 548 4,250 Purchases of marketable securities......... (126) Proceeds from sales of property and equipment............................. 153 Increase in notes receivable............... (5,178) (9,606) Purchases of property and equipment........ (97,409) (71,854) (112,013) Goodwill................................... (9,388) Other...................................... 171 (772) (1,345) Restricted cash held by trustees........... (84,551) ----------- ----------- ----------- Net cash used in investing activities.... (179,810) (86,644) (118,714) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt... 235,000 115,000 Proceeds from line of credit............... 44,500 49,500 Repayment of line of credit................ (90,000) (4,000) Payments on installment contracts.......... (2,991) (6,268) (3,124) Payments on long-term debt................. (2,191) (186) (3,901) Increase in deferred finance costs......... (9,716) (2,441) (4,775) Proceeds from partner loans................ 23,197 Capital contributions from partner......... 19,044 1,718 Other...................................... (7,448) (3,375) 1,618 ----------- ----------- ----------- Net cash provided from financing activities.............................. 209,395 34,948 104,818 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.......................... 22,125 (2,132) 10,887 Cash and cash equivalents, beginning of year......................... 16,159 18,291 7,404 ----------- ----------- ----------- Cash and cash equivalents, end of year..... $38,284 $16,159 $18,291 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 32 ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands, Except Share Data)
TOTAL COMMON CAPITAL IN RETAINED STOCKHOLDERS' SHARES STOCK EXCESS OF PAR EARNIINGS EQUITY ---------- ----------- ------------- --------- ------------ Balance, December 31, 1993 . . . . 24,333,333 $ 243 $71,865 $ 8,844 $80,952 Net income . . . . . . . . . . . . 9,635 9,635 ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1994 . . . . 24,333,333 243 71,865 18,479 90,587 Net income . . . . . . . . . . . 6,953 6,953 ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 . . . . 24,333,333 243 71,865 25,432 97,540 Net loss . . . . . . . . . . . . (24,839) (24,839) ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 . . . . 24,333,333 $ 243 $71,865 $ 593 $72,701 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 33 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, 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 Indiana Partnership is developing its permanent facility which is expected to open in December 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Argosy and its controlled subsidiaries and partnerships. All significant intercompany transactions have been eliminated. Under certain conditions, subsidiaries are required to obtain approval from state gaming authorities before making distributions to Argosy. 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. MARKETABLE SECURITIES -- Marketable securities, classified as available for sale, are recorded at fair market value which approximates cost. 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 following estimated useful lives: Buildings and shore improvements 5 to 31 years Riverboats, docks and improvements 5 to 20 years Furniture, fixtures and equipment 5 to 10 years 34 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 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. CASINO REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions and food and beverage, which were provided to customers without charge, has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated cost of providing promotional allowances has been included in costs and expenses as follows: YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- Admissions. . . . . . . . . . $ 505 $ 4,601 $ 3,399 Food, beverage and other. . . 4,054 2,989 2,775 ADMISSIONS REVENUE -- Admissions revenue is recognized at the time the related service is performed. ADVERTISING COSTS -- The Company expenses advertising costs as incurred. Advertising expense was $9,192, $7,908, and $4,448 in 1996, 1995 and 1994 respectively. DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an effort to identify and develop new gaming locations are expensed as incurred, as there can be no assurance that such costs, if capitalized, would be realizable. Preopening costs are expensed as incurred. RECLASSIFICATIONS -- Certain amounts in prior years' financial statements have been reclassified to conform to the 1996 presentation. 35 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following: DECEMBER 31, -------------------------- 1996 1995 -------- -------- Land......................................... $ 40,252 $ 18,828 Buildings, leasehold and shore improvements.. 92,256 14,449 Riverboats, docks and improvements........... 122,555 113,707 Furniture, fixtures and equipment............ 67,198 48,936 Construction in progress..................... 39,283 77,188 -------- -------- 361,544 273,108 Less accumulated depreciation and amortization................................ (47,064) (33,628) Net property and equipment............... $314,480 $239,480 -------- -------- -------- -------- 3. LONG-TERM DEBT Long-term debt consists of the following: DECEMBER 31, -------------------------- 1996 1995 -------- -------- First mortgage notes due June 1, 2004, interest payable semi-annually at 13 1/4%... $ 235,000 $ Convertible subordinated notes due June 1, 2001, convertible into common stock at $17.70 per share, interest payable semi-annually at 12%................ 115,000 115,000 Senior secured line of credit................ 45,500 Notes payable, principal and interest payments due quarterly through September 2015, discounted at 10.5%................... 7,011 9,202 Loans from partner, principal due in equal annual installments through 2004, interest payable at prime + 6%....................... 23,197 -------- -------- 380,208 169,702 Less: current maturities.................... 2,900 399 -------- -------- Long-term debt, less current maturities...... $ 377,308 $169,303 -------- -------- -------- -------- On June 5, 1996 the Company issued $235,000 of First Mortgage Notes due 2004 ("Mortgage Notes"). The Mortgage Notes are senior obligations of the Company secured by substantially all of its assets, except the assets of the Indiana Partnership. 36 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) The Mortgage Notes contain certain restrictions on the payment of dividends on the Company's common stock and the occurrence of additional indebtedness, as well as other covenants customary in senior secured financings. Under terms of the indenture governing the Mortgage Notes, Argosy is required to make offers to purchase notes, at 101, at an amount equal to 50% of the proceeds from certain distributions, above specified levels, received from the Indiana Partnership. In addition, $94,300 of the proceeds of the Mortgage Notes were initially placed in a disbursement account which can only be used to fund the company's obligations for the construction of the Lawrenceburg project. Approximately $69,600 of this amount remains and is included in restricted cash and cash equivalents at December 31, 1996. The Company used a portion of the proceeds from the issuance of the Mortgage Notes to repay and terminate its senior secured line of credit ("Line of Credit"). In connection with this early termination of the Line of Credit, the Company expensed approximately $1,484 of deferred finance costs ($890 net of tax). The convertible subordinated notes ("Notes") are convertible into common stock at any time and may be redeemed by the Company on or after June 1, 1997, in whole or in part, at specified percentages of principal plus accrued and unpaid interest to the date of redemption. The Notes are subordinated to prior payment in full of all senior indebtedness as defined, including such indebtedness incurred in the future. Interest expense for the years ended December 31, 1996, 1995 and 1994 was $34,842 (net of $3,033 capitalized), $14,708 (net of $3,203 capitalized) and $8,182 (net of $1,665 capitalized), respectively. Maturities of long-term debt at December 31, 1996 are as follows: 1997............................... $ 2,900 1998............................... 2,900 1999............................... 2,900 2000............................... 3,191 2001............................... 118,570 Thereafter......................... 249,747 4. OTHER LONG-TERM OBLIGATIONS Included in Other long-term obligations is approximately $20,000 representing the remaining grants and infrastructure payments due from the Indiana Partnership under terms of a development agreement with the City of Lawrenceburg. Argosy's portion of this obligation will be funded from the Lawrenceburg disbursement account. 37 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 5. INCOME TAXES Income tax benefit (expense) for the years ended December 31, 1996, 1995 and 1994 consists of the following: 1996 1995 1994 ----------- ----------- ----------- CURRENT: Federal.................... $ 7,877 $ (1,522) $ (4,316) State...................... 1,117 (760) (1,307) ---------- ---------- ---------- 8,994 (2,282) (5,623) ---------- ---------- ---------- DEFERRED: Federal.................... 4,173 (3,704) (815) State...................... 1,251 (635) (15) ---------- ---------- ---------- 5,424 (4,339) (830) ---------- ---------- ---------- Income tax benefit (expense) $ 14,418 $ (6,621) $ (6,453) ---------- ---------- ---------- ---------- ---------- ---------- 38 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) The provision for income taxes for the years ended December 31, 1996, 1995 and 1994 differs from that computed at the federal statutory corporate tax rate as follows: 1996 1995 1994 -------- -------- -------- Federal statutory rate................ (35.0) % 35.0 % 35.0 % State income taxes, net of federal benefit............................ (2.5) 6.8 5.0 Prior year taxes...................... 4.4 Goodwill amortization................. 0.5 0.9 Tax-exempt interest income............ (0.7) Other, net............................ 2.1 2.3 1.3 --------- -------- -------- (34.9) % 49.4 % 40.6 % --------- -------- -------- --------- -------- -------- The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows: 1996 1995 ---------- --------- Depreciation.................................. $ (11,605) $ (8,684) Preopening.................................... 8,086 4,609 Benefit of net operating loss carry forward... 6,464 Other, net.................................... (390) 875 --------- --------- 2,555 (3,200) Valuation allowance (924) (595) --------- --------- Net deferred tax asset (liability) $1,631 $(3,795) --------- --------- --------- --------- The valuation allowance relates to deferred tax assets established under SFAS 109 for net operating loss carry forwards of approximately $6,500. These unutilized loss carry forwards, which will expire through 2011, will be carried forward to future years for possible utilization. 6. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amounts of $5,191, $1,681 and $9,564 in 1996, 1995 and 1994, respectively, which was financed through installment contracts. The Company paid $33,302, $16,052 and $8,220 for interest, and $332, $3,105 and $5,325 for income taxes in 1996, 1995 and 1994 respectively. 39 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 7 . LEASES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1996 are as follows: YEARS ENDING DECEMBER 31, - ------------------------- 1997 ...................................................... $ 3,336 1998 ...................................................... 983 1999 ...................................................... 738 2000 ...................................................... 521 2001 ...................................................... 411 Thereafter ................................................ 15,350 Rent expense for the years ended December 31, 1996, 1995 and 1994 was $6,204, $4,947, and $2,221, respectively. 8. 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 ten years after their respective grant dates and become exercisable over a specified vesting period. At December 31, 1996, options for 1,033,253 shares are exercisable under the Stock Option Plan. 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, 1996, options for 19,000 shares are exercisable under the Directors' Option Plan. 40 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) A summary of stock option activity is as follows:
STOCK OPTION PLAN DIRECTORS OPTION PLAN --------------------------------- -------------------------------- OPTION PRICE OPTION PRICE SHARES PER SHARE SHARES PER SHARE ------------ --------------- ------------- -------------- Outstanding, December 31, 1993 147,158 $19.00 - $19.38 18,000 $19.00 Granted................... 2,200,000 $16.75 Forfeited................. (1,196) $19.00 - $19.38 (3,000) $19.00 ------------ ------------ Outstanding, December 31, 1994 2,345,962 $16.75 - $19.38 15,000 $19.00 Granted................... 150,000 $16.75 6,000 $11.50 Forfeited................. (50,709) $16.75 - $19.38 ------------ ------------ Outstanding, December 31, 1995 2,445,253 $16.75 - $19.38 21,000 $11.50 - $19.00 Forfeited................. (10,000) $16.75 ------------ ------------ Outstanding, December 31, 1996 2,435,253 $16.75 - $19.38 21,000 $11.50 - $19.00 ============ ============
The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock Based Compensation. Accordingly, no compensation expense has been recognized for either stock option plan. The compensation expense related to the 1995 stock option grants was zero. 9. 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 maximum of 10% of their eligible salaries (as defined) subject to limits, as determined by provisions of the Internal Revenue Code, and the Company will match 100% of participants' contributions up to 5% of their eligible salaries. Expense recognized under the Plan was approximately $1,546, $1,708 and $587 in 1996, 1995 and 1994, respectively. 41 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 10. SUBSIDIARY GUARANTORS On June 5, 1996, the Company issued the Mortgage Notes in a private placement transaction. In October 1996, the Company exchanged all of the outstanding privately placed Mortgage Notes for a like amount of identical Mortgage Notes registered with the Securities and Exchange Commission. The Mortgage Notes rank senior in right of payment to all existing and future indebtedness of the Company. The Mortgage Notes are unconditionally guaranteed, on a joint and several basis, by the following wholly-owned subsidiaries of the Company: Alton Gaming Company; The Missouri Gaming Company; The St. Louis Gaming Company; Iowa Gaming Company; Jazz Enterprises, Inc., Argosy of Louisiana, Inc.; Catfish Queen Partnership in Commendam; and The Indiana Gaming Company (the "Guarantors"). The Mortgage Notes are secured, subject to certain prior liens, by a first lien on (i) substantially all of the assets of the Company including the assets used in the Company's Alton, Riverside, Baton Rouge and Sioux City operations, (ii) a pledge of all the capital stock of, and partnership interests in, the Company's subsidiaries, excluding the Company's partnership interest in its Sioux City property, (iii) a pledge of the intercompany notes payable to the Company from its subsidiaries and (iv) an assignment of the proceeds of the management agreement relating to the Lawrenceburg casino project. The collateral for the Mortgage Notes does not include assets of the Indiana Partnership. The following tables present summarized balance sheet information of the Company as of December 31, 1996 and 1995, and summarized operating statement information for the years ended December 31, 1996, 1995 and 1994. 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. 42 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) Summarized balance sheet information as of December 31, 1996 and 1995, is as follows:
DECEMBER 31, 1996 ------------------------------------------------------------------------ PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------- ------------- ------------ ------------ ------------ ASSETS: Current assets........... $ 29,353 $ 25,301 $ 13,191 $ (9,004) $ 58,841 Non-current assets....... 403,873 314,287 119,727 (364,569) 473,318 ------------ ----------- ----------- ----------- ---------- $ 433,226 $ 339,588 $ 132,918 $ (373,573) $ 532,159 ------------ ----------- ----------- ----------- ---------- ------------ ----------- ----------- ----------- ---------- LIABILITIES AND EQUITY: Current liabilities...... $ 10,525 $ 26,939 $ 20,630 $ (13,128) $ 44,966 Non-current liabilities.. 350,000 267,428 78,856 (281,792) 414,492 Stockholders' equity..... 72,701 45,221 33,432 (78,653) 72,701 ------------ ----------- ----------- ---------- ---------- $ 433,226 $ 339,588 $ 132,918 $ (373,573) $ 532,159 ------------ ----------- ----------- ----------- ---------- ------------ ----------- ----------- ----------- ---------- DECEMBER 31, 1995 ------------------------------------------------------------------------ PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------- ------------- ------------ ------------ ------------ ASSETS: Current assets........... $ 5,998 $ 23,567 $ 2,904 $ (3,977) $ 28,492 Non-current assets....... 259,670 260,517 21,140 (259,937) 281,390 ----------- ----------- ----------- ----------- ----------- $ 265,668 $ 284,084 $ 24,044 $ (263,914) $ 309,882 ------------ ----------- ----------- ----------- ---------- ------------ ----------- ----------- ----------- ---------- LIABILITIES AND EQUITY: Current liabilities...... $ 6,648 $ 27,316 $ 3,861 $ (2,496) $ 35,329 Non-current liabilities.. 161,480 192,681 3,401 (180,549) 177,013 Stockholders' equity..... 97,540 64,087 16,782 (80,869) 97,540 ----------- ----------- ----------- ----------- ----------- $265,668 $284,084 $24,044 $(263,914) $309,882 ------------ ----------- ----------- ----------- ---------- ------------ ----------- ----------- ----------- ----------
43 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) Summarized operating statement information for the years ended December 31, 1996, 1995 and 1994, is as follows:
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------------------------ PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ----------- ---------- ------------- ------------- Net revenues.................. $ 4,875 $ 211,319 $ 24,299 $ 4,324 $ 244,817 Costs and expenses............ 16,043 209,955 35,552 (5,982) 255,568 Net interest expense......... 22,177 7,176 738 516 30,607 Net (loss) income............. (24,839) (2,297) (15,718) 18,015 (24,839) YEAR ENDED DECEMBER 31, 1995 --------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ---------- ------------ ------------- ------------- ------------- Net revenues.................. $ 4,071 $ 233,205 $ 21,994 $ (6,579) $ 252,691 Costs and expenses............ 14,161 195,517 21,930 (6,579) 225,029 Net interest expense.......... 8,964 5,185 123 14,272 Net income (loss)............. 6,953 18,101 (59) (18,042) 6,953 YEAR ENDED DECEMBER 31, 1994 --------------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------------ ------------ ----------- ------------ ------------ Net revenues.................. $ 4,844 $ 152,654 $ $(4,453) $153,045 Costs and expenses............ 9,521 124,144 839 (4,453) 130,051 Net interest income (expense).................... 6,620 481 7,101 Net income (loss)............. 9,635 17,252 (839) (16,413) 9,635
11. PURCHASE OF JAZZ ENTERPRISES, INC. Effective May 30, 1995 the Company acquired 100% of the stock of Jazz Enterprises, Inc. ("Jazz"), formerly a 10% partner in the Company's Baton Rouge, Louisiana riverboat casino. The acquisition was accounted for as a purchase. Terms of the transaction allowed the Company to acquire Jazz's 10% limited partnership interest in the Company's Baton Rouge casino and all of Jazz's interest in the Catfish Town real estate development. Under terms of the purchase agreement, the Company made initial cash payments to Jazz totalling $8,500 and is required to make additional payments of $1,350 annually for ten years, and payments of $500 annually for the following ten years. The net present value of these additional payments was approximately $9,400 assuming a discount rate of 10.5%, and is included in long-term debt in the accompanying balance sheets. In addition, the Company forgave loans to Jazz and its principals of approximately $20,700 and assumed certain construction obligations, ordinary course accounts payable and other liabilities totalling approximately $7,300, and paid expenses of approximately $900. Under terms of the Purchase Agreement substantially all other obligations of Jazz existing at the time of the purchase remain the responsibility of the former owners of Jazz. 44 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) The table below sets forth the pro forma historical operating results of the Company for the years ended December 31, 1995 and 1994, giving effect to the acquisition as if the acquisition occurred on January 1, 1994. The Company's fiscal year end is December 31 and Jazz's year end is February 28. The pro forma operating results of the years ended December 31, 1995 and 1994 were prepared using the Company's operating results for the years ended December 31, 1995 and 1994, and Jazz's operating results for period January 1, 1995 through May 30, 1995 (the effective date which Jazz became a wholly owned subsidiary of the Company), and year ended February 28, 1995. Jazz's revenues and net loss for the months of January and February 1995 are immaterial. YEARS ENDED DECEMBER 31, 1995 1994 ------------- ------------- (UNAUDITED) Net revenues....................... $ 252,719 $ 153,862 Income from operations............. 26,762 18,746 Interest expense................... 15,480 10,156 Net income......................... 5,712 5,393 Net income per share............... .23 .22 The pro forma condensed statements of operations are not necessarily indicative of either future results of operations or results that might have been achieved if the foregoing transactions had been consummated as of the indicated dates. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at December 31, 1996 are as follows: CARRYING AMOUNT FAIR VALUE ------------------------------------ Cash and cash equivalents.......... $ 38,284 $ 38,284 Marketable securities.............. 126 126 First mortgage notes............... 235,000 220,266 Convertible subordinated notes..... 115,000 92,575 Other.............................. 30,208 30,208 The fair value of the first mortgage notes and the convertible subordinated notes are based on quoted market prices. Market quotes for the fair value of the remainder of the Company's debt are not available. 45 ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and Per Share Data) 13. COMMITMENTS AND CONTINGENT LIABILITIES LAWRENCEBURG, INDIANA DEVELOPMENT--On June 30, 1995 the Indiana Partnership was awarded a preliminary suitability certificate from the Indiana Gaming Commission to develop a riverboat casino project on the Ohio River in Lawrenceburg, Indiana. The Company is a 57.5% general partner in the Indiana Partnership. On December 10, 1996 the Indiana Partnership was awarded a gaming license and commenced operations at a temporary facility. The Indiana Partnership is in the process of constructing its permanent facility which is expected to open in December 1997. Provisions of the partnership agreement governing the Indiana Partnership stipulate that capital contributions up to a total project cost of $225 million, will be made on the same basis as the partners' equity ownership with any excess project cost being the sole responsibility of the Company. Funding for the Indiana Partnership is to be provided by capital equity contributions for the first $52,500 and capital loans by the partners for the balance. Under terms of the Lawrenceburg partnership agreement, after the third anniversary date of commencement of operations at the Lawrenceburg casino, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests). In the event of this occurrence, if the partners cannot agree on a selling price, the Indiana Partnership will be sold in its entirety. The completion of the permanent facility is subject to the satisfaction of numerous conditions. The Indiana Partnership must obtain numerous permits and licenses. In addition, the Company must complete the construction of its permanent gaming facilities, which must be open within 12 months of the opening of the temporary casino. There can be no assurance that this schedule will be met. 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 $12,600, including interest through December 31, 1996, 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 46 AGROSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (In Thousands, Except Share and per Share Data) financial condition of the Company.
14. QUARTERLY FINANCIAL INFORMATION (unaudited) FIRST SECOND THIRD FOURTH ----- ------ ----- ------ 1996: Net revenues . . . . . . . . . . . . . . $62,689 $63,265 $60,022 $58,841 Income (loss) from operations(a) . . . . 1,912 103 (3,748) (9,018) Other expense, net . . . . . . . . . . . 4,121 6,785 10,251 9,450 Loss before extraordinary item . . . . . (3,931) Loss per share before extraordinary item (.16) Net loss(b). . . . . . . . . . . . . . . (1,047) (4,821) (7,708) (11,263) Net loss per share . . . . . . . . . . . (.04) (.20) (.32) (.46) 1995: Net revenues . . . . . . . . . . . . . . $60,374 $65,162 $66,637 $60,518 Income from operations(c). . . . . . . . 6,221 10,028 6,585 4,828 Other expense, net . . . . . . . . . . . 3,844 3,859 3,879 2,690 Net income . . . . . . . . . . . . . . . 1,468 3,312 1,654 519 Net income per share . . . . . . . . . . .06 .14 .07 .02
(a) Income from operations for the second quarter of 1996 includes a charge of $3,508 related to lease termination costs associated with assets formerly used at the Riverside temporary facility. (b) Net loss for the second quarter of 1996 includes an after tax charge of $890 related to an extraordinary item for the early extinguishment of a line of credit. (c) Income from operations for the third quarter of 1995 includes a charge of $3,477 related to the write off of a note receivable. 47 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Argosy Gaming Company at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 6, 1997 48
ADDITIONAL CORPORATE INFORMATION OFFICERS TRANSFER AGENTS AND REGISTRARS H. STEVEN NORTON COMMON STOCK PRESIDENT AND CHIEF OPERATING OFFICER The Harris Trust and Savings Bank Chicago, Illinois JOSEPH G. URAM EXECUTIVE VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER CONVERTIBLE NOTES Bank One Ohio Trust Company, NA PATSY S. HUBBARD Columbus, Ohio CORPORATE SECRETARY FIRST MORTGAGE NOTES BOARD OF DIRECTORS First National Bank of Commerce New Orleans, Louisianna WILLIAM F. CELLINI CHAIRMAN OF THE BOARD OF ARGOSY GAMING COMPANY CHIEF EXECUTIVE OFFICER OF NEW FRONTIER GROUP STOCK INFORMATION EDWARD F. BRENNAN The Company's common stock, convertible notes PRINCIPAL IN THE LAW FIRM OF BRENNAN, CATES AND CONSTANCE and first mortgage notes are traded on the New York Stock Exchange. The common stock ticker symbol is "AGY"; the convertible notes ticker symbol is GEORGE L. BRISTOL(1) "AGY01"; and the first mortgage notes ticker PRESIDENT OF GLB, INC. symbol is "AGY04." Daily trading information is listed in the stock and bond tables carried by FELIX LANCE CALLIS(2) major newspapers. PARTNER WITH LAW FIRM OF CALLIS, PAPA, JENSEN, JACKSTADT & HALLORAN P.C. ANNUAL SHAREHOLDERS' MEETING JIMMIE F. GALLAGHER(1), (2) RETIRED CASINO EXECUTIVE The Annual Meeting of Argosy Gaming Company will be held Tuesday, April 22, 1997, in the North WILLIAM J. MCENERY(1) Depot Ballroom at Catfish Town, 103 France Street, PRESIDENT OF GAS CITY LTD. Baton Rouge, Louisiana. All stockholders are PRESIDENT OF BELL VALLEY FARMS INC. cordially invited to attend. PRESIDENT OF A.D. CONNOR INC. INVESTOR RELATIONS JOHN B. PRATT, SR.(1), (2) ATTORNEY AT LAW Inquiries and requests regarding the Annual Report or other materials should be directed to: (1) MEMBER OF THE AUDIT COMMITTEE (2) MEMBER OF THE COMPENSATION COMMITTEE G. DAN MARSHALL VICE PRESIDENT AND ANNUAL REPORT ON FORM 10-K DIRECTOR OF INVESTOR RELATIONS Argosy Gaming Company will be pleased to make its Annual Report on Form 10-K, filed with the Securities Argosy Gaming Company and Exchange Commission (SEC), available to stockholders 219 Piasa Street without charge on written request to the Director of Alton, Illinois 62002-6232 Investor Relations. (618) 474-7666 CORPORATE HEADQUARTERS CORPORATE INFORMATION Look for Argosy Gaming Company on the Internet at: WWW.ARGOSYCASINOS.COM where we publish our Argosy Gaming Company GENERAL COUNSEL quarterly earnings releases and other financial 219 Piasa Street Winston & Strawn news as well as copies of documents filed with the Alton, Illinois 62002-6232 Chicago, Illinois SEC. INDEPENDENT AUDITORS Ernst & Young LLP Chicago, Illinois
49 CASINO LOCATIONS Argosy offers customers gaming entertainment in five distinct locations throughout America's heartland -- from Mississippi River casino operations in Alton, Illinois, and Baton Rouge, Louisiana, to Missouri River gaming facilities in Riverside, Missouri, and Sioux City, Iowa, to the Company's newest attraction on the Ohio River in Lawrenceburg, Indiana.
- ------------------------------------------------------------------------------------------------------------------------------------ Item Item Item - ------------------------------------------------------------------------------------------------------------------------------------ CASINO LOCATIONS RESERVATIONS GAMING OPTIONS Individual Big Six Wheel Video: Poker, Keno Venue (800) 336-7568 Blackjack Alton Belle Casino Caribbean Stud Poker Craps Address Group Roulette 219 Piasa Street, Alton, IL 62002 (800) 253-3423 Slots Progressive Slots - ------------------------------------------------------------------------------------------------------------------------------------ Individual Big Six Wheel Pai Gow (800) 270-7711 Blackjack Mini-Baccarat Venue Caribbean Stud Poker Slots Argosy Casino at Riverside Group Craps Progressive Slots (800) 900-3423 Roulette Video: Poker, Keno, Blackjack Address Let It Ride 777 Northwest Argosy Parkway, Riverside, MO 64150 Poker - ------------------------------------------------------------------------------------------------------------------------------------ Individual Big Six Wheel Progressive Slots (800) 266-2692 Blackjack Video: Poker, Keno Venue Caribbean Stud Poker Free Million-Dollar Pull Belle of Baton Rouge Casino Group Craps (800) 378-5825 Roulette Address Let It Ride 103 France Street, Baton Rouge, LA 70802 Slots - ------------------------------------------------------------------------------------------------------------------------------------ Individual Blackjack Progressive Slots (800) 778-3454 Caribbean Stud Poker Video: Poker, Keno Venue Craps Belle of Sioux City Casino Group Roulette (800) 778-3454 Let It Ride Poker Slots Address 100 Larsen Park Drive, Sioux City, IA 51102 - ------------------------------------------------------------------------------------------------------------------------------------ Individual Blackjack (800) 700-4477 Caribbean Stud Poker Venue Craps Argosy Casino Lawrenceburg Group Roulette (800) 600-9977 Slots Address Progressive Slots 777 East Eads Parkway, Lawrenceburg, IN 47025 Video: Poker, Keno - ------------------------------------------------------------------------------------------------------------------------------------
Design: The Falk Design Group, St. Louis, MO. Photography: Galliher Photography, Fort Wayne, IN. Printing: Reprox, St. Louis, MO. 50 [LOGO] 219 PLAZA STREET ALTON, ILLINOIS 62002-6232 EX-21 4 EXHIBIT 21 EXHIBIT 21 to Form 10-K filed on behalf of Argosy Gaming Company Commission File No. 0-21122 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% EX-24.1 5 EXHIBIT 24.1 EXHIBIT 24.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Argosy Gaming Company of our report dated February 6, 1997, included in the 1996 Annual Report to Shareholders of Argosy Gaming Company. Our audits also included the financial statement schedules of Argosy Gaming Company listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Chicago, Illinois March 28, 1997 EX-24.2 6 EXHIBIT 24.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We have issued our report dated July 10, 1995, accompanying the financial statements incorporated by reference of Argosy Gaming Company on Form 10-K for the year ended December 31, 1996. We hereby consent to the incorporation by reference of said report in the Registration Statement of Argosy Gaming Company on Form S-8 (File No. 33-76418). GRANT THORNTON LLP Reno, Nevada March 27, 1997 EX-25 7 EXHIBIT 25 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, 1996 hereby constitutes and appoints George L. Bristol and Joseph G. Uram, 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: March 27, 1997 /s/ Edward F. Brennan ---------------------------------------- Edward F. Brennan 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 -----END PRIVACY-ENHANCED MESSAGE-----