-----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, AsbTcB66BobL5iZ8QF86w1NiwelZWqa75JbiTr8T8RlLc9pES/vrwvdUQUfIB1J7 1xMkKhBQ2K+6iXG6Za0XaA== 0001047469-98-011524.txt : 19980327 0001047469-98-011524.hdr.sgml : 19980327 ACCESSION NUMBER: 0001047469-98-011524 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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: SEC FILE NUMBER: 001-11853 FILM NUMBER: 98573521 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, 1997 COMMISSION FILE NUMBER: 0-21122 ------------------------ ARGOSY GAMING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 37-1304247 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 219 PIASA STREET, ALTON, ILLINOIS 62002 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (618) 474-7500 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - -------------------------------------------------------------------------------- ------------------ 13 1/4% First Mortgage Notes due 2004 New York 12% Convertible Subordinated Notes due 2001 New York Common Stock, par value $.01 per share New York Securities registered pursuant to Section 12(g) of the Act: None
------------------------ Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 24, 1998, the aggregate market value of the registrant's Common Stock held by non-affiliates was $53,725,260. The closing price of the Common Stock on March 24, 1998 as reported on the New York Stock Exchange, was $3 3/4. As of March 24, 1998, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 24,498,333. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997, and of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 23, 1998 as described in the Cross Reference Sheet and a Table of Contents included herewith, is incorporated herein by reference into Parts II and III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS
PAGE REFERENCE OR REFERENCE(1) ------------------- PART I ITEM 1. BUSINESS............................................................................ 1 ITEM 2. PROPERTIES.......................................................................... 18 ITEM 3. LEGAL PROCEEDINGS................................................................... 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)............ 24 ITEM 6. SELECTED FINANCIAL DATA(3).......................................................... 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(4)..................................................................... 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(5)...................................... 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................ 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(6)............................... 96 ITEM 11. EXECUTIVE COMPENSATION(7)........................................................... 96 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(8)................... 96 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(7)................................... 96 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................... 97
- ------------------------ (1) Certain information is incorporated by reference, as indicated below, from the Annual Report to Stockholders for the fiscal year ended December 31, 1997 (the "Annual Report") and the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 23, 1998, (the "Proxy Statement"). (2) Proxy Statement section entitled "Market for Registrant's Common Equity and Related Stockholder Matters." (3) Annual report, inside front cover, section entitled "Financial Highlights." (4) Annual report, pages 26-33, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Annual report, pages 34-51, 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 Stockholder--Security Ownership of Certain Beneficial Owners and Management." PART I ITEM 1. BUSINESS GENERAL Argosy Gaming Company (the "Company") is a multi-jurisdictional developer, owner and operator of riverboat casinos and related entertainment facilities in the midwestern and southern United States. The Company, through its subsidiaries, owns and operates riverboat casinos in Alton, Illinois, Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux City, Iowa. Unless the context otherwise requires, "Company" and "Argosy" shall mean Argosy Gaming Company and its subsidiaries. The Company's principal executive offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone number is (618) 474-7500. CURRENT OPERATIONS ALTON BELLE CASINO--Alton, Illinois, is located on a leased site on the Mississippi River approximately 20 miles northeast of downtown St. Louis, and consists of 22,800 gaming square feet, 684 slot machines and 35 table games. The facility also includes a 37,000 square foot, three-level floating entertainment pavilion which features a sports/entertainment lounge, buffet and restaurant facilities, conference facilities and the market's only off-track betting parlor. ARGOSY CASINO OF GREATER KANSAS CITY--Riverside, Missouri, is located on a 55-acre owned site approximately five miles from downtown Kansas City on the Missouri River and consists of 35,863 gaming square feet, 965 slot machines and 54 table games. The riverboat casino is complemented by an 85,000 square foot land-based entertainment facility featuring specialty and buffet restaurants, a sports/entertainment lounge, and 14,000 square feet of banquet/conference facilities. BELLE OF BATON ROUGE--Baton Rouge, Louisiana, is located on a site on the Mississippi River in downtown Baton Rouge and consists of 27,971 gaming square feet, 776 slot machines and 43 table games. The riverboat casino is complemented by Argosy's adjacent land-based entertainment development known as Catfish Town. The Catfish Town development includes a 50,000 square foot festival atrium, entertainment/sports lounge, buffet/coffee shop, conference facilities and approximately 150,000 square feet of leasable retail space. BELLE OF SIOUX CITY--Sioux City, Iowa, is located on a leased site in downtown Sioux City on the Missouri River and consists of 12,500 gaming square feet, 419 slot machines and 24 table games, a bar and gift shop. The casino is complemented by adjacent barge facilities featuring buffet dining, meeting space and administrative support offices. LAWRENCEBURG CASINO--In June 1995, Indiana Gaming Company, L.P., a joint-venture subsidiary of the Company ("Indiana Partnership"), was awarded the right to develop and operate a riverboat casino and entertainment complex in Lawrenceburg, Indiana, which is located approximately 15 miles west of Cincinnati, Ohio. The Company is the sole general partner of, and holds a 57.5% general partnership interest in the Indiana partnership. Conseco Entertainment L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited partnership interest and certain other investors, including H. Steven Norton, a former employee of the Company, who brought the opportunity to the Company concurrent with his initial employment, hold the remaining 13.5% limited partnership interest in the Indiana Partnership. The Company manages the development, construction and operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA and Conseco receives a financial advisory fee of 5% of EBITDA. The Lawrenceburg casino opened December 10, 1996 and, through September 30, 1997, the Indiana Partnership operated at a temporary site utilizing a leased vessel with approximately 20,500 square feet of 1 gaming space. The vessel, which had a capacity of 1,600 passengers, featured approximately 870 slot machines and 52 table games for a total of approximately 1,275 gaming positions. In addition, the Indiana Partnership leased, from the Company, an approximately 24,000 square foot floating entertainment and support facility which featured ticketing and holding areas, a food court, two bars and a gift kiosk. Parking for the temporary facility was provided at a 1,400 space satellite lot. The Indiana Partnership provided free shuttle service for the parking lot to the temporary site. On October 1, 1997, the Indiana Partnership began operating its permanent vessel at the temporary site. The vessel features approximately 74,300 square feet of gaming space on three levels and has approximately 2,470 gaming positions consisting of approximately 1,735 slots and 97 table games. The vessel can accommodate approximately 4,400 passengers and crew members. On December 10, 1997, the Indiana Partnership moved the riverboat casino from the temporary site to its permanent facility which includes a 1,750 space parking garage and a 120,000 square foot land-based entertainment pavilion and support facility featuring a 350 seat buffet restaurant, two specialty restaurants, and an entertainment lounge. The Company continues to utilize the satellite parking lot for employee and overflow parking. The final component of the Lawrenceburg property, a 300 room hotel is expected to open in the second quarter of 1998. The partnership agreement governing the Indiana Partnership provides the $225 million budgeted construction cost of the Lawrenceburg Casino development would be funded 57.5% by the Company and 42.5% by Conseco. The Company believes that the Lawrenceburg casino project will be completed within the budgeted amount and that funds sufficient to meet its obligations are on hand in its restricted cash account at December 31, 1997. For a further description of the terms of the Indiana Partnership, see "Lawrenceburg Casino Partnership Agreement". CORPORATE STRATEGY In 1997, the Company implemented a change in operating strategy in an attempt to build strength and gain momentum as a leading riverboat casino operator. This strategy includes assembling a new management team with significant experience and expertise in gaming industry operations and marketing, adopting new marketing strategies with an emphasis on direct marketing, and prudently investing in gaming and gaming-related assets for its properties. Argosy's corporate strategy involves the following elements: EXPERIENCED MANAGEMENT TEAM. Argosy's Board of Directors assembled a new, experienced management team during 1997 to emphasize a renewed commitment to Company-wide operations. In April 1997, the Board of Directors named James B. Perry President and CEO of the Company. In June 1997, Mr. Perry recruited Vice President of Operations, James A. Gulbrandsen, and Vice President of Sales and Marketing, Virginia M. McDowell. In addition, general managers with significant gaming industry experience were hired at three of Argosy's properties during the third and fourth quarters of 1997. EXPANDED SALES AND MARKETING EFFORTS. The Company adopted a new marketing strategy designed to confront heightened competition in each of its markets with stronger, coordinated marketing, increased promotions and targeted entertainment events. During 1998, Argosy anticipates replacing or upgrading the player tracking systems at each property. These enhancements will enable the Company to provide targeted bonusing based upon customers' playing habits. In addition, Argosy's marketing department will seek to strengthen brand recognition in Alton, Baton Rouge and Sioux City by including the Argosy brand name in the marketing and entertainment efforts of those properties. Finally, the Company has analyzed the database at each property, and has refocused its entertainment events, including concerts, private parties and sporting events, to attract and reward the targeted Argosy consumer. 2 OPERATIONS. The Company's operating strategy is to provide a superior customer experience to sophisticated gaming customers by offering a competitive gaming product and by emphasizing prompt, friendly customer service. CAPITAL IMPROVEMENTS. Argosy's management team has developed a capital plan that emphasizes prudent capital investment to enhance the Company's operations. Anticipated capital expenditures include replacing older, less competitive slot machines with newer products and replacing or upgrading player tracking and database systems in order to better implement the Company's enhanced marketing plan. In addition, the Company anticipates improving its physical plant, including parking, public areas, restaurants, etc., as necessary, to accommodate customers' needs and improve current operating inefficiencies. POTENTIAL FUTURE PROJECTS BATON ROUGE DEVELOPMENT. Argosy has entered into a joint venture agreement and a development agreement with a developer for the ownership and construction of a 300-room convention hotel adjacent to the Company's Catfish Town Atrium development. The hotel joint venture is negotiating with a major national hotel chain to manage the hotel. The consummation of the hotel transaction is subject to numerous conditions precedent including, without limitation, obtaining separate non-recourse project financing. The proposed hotel would be the only nationally franchised hotel in downtown Baton Rouge and would be located across from the Baton Rouge Convention Center. COMPETITION The Company's Alton Casino faces competition from four other riverboat casino facilities currently operating in the St. Louis area and expects the level of competition to remain intense in the future. The most recent casino complex to open includes two independently owned facilities, each of which operate two dockside vessels. This casino complex, which increased gaming capacity in St. Louis by approximately 55%, opened in March of 1997. The Company's Riverside Casino faces competition from four casino companies in the Kansas City area that offer dockside gaming, two of which offer two gaming vessels each. The Company's Baton Rouge Casino faces competition from one casino located in downtown Baton Rouge, a nearby native American casino and multiple casinos throughout Louisiana. Currently, the Company faces competition in Sioux City, Iowa, from two land-based Native American casinos, slot machines at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in January 1996. The Indiana Partnership faces competition from one other riverboat casino in the Cincinnati market, which opened in October 1996. There could be further unanticipated competition in any market which the Company operates as a result of legislative changes or other events. The Company expects each market in which it participates, both current and prospective, to be highly competitive. EMPLOYEES As of December 31, 1997, the Company had approximately 3,955 full-time and 473 part-time employees. Approximately 2,125 employees are represented by the Seafarers International Union of North America. The Company has collective bargaining agreements with that union which expire at various times between June 2001 and June 2003. Twelve employees are represented by the International Brotherhood of Electrical Workers. In addition, approximately 75 employees have recently voted to be represented by the United Plant Guard Workers of America and 40 employees have recently voted to be represented by American Maritime Officers Union. The Company is currently negotiating collective bargaining agreements with each group. The Company has not experienced any work stoppages and believes its relations with its employees are generally satisfactory. 3 LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT GENERAL The Indiana Partnership operates pursuant to a partnership agreement entered into among the partners as of April 11, 1994, as amended and restated as of February 21, 1996. The Indiana Gaming Company manages the partnership pursuant to a management agreement and as general partner, subject only to certain actions or major decisions requiring the consent of a majority in interest of the limited partners. Under the provisions of the partnership agreement and the management agreement, the Company manages the development, construction and operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA (as defined in the partnership agreement) and Conseco receives a financial advisory fee of 5% of EBITDA. PROJECT FUNDING The partnership agreement governing the Indiana Partnership provides that the $225 million budgeted construction cost of the Lawrenceburg Casino development would be funded 57.5% by the Company and 42.5% by Conseco. The Indiana Partnership has been funded with $52.5 million of capital contributions by the partners of which $16.75 million constitutes common equity and $35.75 million constitutes preferred equity. The Company has contributed approximately $9.6 million of common equity, and approximately $20.6 million of preferred equity. The remainder of the common and preferred equity has been contributed by Conseco. The remainder of the cost of the Lawrenceburg Casino has been funded by third party financing of $25.0 million and capital loans from the Company and Conseco of approximately $147.5 million. The capital loans have been funded 57.5% by the Company and 42.5% by Conseco. In addition to the $225 million budgeted construction cost of the Lawrenceburg Casino described above, the Company has incurred approximately $15 million of pre-opening, administrative, training and other soft costs in connection with opening the temporary and permanent Lawrenceburg Casinos. Pursuant to the terms of the partnership agreement, the Company had the sole obligation to fund these costs. PARTNER DISTRIBUTIONS The Lawrenceburg Casino partnership agreement sets forth the manner in which cash flow of the Indiana Partnership is distributed. Pursuant to the agreement, principal on capital loans is repaid on an eight-year amortizing schedule and cash flow (after repayment of principal of, and interest on, capital loans) is distributed by the general partner not less frequently than quarterly: (i) first, to the partners pro rata for tax payments in an amount equal to their taxable net income for such period; (ii) second, to the partners as a prepayment of principal on capital loans to be applied in the inverse order of maturity, up to 75% of the remaining cash flow; (iii) third, in payment of a preferred return of 14% on any preferred equity contributed by the partners; (iv) fourth, as a return of the preferred equity contributed by the partners; (v) fifth, as a return of common equity contributed by the partners; and (vi) sixth, to the partners in accordance with their respective percentage interests. The partnership agreement provides that the net cash proceeds from a sale or refinancing are distributed by the general partner in the same order as cash flow except that the proceeds will be used to repay 100% of outstanding capital loans by the partners. 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 4 dilution for failure to pay required capital; (v) a final unappealable judgment against The Indiana Gaming Company in excess of $25 million which is uninsured and remains unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts constituting "gross mismanagement"; (vii) failure of The Indiana Gaming Company to fund project costs in excess of $215 million (after expiration of applicable notice and cure periods); and (viii) foreclosure by the Trustee under the Company's loan agreement on The Indiana Gaming Company's pledge of its partnership interest the Indiana Partnership. Upon removal as general partner, the general partnership interest of The Indiana Gaming Company becomes a "special limited partner" interest with rights to partner distributions but only limited voting rights on partnership matters. Also, if the reason for the removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii) above the limited partners may acquire all, but not less than all, of The Indiana Gaming Company's interest for the fair market value thereof determined by an appraisal process. LIMITED PARTNERS' SALE RIGHTS The Lawrenceburg Casino partnership agreement provides that: (i) after the third anniversary date of commencement of operations at the Lawrenceburg Casino, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests) or (ii) after a deadlock by the parties with respect to significant items in any annual operating budget of the partnership for budget year 1999 and thereafter, any partner has a right to sell its interest to the other partners (the limited partner pursuant to clause (i) and the partner desiring to sell pursuant to clause (ii) is hereinafter referred to as a "Selling Partner" and the non-selling partners are hereinafter referred to as the "Non-Selling Partners"). The partnership agreement provides that after the Selling Partner gives notice of its intent to sell, the Selling Partner and Non-Selling Partners shall have 60 days to attempt in good faith to agree to a purchase price. If within such period of time no such agreement is reached, then the Selling Partner's interest shall be appraised pursuant to an appraisal process to determine the fair market value thereof. After the fair market value of the Selling Partner's interest is determined by the appraisal process, the Non-Selling Partners have 60 days to reject such sale at that price, and if the Non-Selling Partners decline to purchase the interest of the Selling Partner at the appraisal price then the general partner is to solicit bids and sell all of the assets of the partnership within twelve months to the highest bidder and the partnership will be dissolved within a 12-month period. No assurances can be given that The Indiana Gaming Company, if it is a Non-Selling Partner, will have or will be able to obtain sufficient funds to acquire any Selling Partner's interest in the circumstances provided for above and therefore the assets of the partnership would have to be sold to the highest bidder as provided above. In addition, the partnership agreement provides all partners with a right of first refusal on transfers of partnership interests. A foreclosure by the Trustee on the Company's pledge of its partnership interest shall be deemed a transfer giving rise to the right of first refusal. REGULATORY MATTERS ILLINOIS In February 1990, the State of Illinois pursuant to the Riverboat Gambling Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act authorizes riverboat gaming upon any navigable stream within or forming a boundary of the State of Illinois other than Lake Michigan. The Riverboat Act does not, however, authorize riverboat gaming or the docking of a riverboat conducting gaming within a county having a population in excess of 3,000,000. The Riverboat Act grants the Illinois Gaming Board specific powers and 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 5 Board). No person, firm or corporation may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner may hold up to 10% of a second riverboat gaming operation in Illinois. In addition to the ten owner's licenses which may be authorized under the Riverboat Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming and to conduct such gaming on a specified date or series of dates. Riverboat gaming under such a license may take place on a riverboat not normally used for riverboat gaming. An owner's license is issued for an initial period of three years (with a fee of $25,000 for the first year and $5,000 for each of the following two years) and must be renewed annually thereafter (with a fee of $5,000 for each year). The Company's Illinois gaming license is subject to renewal in October, 1998. An owner's license is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Gaming Board that the licensee continues to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board also requires that officers, directors and employees of a gaming operation be licensed. Licenses issued by the Illinois Gaming Board may not be transferred to another person or entity. All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Pursuant to its rule making authority under the Illinois Riverboat Act, the Illinois Gaming Board has adopted certain regulations that provide that any beneficial owner of the legal or beneficial interests of a gaming company may be required, and in the case of a beneficial owner of 5% or more of the legal or beneficial interests (a "5% Holder") is required, to furnish a detailed personal disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the personal disclosure form as the basis for its investigation to determine such holder's suitability as a stockholder of the company. In the case of a 5% Holder, the Illinois Gaming Board conducts such an investigation. The Illinois Gaming Board's decisions as to suitability are based on the same criteria used for a finding of preliminary suitability for licensure including character, reputation, experience and financial integrity of such holder. If the Illinois Gaming Board determines that a holder is not suitable, the holder is entitled to request a hearing; however, if no hearing is requested after such determination or such finding is upheld after a hearing, the holder is required to divest his shares of common stock of the company. After a holder is required to divest and until divestiture, the licensee is unable to distribute profits to such stockholder. The Illinois Gaming Board has adopted a regulation that provides that a licensee can only make distributions to shareholders to the extent such distributions would not impair the financial viability of the licensee. Factors which would be considered by the Illinois Gaming Board include working capital requirements, debt service requirements, requirements for repairs and maintenance and capital expenditure requirements. Illinois Gaming Board approval is required for certain changes, including, among other things, to the type of entity, debt and equity offerings by a company, issuances of debt, riverboat capacity or significant design changes, changes in the number of gaming positions and pro forma budgets and financial statements. Minimum and maximum wagers on games are set by the licensee. Wagering may not be conducted with money or negotiable currency. No person under the age of 21 is permitted to wager in Illinois, and wagers may only be taken from a person present on a licensed riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. Under the Riverboat Act, vessels must have the capacity to hold a minimum of 500 persons if operating on the Mississippi River or the Illinois River south of Marshall County, and a minimum of 400 persons on any other waterway. In addition, all riverboats must be accessible to disabled persons, must be either a replica of a 19th century Illinois riverboat or be a casino cruise ship design and must comply with applicable federal and state laws, including but not limited to U.S. Coast Guard regulations. 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 6 boards a riverboat for an excursion and may continue while other passengers are boarding for a period not to exceed thirty minutes, at which time the gangplank or its equivalent must be pulled up and further boarding is not permitted. For the purpose of orderly egress of passengers from a riverboat at the end of an excursion, gaming may continue for a period not to exceed thirty minutes after the gangplank or its equivalent is lowered. During this thirty minute period of egress, new passengers may not board a riverboat. These periods of time do not extend the four-hour maximum. Special event extended cruises may be authorized by the Illinois Gaming Board. Although the Riverboat Act provides that no gambling may be conducted while a riverboat is docked, an Illinois Gaming Board rule currently permits dockside gaming during the 30-minute time periods prior to and following a cruise. Furthermore, if the captain of the riverboat reasonably determines that for reasons of safety, although seaworthy, the riverboat should not leave the dock or should return immediately thereto due to inclement weather, mechanical or structural problems, or river icing, then a gaming excursion may commence or continue while the gang plank or its equipment is raised and remains raised, and ingress is prohibited until completion of the excursion, in which case the riverboat is not considered docked. If such a situation occurs, the holder of the owner's license must promptly file a report with the administrator of the Illinois Gaming Board detailing the basis for its decision not to cruise. Recent pronouncements by the Illinois Gaming Board indicate that the explanations for failure to cruise pursuant to the rule will be scrutinized and that any abuse of the rule will result in disciplinary actions, which may include, among other things, any of the following: cancellation of future cruises, penalties, fines, suspension and/or revocation of a license. The Riverboat Act imposes a graduated wagering tax based on adjusted gross receipts ("AGR") from gambling games at a rate of 15% on AGR up to $25 million, 20% on AGR between $25 million and $50 million, 25% on AGR between $50 million and $75 million, 30% on AGR between $75 million and $100 million, and 35% on AGR in excess of $100 million. The tax imposed is to be paid by the licensed owner to the Illinois Gaming Board on the day after the day when the wagers were made. The Riverboat Act also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. In addition, all use, occupancy and excise taxes that apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. The Company also pays $.25 admission tax to the City of Alton for each person admitted to the Alton Belle Casino. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming as it may deem necessary and proper and into alleged violations of the Riverboat Act. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to riverboat gaming operations at all times. A holder of any license is subject to the imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit and in compliance with applicable laws of Illinois regarding administrative procedures and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Gaming Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. 7 The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interests of the public and the gaming industry. INDIANA In June 1993, the Indiana legislature adopted legislation permitting riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and Patoka Lake. The legislation granted authority to supervise gaming activities to the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission"). The Indiana Gaming Commission is empowered to administer, regulate and enforce the system of riverboat gaming established under Indiana's Riverboat Gambling Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all riverboat gaming operations in Indiana, as well as all persons on riverboats where gaming operations are conducted. The Indiana Gaming Commission has broad powers to regulate riverboat gaming operations and to approve the form of ownership and financial structure of not only riverboat owner licensees, but also their entity qualifiers, and intermediary and holding companies. The following description reflects both adopted and proposed rules. Further, the Indiana General Assembly has the power to promulgate new laws and implement amendments to the Riverboat Gambling Act, which can materially affect the operation or economic viability of the gaming industry in Indiana. No one may operate a riverboat gaming operation in Indiana without holding a riverboat owner's license. The Indiana Gaming Commission has implemented strict regulations with respect to the suitability of riverboat license owners, their key personnel, and employees. The Indiana Gaming Commission utilizes a "class based" licensing structure that subjects all individuals associated with a riverboat licensee or a riverboat license applicant to varying degrees of background investigations. Under current Indiana law a maximum of 11 owner's licenses may be in effect at any time with an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to Lake Michigan, an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to the Ohio River and one license to be issued to an owner whose home port is a county contiguous to Lake Patoka. For counties contiguous to the Ohio River, the Indiana Gaming Commission may not issue a license unless an ordinance has been passed permitting the docking of a riverboat by the specified local entity and the voters of the county have approved riverboat gambling in the county. A license holder is required to pay an initial license fee of $25,000, (which covers the first 5 years of operation), a renewal fee of $5,000 per year thereafter and post a bond to guaranty performance of the licensee's obligations under the legislation. Gaming will be permitted only on riverboats which (i) have a valid certificate of inspection from the U.S. Coast Guard for the carrying of at least 500 passengers, (ii) are at least 150 feet in length, and (iii) for riverboats operating on the Ohio River, replicate historic Indiana steamboat passenger vessels of the 19th century. No person or entity may simultaneously own an interest in more than two riverboat owner's licenses. A person or entity may simultaneously own up to 100% in one riverboat owner's license and no more than 10% in a second riverboat owner's license. A riverboat owner licensee must possess a level of skill, experience, or knowledge necessary to conduct a riverboat gaming operation that will have a positive economic impact on the host site, as well as the entire State of Indiana. Additional representative, but not exclusive, qualification criteria with respect to the holder of a riverboat owner's license include character, reputation, financial integrity, the facilities or proposed facilities for the conduct of riverboat gaming including related non-gaming projects such as hotel development, and the good faith affirmative action plan to recruit, train and upgrade minorities and women in all employment classifications. The Indiana Gaming Commission shall require persons holding owner's licenses to adopt policies concerning the preferential hiring of residents of the city in which the riverboat docks for riverboat jobs. The Indiana Gaming Commission has broad discretion in regard to the issuance, renewal, revocation and suspension of licenses and approvals, and the Indiana Gaming Commission is empowered to regulate a wide variety of gaming and non-gaming related activities, including the licensing of suppliers to, and employees at, riverboat gaming operations, and effectively to approve the form of ownership and financial 8 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. 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 9 institutional investor; the name, address, telephone number, social security number or federal tax identification number of each person who has the power to direct or control the institutional investor's exercise of its voting rights as a holder of voting securities of the riverboat licensee; the name of each person who beneficially owns 5% or more of the institutional investor's voting securities or equivalent; a list of the institutional investor's affiliates; a list of all securities of the riverboat licensee that are or were beneficially owned by the institutional investor or its affiliates within the preceding one year; a disclosure of all criminal and regulatory sanctions imposed during the preceding ten years; a copy of any filing made under 15 U.S.C. 18(a); and any other additional information the Indiana Gaming Commission may request to insure compliance with Indiana gaming laws. Each institutional investor who, individually or in association with others, acquires, directly or indirectly, the beneficial ownership of 15% or more of any class of voting securities of a publicly-traded corporation that owns a riverboat owner's license or 15% or more of the beneficial interest in a riverboat licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for a finding of suitability within 45 days after acquiring the securities. An institutional investor means any of the following: a retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees; an investment company registered under the Investment Company Act of 1940; a collective investment trust organized by banks under Part 9 of the Rules of the Comptroller of the Currency; a closed end investment trust; a chartered or licensed life insurance company or property and casualty insurance company; a banking, chartered or licensed lending institution; an investment adviser registered under the Investment Advisers Act of 1940; and any other entity the Indiana Gaming Commission determines constitutes an institutional investor. The Riverboat Gambling Act imposes a tax on admissions to gaming excursions at a rate of $3.00 for each person admitted to the gaming excursion. This admission tax is imposed upon the license owner conducting the gaming excursion on a per-person basis without regard to the actual fee paid by the person using the ticket, with the exception that no tax shall be paid by admittees who are actual and necessary officials, employees of the licensee or other persons actually working on the riverboat. A tax is imposed on the adjusted gross receipts received from gaming games under the Riverboat Gambling Act at a rate of twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted gross receipts is defined as the total of all cash and property (including checks received by a licensee), whether collected or not, received by a licensee from gaming operations less the total of all cash paid out as winnings to patrons including a provision for uncollectible gaming receivables as is further set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from time to time, impose other fees and assessments on riverboat owner licensees. In addition, all use, excise and retail taxes apply to sales aboard riverboats. In general, riverboat excursions are limited to a duration of at least two and no more than four hours, and no gaming may be conducted while the riverboat is docked, with the exception of (i) the 30 minutes during passenger embarkation and disembarkation and (ii) when weather, water or traffic prevent the riverboat from cruising. Minimum and maximum wagers on games are set by the licensee, and wagering may not be conducted with money or other negotiable currency. No person under the age of 21 is permitted to be present on a riverboat, and wagers may only be taken from a person present on a licensed riverboat. No riverboat licensee or riverboat license applicant may enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received as determined at the time the contract is executed. Any contract entered into by a riverboat licensee or riverboat license applicant that exceeds the total dollar amount of $50,000 shall be a written contract. A riverboat license applicant means an applicant for a riverboat owner's license that has been issued a certificate of suitability. 10 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 maintaining suitability for licensure, is not complying with licensure conditions, and/or is not complying with Indiana gaming laws or regulations. The Indiana Gaming Commission may suspend, revoke, restrict or place conditions on the license of a licensee; require the removal of a licensee or an employee of a licensee; impose a civil penalty or take any other action deemed necessary by the Indiana Gaming Commission to insure compliance with Indiana gaming laws. IOWA In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and Missouri Rivers and certain other waterways located in Iowa. The Excursion Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa Commission") jurisdiction over all gambling operations. The legislation authorized the granting of licenses to conduct riverboat gaming to not-for-profit corporations which, in turn, are permitted to enter into operating agreements with persons who are licensed by the Iowa Commission to operate riverboat casinos. The number of licenses which may be granted is not limited by statute or regulation. Gaming is permitted only on riverboats which recreate, as nearly as practicable, Iowa's riverboat history and have a capacity for at least 250 persons with tickets. In addition the licensee must utilize Iowa resources, goods and services in the operation of the riverboat. An excursion gambling boat must operate at least one excursion each day for 100 days during the excursion season, (from April 1 through October 31). Excursions consist of a minimum two hours during the excursion season. While an excursion 11 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 vessel, and the city or county in which gaming is conducted is permitted to impose an admission fee of not greater than 50 cents. Pursuant to its rule making authority, the Iowa Commission requires officers, directors and certain key employees of the Company to be licensed by the Iowa Commission. In addition, anyone having a material relationship or involvement with the Company may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove a change in position by such officers or key employees and the power to require the Company to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Commission finds unsuitable to act in such capacities. Any contract in excess of $50,000 must be submitted to and approved by the Iowa Commission. The Iowa Commission may also require any individual who has a material relationship with the Company to be investigated and licensed or found suitable. Any person who acquires 5% or more of the Company's equity securities must be approved by the Iowa Commission prior to such acquisition. The applicant stockholder is required to pay all costs of such investigation. Iowa Governor Terry Branstad has proposed that the Iowa legislature impose a five-year moratorium on the expansion of gaming. LOUISIANA In July 1991, the Louisiana legislature adopted legislation permitting certain types of gaming activity on certain rivers and waterways in Louisiana. The legislation granted authority to supervise riverboat gaming activities to the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement Division of the Louisiana State Police (the "Louisiana Enforcement Division"). The Louisiana Riverboat Gaming Commission was authorized to hear and determine all appeals relative to the granting, suspension, revocation, condition or renewal of all licenses, permits and applications. In addition, the Louisiana Riverboat Gaming Commission was to establish rules providing for and determining, among other things, authorized routes, duration of excursions and the stops a riverboat may make, minimum levels of insurance, construction of riverboats, periodic inspections and procedures for negotiable instrument 12 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 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. 13 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 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 14 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. 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 15 welfare of the people of the state of Missouri, or that would discredit the Missouri gaming industry or the state of Missouri. The Missouri Gaming Commission may waive any licensing requirement or procedure for any type of license if it determines that the waiver is in the best interests of the public. In addition, a supplier's license is required of persons who sell or lease gambling equipment, gambling supplies or both to any licensee. A licensee licensed to conduct gambling games shall acquire all gambling games or implements of gambling from a licensed supplier. On August 29, 1996, certain residents of St. Louis County (the "St. Louis Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and injunctive relief generally against the Missouri Gaming Commission and specifically against the granting of licenses by the Missouri Gaming Commission to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP ("Players") with respect to their casino development in Maryland Heights, Missouri. The suit alleged that (i) the Missouri legislature lacks the constitutional authority to authorize the Missouri Gaming Commission to license casinos except on excursion gambling boats and floating facilities "upon" the Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly construed a statute to permit it to grant gaming licenses to excursion gambling boats or floating facilities placed within artificial spaces and (iii) the Missouri Gaming Commission is not authorized to regulate gaming operations conducted upon floating facilities. In December 1996, the Missouri court dismissed the St. Louis Plaintiffs' claim and the St. Louis Plaintiffs appealed the decision to the Missouri Supreme Court. In December 1997, the Missouri Supreme Court ruled that the definition of the words "upon the Mississippi and Missouri Rivers" in the Missouri Constitution required that to be permitted an artificial basin must be contiguous to the river and that the artificial basin must be filled with river water and touch the surface stream of the river for considerable distances. The Company conducts its gaming operations at the Argosy Casino in Riverside on a docked, excursion riverboat from a constructed harbor that is open to the Missouri River. The Company believes that, if necessary, it could modify its operations in Riverside so as to be in compliance with even the strictest construction of the St. Louis Plaintiffs' interpretation of Missouri gaming law. The Company is unable at this time to determine what effect, if any, this action would have on its business, results of operations, competitive position in the Kansas City and St. Louis markets or the merits of the St. Louis Plaintiffs' action. LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally prohibited form of lottery. In order to amend the Kansas constitution, two-thirds of the members of each house of the Kansas legislature and a majority of Kansas voters would have to approve a proposed amendment. The State of Kansas has approved Class III Indian compacts with four separate tribes authorizing the tribes to conduct table and keno games, but not slot machines, on their respective reservation lands. One such casino is open and is located approximately 60 miles from Kansas City. KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally prohibited form of lottery. In order to amend the Kentucky constitution, three-fifths of the members of each house of the Kentucky legislature and a majority of Kentucky voters would have to approve a proposed amendment. Several Kentucky racetracks have publicly lobbied for the right to conduct casino games. OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited form of lottery. In order to amend the Ohio constitution, three-fifths of the members of each house of the Ohio legislature and a majority of Ohio voters would have to approve any proposed amendment. NEBRASKA. A number of efforts to expand gaming in Nebraska failed during 1996. After an effort to present a statewide referendum on legalizing casino gaming failed in the Nebraska legislature, three separate voter petition drives also failed. 16 FEDERAL AND NON-GAMING REGULATIONS The Company and its subsidiaries are subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in additional costs to the Company. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. All vessels operated by the Company must comply with U.S. Coast Guard requirements as to safety and must hold a Certificate of Seaworthiness. These requirements set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessel. Loss of the Certificate of Seaworthiness of a vessel would preclude its use as a riverboat. Every five years, vessels must be dry docked for an inspection of the outside of the hull resulting in a loss of service for a period of time. The U. S. Coast Guard is developing a pilot program which would utilize underwater equipment to complete a hull inspection while the vessel remains in service. This procedure was utilized to inspect the Alton Gaming Company riverboat casino in February 1998. If the procedure is disapproved by the U. S. Coast Guard, Alton Gaming Company would be required to remove its riverboat from service and seek to lease another riverboat casino or discontinue operations for the inspection period. All shipboard employees of the Company employed on U.S. Coast Guard regulated vessels, including those who have nothing to do with the actual operation of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act which, among other things, exempts these employees from state limits on workers' compensation awards. The Company is subject to the provisions of the Americans With Disabilities Act but does not anticipate incurring significant expenses to bring its facilities or procedures into compliance with such Act. The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires banks, other financial institutions and casinos to monitor receipts and disbursements of currency in excess of $10,000 and report them to the United States Department of the Treasury (the "Treasury"). In management's opinion, the BSA may have resulted in a reduction in the volume of play by high level wagerers. The Treasury has proposed tentative amendments to the BSA which would apply solely to casinos and their reporting of currency transactions. The most significant proposed change in the BSA is a reduction in the threshold at which customer identification data must be obtained and documented by the casino, from $10,000 to $3,000 (which may include the aggregation of smaller denomination transactions). Additionally, the amendments would substantially increase the record-keeping requirements imposed upon casinos relating to customer data, currency and non-currency transactions. Management believes the proposed amendments, if enacted in their current form, could result in a further reduction in the volume of play by upper-and middle-level wagerers while adding operating costs associated with the more extensive record-keeping requirements. However, the effect on the Company's operations is not expected to be material. 17 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.
INTEREST FUNCTION LEASE EXPIRATION --------- --------------------------- ------------------ ALTON, ILLINOIS Office Building Leased Executive Offices August 1999 Alton Belle II 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 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 Sprit of America Owned Temporary Lawrenceburg Staging Vessel Argosy I Owned 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. 18 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. CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT On November 29, 1996, Schilling Casino Corporation d/b/a Empire Casino & Resort ("Empire"), an unsuccessful competing applicant for the riverboat owner's license in Lawrenceburg, Indiana that was awarded to the Indiana Partnership by the Indiana Gaming Commission (the "Commission"), filed with the Commission a purported "Request for Hearing" (the "Request") on the denial of Empire's application for the Lawrenceburg license. Empire's Request, which was referred to an Administrative Law Judge (the "ALJ"), did not seek a stay of the award of the license to the Indiana Partnership or of the Indiana Partnership's commencement of regular gaming operations from its temporary gaming facility at Lawrenceburg, which commenced December 10, 1996. The Company and the Indiana Partnership were granted leave to intervene in the administrative proceedings on the Empire Request. The grounds asserted in the Empire Request included claims that (i) the application process followed by the Commission did not afford Empire due process and violated Indiana laws; (ii) the Indiana Partnership failed to comply with conditions in the certificate and failed to open the temporary gaming facility in a timely fashion, (iii) the Indiana Partnership made misrepresentations to the Commission during the licensing hearings; (iv) the Commission could not lawfully have extended the certificate beyond June 30, 1996 (one year after the date of its initial award) without reconsidering all other applications; and (v) the endorsement of the Indiana Partnership by the City of Lawrenceburg was without legal authority and was given improper weight by the Commission. The Company and the Indiana Partnership filed with the ALJ a motion or summary judgment to dismiss Empire's Request; the Commission filed with the ALJ a motion for partial summary judgment on Empire's Request; and Empire filed with the ALJ its "discovery plan" describing discovery it wished to pursue in the matter, as to which the Company and the Indiana Partnership filed a motion for protective order. After briefing and a hearing before the ALJ, the ALJ issued on June 13, 1997 his findings of fact and conclusions of law and his recommended orders to the Commission (the "ALJ Entries") on the various matters presented. The ALJ Entries rejected the claims asserted in Empire's Request; granted the Commission's motion for partial summary judgment; and denied the discovery sought by Empire. The ALJ Entries treated the motion for summary judgment by the Company and the Indiana Partnership as moot (given the recommendation that the Commission's motion for partial summary judgment be granted); and denied the Company's and Indiana Partnership's motion to dismiss, which had been based in part on the claim that Empire's Request did not timely comply with procedural requirements. Finally, the ALJ Entries stated Empire would be entitled to an evidentiary hearing only for purposes of attempting to establish that it should have been awarded the Lawrenceburg license, an issue on which Commission regulations place the burden of proof on Empire. Empire submitted to the Commission exceptions and objections to the ALJ Entries. (The Company and the Indiana Partnership also filed exceptions to the ALJ Entries, to preserve for the record at any subsequent hearing or judicial review proceeding those points on which they disagreed with the ALJ Entries.) At a meeting on August 19, 1997, at which counsel for Empire and counsel for the Company and the Indiana Partnership addressed the Commission, the Commission considered the ALJ Entries and the exceptions and objections of the parties, and entered an order adopting the ALJ Entries in their entirety (the "Commission Order"). 19 On August 25, 1997, the Commission formally notified Empire that it had entered the Commission Order as the "final determination of the Commission" on Empire's Request, and advised that any person who wished to seek judicial review of the Commission Order was required to file a petition for review in an appropriate court within thirty days of service of the notice. The Commission notice also advised Empire that it could seek a hearing on the denial of its license application, as contemplated by the ALJ Entries. Empire has not filed any petition for judicial review of the Commission Order, and the time for filing of such a petition expired in late September 1997. Furthermore, in response to an order issued by the ALJ on September 3, 1997, Empire's counsel notified the ALJ in writing on September 15, 1997, that it would not seek a hearing before the ALJ on the denial of its license application. CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL. In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House") filed a cause of action in the U. S. District Court of the Middle District of Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and Argosy obtained the gaming license for Baton Rouge based upon false and fraudulent pretenses and declarations and financial misrepresentations. The complaint alleges tortious conduct as well as violations of RICO and seeks damages of $158 million plus court costs and attorneys' fees. The plaintiff was an applicant for a gaming license in Baton Rouge whose application was denied by the Louisiana Enforcement Division. The Company believes the allegations of the plaintiff are without merit and intends to vigorously defend such cause of action. On June 7, 1995, the Company consummated its purchase of all of the outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company intends to seek indemnification from the Former Jazz Shareholders for any liability the Company, Argosy Louisiana or Jazz suffers as a result of such cause of action. As part of the consideration payable by the Company to the Former Jazz Shareholder for the acquisition of Jazz, the Company agreed at the time of such acquisition to annual deferred purchase price payments of $1,350,000 for each of the first ten years after closing and $500,000 for each of the next ten years. Payments are to be made quarterly by the Company. The definitive acquisition documents provide the Company with off-set rights against such deferred purchase price payments for indemnification claims of the Company against the Former Jazz Shareholders and for the liabilities that the Former Jazz Shareholder contractually agreed to retain. There can be no assurance that the Former Jazz Shareholders will have assets sufficient to satisfy any claim in excess of the Company's off-set rights. The defendants filed a Motion to Dismiss, or alternatively to abstain and stay the action, pending resolution of certain Louisiana state court claims filed by Capitol House. The trial court decided in favor of the defendants and dismissed the suit without prejudice to the rights of plaintiff to revive the suit after the conclusion of the pending state court matters. The plaintiff appealed this dismissal to the U. S. Fifth Circuit Court of Appeals. While the appeal was pending, several of the Louisiana state court claims were resolved. On March 11, 1997, the U. S. Fifth Circuit Court of Appeals vacated the trial court's dismissal and remanded the case to the district court for further proceedings. The defendants have re-urged the previously filed motion to dismiss. On November 17, 1997, the district court granted the motion and dismissed, with prejudice, all of the federal claims under RICO. The claims of Capitol House that arose under Louisiana state law were dismissed, without prejudice. Capitol House filed an appeal of the district court dismissal on January 9, 1998, and the matter will be appealed to the U. S. Fifth Circuit Court of Appeals. Additionally, Capitol House filed an amended petition in the Nineteenth Judicial District Court for East Baton Rouge Parish, State of Louisiana, Suit Number 418,525 on November 26, 1997, amending its previously filed but unserved suit against Richard Perryman, the person selected by the Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming license for East Baton Rouge Parish, and now adding its state law claims against Jazz, the former shareholders of Jazz, Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit alleges that these parties violated the Louisiana Unfair Trade Practices Act 20 in connection with obtaining the gaming license which was issued to the Company. This suit alleges the same, or substantially similar, facts that formed the basis of the federal claim which was dismissed on November 17, 1997. The defendants have obtained an extension of time to file their response and intend to file an Exception and/or a Motion to Dismiss in response to Capitol House's state court suit. MARION COUNTY, INDIANA GRAND JURY On or after March 15, 1996, the Company, its partners in the Lawrenceburg casino project and certain other individuals and entities were served with document request subpoenas issued by the Office of the Prosecuting Attorney of Marion County, Indiana in connection with a grand jury investigation entitled: STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law requires that at the time a target of an investigation is determined, that entity or person must be so advised by the Office of the Prosecuting Attorney. On March 23, 1996 the Company was advised by the Marion County prosecutor that no target subpoenas had been issued by the grand jury in its investigation as of that date. As described below, the grand jury has since handed up indictments on April 28, 1997 against four persons, but the Company and the partners of the Indiana Partnership continue not to have been advised by the Marion County Prosecutor that any of them is a target of the investigation. However, there can be no assurance that further targets will not be identified as further information and documents are obtained and considered by the grand jury. Due to the confidential nature of grand jury proceedings, the Company is not aware of the specific subject matter or matters of the investigation, other than to the extent revealed by the April 28, 1997 indictments. The Company believes it has fully complied with its subpoena, and has been informed by its partners that they have done the same. The subpoenas requested information regarding the current or prior ownership interest in the Company and the partners of the Indiana Partnership by the individuals or entities described below. The subpoenas also requested that the Company and its partners produce a broad category of documents including documents regarding employment and other agreements, gifts, payments and correspondence between the Company and any of its partners on the one hand and several business entities and individuals, including a then-Indiana state legislator (Samuel Turpin), certain Indiana lobbyists, and certain Lawrenceburg, Indiana city officials and businessmen on the other hand. The Company has learned that this legislator (Turpin) has served as an employee of a subsidiary of Conseco, Inc., the parent company of the 29% limited partner in the Indiana Partnership since September 1995. Additionally, the Company has learned that Turpin has served since September 1993 as a consultant to American Consulting Engineers, Inc. ("ACE"), a major Indiana engineering firm that is engaged in many state and local government funded construction projects. ACE also serves as lead engineer for the Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative Ethics Committee voted to reprimand, but take no further action against, Turpin for failing to properly report the foregoing employment and consulting arrangements on his 1993, 1994 and 1995 statements of economic interests. On June 27, 1996, Turpin announced his resignation as chairman of the Indiana House Ways and Means Committee. Turpin did not seek re-election in 1996 and is no longer a member of the Indiana House of Representatives. On April 28, 1997, the grand jury made a "First and Partial Report" that handed up felony indictments against (1) Willis Conner, co-owner of ACE; (2) Kenneth Cragen, president of and lobbyist for the Indiana Motor Truck Association ("IMTA"); (3) Turpin; and (4) James Wurster, co-owner of ACE. Conner, Wurster and Turpin are each charged with one count of bribery in connection with payments made by ACE to Turpin while he served in the Indiana General Assembly, which payments were stated to be for consulting fees for duties outside the legislative process, but which the indictment charges were in return for official acts by Turpin that promoted the economic interests of ACE. The press release by the Marion County prosecutor at the time of the indictments described those economic interests as including "the promoting of certain riverboat gaming interests in which ACE had a financial interest, the diverting of state funds into highway construction and, while Turpin was a member of the State Budget Committee, the release of state funds that benefited particular ACE public works projects." Turpin was also charged with 21 five counts of filing fraudulent campaign finance reports, and one count of perjury in connection with a sworn statement to the Indiana Bureau of Motor Vehicles. Wurster was also charged with one count, and Cragen with two counts, of unlawful lobbying in connection with lobbying activities involving IMTA and ACE. The company (including entities controlled by its employees) believes that it has not engaged in, or been informed by its partners that they have engaged in, any illegal conduct in the pursuit of or the granting of the gaming license to the Indiana partnership of Lawrenceburg. Because the grand jury proceedings were unlikely to be concluded quickly, on March 25, 1996, a former U.S. Attorney (James Richmond) and his law firm were retained to conduct, as special independent counsel (the "special independent counsel"), an internal investigation into the activities and actions of the Company and the entities controlled by any person employed by the Company with respect to (i) the hiring by Conseco, Inc. and the Indiana engineering firm of the then-state legislator, (Turpin) (ii) the endorsement of the Indiana Partnership by the City of Lawrenceburg and the financial affairs of certain Lawrenceburg officials with respect to such endorsement and the awarding of the certificate of suitability by the Indiana Gaming Commission, and (iii) their lobbying efforts in furtherance of the Indiana legislature's enactment of legislation authorizing gaming and limiting gaming licenses to one per county. A special committee of independent directors of the Company was appointed to supervise and coordinate the special independent counsel's investigation. The special independent counsel did not investigate Conseco, Inc. The Company was advised that Conseco, Inc. also retained independent counsel and such counsel conducted its own internal investigation of matters that may be the subject of the grand jury proceedings and such investigation found no wrongdoing by Conseco, Inc. or any person or entity it controls, or is controlled by. From March 25 to April 15, 1996, the special independent counsel conducted its investigation and issued an interim report in which it concluded that it found no evidence that the Company or any entity controlled by or person employed by the Company had any involvement in, or knowledge of, the relationship between the then-state legislator (Turpin) and Conseco, Inc. or the Indiana engineering firm (ACE), or attempted to improperly influence any City of Lawrenceburg official, state legislator or Indiana Gaming Commission member or staff member in connection with the endorsement of the partnership by the City of Lawrenceburg and the awarding of the certificate of suitability to the Indiana Partnership with regard to lobbying, including the lobbying with respect to one gaming license per county legislation. The special independent counsel found no evidence that the Company or any entity controlled by or person employed by the Company attempted to unduly influence any legislator in any way. However, no investigation was made of any lobbyist's records, activities or expenditures, nor were any outside lobbyists interviewed. The special independent counsel also audited the Company's compliance with the lobbying disclosure statute in Indiana and found only technical errors in the Company's lobbying disclosure statements. No evidence was found that these technical errors were intentional or designed to hide any lobbying activity. In conducting its investigation, the special independent counsel, among other things, reviewed numerous boxes of documents produced by the executive and Lawrenceburg offices of the Company and extensively interviewed the nine Company officers and employees most closely related to the Lawrenceburg Casino project, as well as the principal of R.J. Investments, Inc., a 4% limited partner of the Indiana Partnership. Several months after the completion of his investigation, the special independent counsel (Richmond) was retained as Acting General Counsel of the Company for the period January 14, 1997 through April 30, 1997. No assurance can be given, however, that the nature and scope of the investigation conducted by the special independent counsel for the Company and Conseco, was sufficient to uncover conduct that might be considered unlawful. In the event that the Company, any entity controlled by the Company, any person employed by the Company, the Indiana Partnership or any of its partners is found by the Marion County prosecutor to have engaged in unlawful conduct, there is no assurance what effect such action would have on the Indiana Partnership's gaming license. 22 In the event that a partner is determined by the Indiana Gaming Commission to be unsuitable for ownership of a gaming license, the terms of the Indiana Partnership's partnership agreement provide that the Indiana Partnership shall redeem 100% of such unsuitable partner's interest for an amount equal to 90% of the "appraised value" of that partner's interest, determined in accordance with the terms of the partnership agreement. The purchase price is payable in five annual installments, only from available cash flow or sale or financing proceeds of the partnership, and bears interest at "prime". Also, there can be no assurance that the Indiana Gaming Commission would not take other actions such as suspending, revoking or failing to renew the Indiana Partnership's gaming license. There can be no assurance that the grand jury investigation will not lead to events having a material adverse effect on the Company. MATTERS CONCERNING H. STEVEN NORTON In September, 1993, H. Steven Norton, an employee of the Company at the time, filed a cause of action against John T. Connors, a significant shareholder of the Company and a former officer of J. Connors Group Inc., a predecessor entity of the Company ("JCG"), seeking $50 million in damages. Mr. Norton alleged that Mr. Connors failed to fulfill his promise made in the summer of 1991 to establish a partnership with Mr. Norton in which each would have an equal 50% interest in JCG, which had a 25% partnership interest in the Company's predecessor entity that owned the Alton Belle casino. As a result of the reorganization effected immediately prior to its initial public offering, the Company succeeded to all the rights, properties and assets, and assumed all the liabilities, of all of its predecessor entities, including JCG. Subsequent to filing the lawsuit, Mr. Connors advised the Company that his dealings with Mr. Norton, which are the subject of the litigation, were in his capacity as an officer of JCG, and that the Company should assume the defense and reimburse Mr. Connors for the approximately $130,000 spent to date on legal fees, and that any liability resulting from the litigation was assumed by the Company as a result of the Company's reorganization. The Company responded to Mr. Connors that it believed that his actions and dealings with Mr. Norton were solely in his individual capacity as a shareholder of JCG, and the Company declined to assume the defense or reimburse him for previously incurred legal fees, and the Company denied that it has any liability with respect to such matter. If, however, JCG were to have been found liable to Mr. Norton as a result of the actions of Mr. Connors, then the Company could under certain circumstances be liable to Mr. Norton for any damages awarded against JCG. In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit against Mr. Connors and is again seeking $50 million in damages. The Company believes that Mr. Connors will again seek to cause the Company to indemnify and reimburse him from liability thereunder. Therefore, there can be no assurance that the lawsuit will not lead to events having a material adverse effect on the Company. Mr. Norton's employment with the Company ended on February 27, 1998. Prior to the termination of his employment, Mr. Norton asserted that he was entitled to additional compensation from the Company relating to efforts relating to the Lawrenceburg, Indiana casino. The Company's position is that it has no obligation to Mr. Norton relating to the Lawrenceburg, Indiana casino. The Company expects that if no agreement is reached with respect to Mr. Norton's Lawrenceburg claim and other severance related claims Mr. Norton will commence a cause of action against the Company, which the Company will vigorously defend. GAMING INDUSTRY CLASS ACTIONS The Company has been named, along with two gaming equipment suppliers, 41 of the country's largest gaming operators and four gaming distributors (the "Gaming Industry Defendants") in three class action lawsuits pending in Las Vegas, Nevada. The suits allege that the Gaming Industry Defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a course of fraudulent and misleading conduct intended to induce people to play their gaming machines based upon a false belief concerning how those gaming machines actually operate, as well as to the extend to which there 23 is actually an opportunity to win on any given play. The suites seek unspecified compensatory and punitive damages. On January 14, 1997, the Court consolidated all three actions under the case name WILLIAM H. POULOS, ETC. V. CAESARS WORLD, INC., ET AL. On February 13, 1997 the plaintiffs filed a consolidated amended complaint. The Court subsequently dismissed this complaint, in part, and on January 8, 1998, the plaintiffs filed a second consolidated amended complaint. On February 11, 1998 the defendants filed their consolidated answer. On March 19, 1998 the court split discovery between merit discovery and class certification discovery and stayed merit discovery pending a decision on class certification. The Company is unable to determine what effect, if any, the suit would have on its business or operations. CONSERVANCY DISTRICT LEASE LITIGATION IN DEARBORN COUNTY, INDIANA On March 21, 1997, an action was filed in the Circuit Court of Dearborn County, Indiana as Cause No. 15CO1-9703-CP-073, challenging the validity of a lease to the City by the Conservancy District of Lawrenceburg, Indiana (the "District") of certain land owned by the District, which land has in turn been subleased by the City to the the Indiana Partnership and is being used for development and operation of the riverboat gaming facility in the City for which the Indiana Partnership has been awarded a riverboat owner's license by the Commission. Defendants are the District and its individual directors. In early 1998, the Indiana Partnership petitioned to intervene to assist in defending the validity of the challenged lease, which petition is pending before the Court. The District and its directors have advised that they are contesting the action and intend to continue to do so vigorously. If permitted to intervene, the Indiana Partnership also intends to contest the action vigorously. PENDING INTERNAL REVENUE SERVICE AUDIT On November 1, 1994, the Company received a Notice of the beginning of an Administrative Proceeding from the Internal Revenue Service ("IRS") for the 1992 and 1993 tax years of Metro Entertainment & Tourism, Inc. ("Metro"). Metro was merged with and into the Company immediately prior to its initial public offering in February 1993. Metro along with J. Connors Group, Inc. ("Connors") were the partners of Alton Riverboat Gambling Partnership ("ARGP") which until the Company's initial public offering owned and operated the Alton, Illinois riverboat casino. The IRS has proposed certain adjustments with respect to the Company for its 1993 tax year in a 30-day letter. The IRS has also proposed adjustments for ARGP that flow through to Metro in a 60-day letter. Finally, on March 16, 1998 the IRS issued a 60-day letter to Metro for its tax years ending December 1992 and February 1993. The principal issues raised by the IRS in the Metro 60-day letter involve the status of Metro as an S Corporation and the deductibility of the $8.5 million accomodation fee paid to William McEnery in 1992 and 1993. The total Federal tax liability asserted by the IRS against the Company resulting from these proposed adjustments is approximately $11.0 million including interest through December 31, 1997 but excluding penalties, if any. The Company intends to protest these proposed adjustments to the Appeals Office of the IRS and vigorously contest these proposed adjustments. 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 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Proxy Statement, page 18 section entitled "Market for Registrants Common Equity and Related Stockholder Matters." 24 ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from the Annual Report, inside front cover, 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 26-33 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Argosy Gaming Company are included in this report: AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY GAMING COMPANY Incorporated by reference from the Annual Report, pages 34-51, 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....................................................... 27 Balance Sheets....................................................................... 28 Statements of Income................................................................. 29 Statements of Stockholder's Equity................................................... 30 Statements of Cash Flows............................................................. 31 Notes to Financial Statements........................................................ 32 FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY Report of Independent Auditors....................................................... 36 Balance Sheets....................................................................... 37 Statements of Operations............................................................. 38 Statements of Stockholder's Equity................................................... 39 Statements of Cash Flows............................................................. 40 Notes to Financial Statement......................................................... 41 CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC. Report of Independent Auditors....................................................... 45 Consolidated Balance Sheets.......................................................... 46 Consolidated Statements of Operations................................................ 47 Consolidated Statements of Stockholder's Equity...................................... 48 Consolidated Statements of Cash Flows................................................ 49 Notes to Consolidated Financial Statements........................................... 50 FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM Report of Independent Auditors....................................................... 55 Balance Sheets....................................................................... 56 Statements of Operations............................................................. 57
25 Statements of Partners' Equity....................................................... 58 Statements of Cash Flows............................................................. 59 Notes to Financial Statements........................................................ 60 FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC. Report of Independent Auditors....................................................... 64 Balance Sheets....................................................................... 66 Statements of Operations............................................................. 67 Statements of Stockholder's Equity................................................... 68 Statements of Cash Flows............................................................. 69 Notes to Financial Statements........................................................ 70 CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY Report of Independent Auditors....................................................... 76 Consolidated Balance Sheets.......................................................... 77 Consolidated Statements of Operations................................................ 78 Consolidated Statements of Stockholder's Equity...................................... 79 Consolidated Statements of Cash Flows................................................ 80 Notes to Consolidated Financial Statements........................................... 81 FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P. Report of Independent Auditors....................................................... 86 Balance Sheets....................................................................... 87 Statements of Operations............................................................. 88 Statements of Partners' Equity....................................................... 89 Statements of Cash Flows............................................................. 90 Notes to Financial Statements........................................................ 91
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. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 26 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, 1997 and 1996, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alton Gaming Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois February 13, 1998 27 ALTON GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1997 1996 --------- --------- CURRENT ASSETS: Cash...................................................................................... $ 3,807 $ 3,563 Accounts receivable, net of allowance for doubtful accounts of $259 and $311, respectively............................................................................ 211 330 Deferred income taxes..................................................................... 690 631 Other current assets...................................................................... 549 521 --------- --------- Total current assets.................................................................... 5,257 5,045 --------- --------- Due from affiliates....................................................................... 10,405 10,592 Net property and equipment................................................................ 27,447 30,112 Other assets.............................................................................. 6 7 --------- --------- Total assets............................................................................ $ 43,115 $ 45,756 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 799 $ 1,547 Accrued payroll and related expenses...................................................... 1,221 1,011 Slot club liability....................................................................... 766 956 Other accrued liabilities................................................................. 1,515 1,164 Accrued insurance......................................................................... 1,107 1,168 --------- --------- Total current liabilities............................................................... 5,408 5,846 --------- --------- OTHER LONG-TERM OBLIGATIONS--RELATED PARTY.................................................. 186 171 DEFERRED INCOME TAXES....................................................................... 3,745 3,494 STOCKHOLDER'S EQUITY: Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1 Capital in excess of par.................................................................. 256 256 Retained earnings......................................................................... 33,519 35,988 --------- --------- Total stockholder's equity............................................................ 33,776 36,245 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 43,115 $ 45,756 --------- --------- --------- ---------
See accompanying notes to financial statements. 28 ALTON GAMING COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- REVENUES: Casino......................................................................... $ 61,877 $ 72,369 $ 81,413 Food, beverage and other....................................................... 7,433 7,817 7,849 --------- --------- --------- 69,310 80,186 89,262 Less promotional allowances.................................................... (2,102) (2,253) (3,269) --------- --------- --------- Net revenues..................................................................... 67,208 77,933 85,993 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 31,672 36,082 36,185 Food, beverage and other....................................................... 7,113 7,473 6,820 Other operating expenses....................................................... 5,623 5,706 5,437 Selling, general and administrative............................................ 10,856 12,226 10,818 Depreciation and amortization.................................................. 4,455 4,206 4,288 Allocation of corporate costs--related party................................... 2,247 4,193 3,742 --------- --------- --------- 61,966 69,886 67,290 --------- --------- --------- Income from operations........................................................... 5,242 8,047 18,703 --------- --------- --------- OTHER INCOME (EXPENSE): Interest income................................................................ 70 50 87 Interest expense............................................................... (14) (51) (178) --------- --------- --------- 56 (1) (91) --------- --------- --------- Income before income taxes....................................................... 5,298 8,046 18,612 Income tax expense............................................................... 2,002 3,198 7,399 --------- --------- --------- Net income....................................................................... $ 3,296 $ 4,848 $ 11,213 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 29 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, 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 Net income............................ 3,296 3,296 Dividends............................. (5,765) (5,765) -- ------- ----- -------- ------- Balance, December 31, 1997.............. 1,000 $ 1 $ 256 $ 33,519 $ 33,776 -- -- ------- ----- -------- ------- ------- ----- -------- -------
See accompanying notes to financial statements. 30 ALTON GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................................... $ 3,296 $ 4,848 $ 11,213 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 4,455 4,206 4,288 Loss on disposal of equipment................................................ 90 Deferred income taxes........................................................ 192 597 1,612 Changes in operating assets and liabilities: Accounts receivable........................................................ 119 138 16 Other current assets....................................................... (28) 395 32 Other assets............................................................... 166 327 Accounts payable........................................................... (748) 273 (8) Other accrued liabilities.................................................. 96 (1,503) 1,799 Income taxes payable to affiliate.......................................... 214 (5,570) (9,474) --------- --------- ---------- Net cash provided by operating activities................................ 7,686 3,550 9,805 --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................ (1,686) (1,680) (1,566) --------- --------- ---------- Net cash used in investing activities.................................... (1,686) (1,680) (1,566) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid............................................................... (5,765) (2,885) Payments on long-term debt--related party.................................... (431) Due from affiliate........................................................... (6) 692 (6,548) Increase (decrease) in other long term obligations--related party............ 15 13 (294) --------- --------- ---------- Net cash used in financing activities.................................... (5,756) (2,180) (7,273) --------- --------- ---------- Net increase (decrease) in cash.............................................. 244 (310) 966 Cash, beginning of year...................................................... 3,563 3,873 2,907 --------- --------- ---------- Cash, end of year............................................................ $ 3,807 $ 3,563 $ 3,873 --------- --------- ---------- --------- --------- ----------
See accompanying notes to financial statements. 31 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 1996 and 1995 amounts have been reclassified to conform to the 1997 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 food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1997 1996 1995 --------- --------- --------- Food, beverage and other......................................... $ 1,112 $ 1,238 $ 1,662
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $2,807, $3,225 and $3,089 for the years ended December 31, 1997, 1996 and 1995, 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. 32 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- Leasehold and shore improvements................................................ $ 1,933 $ 1,194 Riverboat, dock and improvements................................................ 30,497 29,801 Furniture, fixtures and equipment............................................... 12,209 13,627 ---------- ---------- 44,639 44,622 Less accumulated depreciation and amortization.................................. (17,192) (14,510) ---------- ---------- Net property and equipment...................................................... $ 27,447 $ 30,112 ---------- ---------- ---------- ----------
3. INCOME TAXES Income tax expense for the years ended December 31, 1997, 1996 and 1995, consists of the following:
1997 1996 1995 --------- --------- --------- Current: Federal.................................................................. $ 1,586 $ 2,273 $ 5,150 State.................................................................... 224 328 637 --------- --------- --------- 1,810 2,601 5,787 --------- --------- --------- Deferred: Federal.................................................................. 155 526 1,419 State.................................................................... 37 71 193 --------- --------- --------- 192 597 1,612 --------- --------- --------- Income tax expense..................................................... $ 2,002 $ 3,198 $ 7,399 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1997, 1996 and 1995, differs from that computed at the Federal Statutory tax rate as follows:
1997 1996 1995 --------- --------- --------- Federal statutory rate...................................................... 34.0% 35.0% 35.0% State income taxes, net of federal benefit.................................. 4.8 4.7 4.5 Other....................................................................... (1.0) 0.3 --- --- --- 37.8% 39.7% 39.8% --- --- --- --- --- ---
33 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, 1997 and 1996 are as follows:
1997 1996 --------- --------- Depreciation....................................................................... $ (3,791) $ (3,524) Start-up costs..................................................................... 46 30 Other.............................................................................. 690 631 --------- --------- Net deferred tax liability......................................................... $ (3,055) $ (2,863) --------- --------- --------- ---------
4. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid $14, $148 and $5 for interest for the years ended December 31, 1997, 1996 and 1995, respectively, and $1,597, 8,170 and $15,261 for income taxes in 1997, 1996 and 1995 to Argosy. During 1997, the Company transferred equipment to affiliates with a carrying value of $278. Amounts due from affiliates increased by this amount as a result of the transfer. During 1997, Argosy transferred a barge to the Company with a carrying value of $432. Amounts due from affiliates decreased by this amount as a result of the transfer. 5. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1997, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1998.................................................................................. $ 197 1999.................................................................................. 155 2000.................................................................................. 139 2001.................................................................................. 3
Rent expense for the years ended December 31, 1997, 1996 and 1995, was $532, $565 and $490, 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, worker's compensation and other insurance programs. The Company's estimated share of these costs, which is allocated directly to the Company by Argosy, was $2,023, $3,309 and $2,154 for the years ended December 31, 1997, 1996 and 1995, respectively. Interest expense to related parties amounted to $14, $32 and $178 for the years ended December 31, 1997, 1996 and 1995, 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. 34 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 Gaming Company Employees Savings Trust, a 401(k) defined contribution plan, which covers substantially all of its full time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expenses recognized by the Company under the Plan were $530, $461 and $461 for the years ended December 31, 1997, 1996 and 1995, 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 $13,900, including interest through December 31, 1997, but excluding penalties, if any. While the Company believes the Predecessor has legal authority for its position that it is not subject to federal and certain state income taxes because it met the S-Corporation requirements, no assurances can be given that the Predecessor's position will be upheld. This contingent liability could have a material adverse effect on the Company's results of operations, financial condition and cash flows. No provision has been made for this contingency in the accompanying 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. 35 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, 1997 and 1996, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Missouri Gaming Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Kansas City, Missouri February 13, 1998 36 THE MISSOURI GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1997 1996 --------- --------- CURRENT ASSETS: Cash...................................................................................... $ 3,629 $ 6,143 Accounts receivable, net.................................................................. 269 220 Income taxes receivable from affiliate.................................................... 94 Prepaid rent.............................................................................. 1,041 1,160 Other current assets...................................................................... 217 183 Deferred income taxes..................................................................... 370 --------- --------- Total current assets................................................................ 5,620 7,706 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 70,878 75,773 OTHER ASSETS: Deposits.................................................................................. 221 88 Prepaid rent.............................................................................. 917 1,917 Other..................................................................................... 1,060 1,267 --------- --------- Total other assets.................................................................. 2,198 3,272 --------- --------- TOTAL ASSETS................................................................................ $ 78,696 $ 86,751 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 1,352 $ 3,505 Accrued payroll and related expenses...................................................... 1,181 1,299 Slot club liability....................................................................... 674 636 Accrued insurance......................................................................... 917 748 Other accrued liabilities................................................................. 920 1,561 Income taxes payable to affiliate......................................................... 4,435 --------- --------- Total current liabilities........................................................... 5,044 12,184 --------- --------- DUE TO AFFILIATES........................................................................... 56,007 56,345 DEFERRED INCOME TAXES....................................................................... 1,851 907 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......................................................................... 10,794 12,315 --------- --------- Total stockholder's equity.......................................................... 15,794 17,315 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 78,696 $ 86,751 --------- --------- --------- ---------
See accompanying notes to financial statements. 37 THE MISSOURI GAMING COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS)
DECEMBER 31, -------------------------------- 1997 1996 1995 --------- --------- ---------- REVENUES: Casino........................................................................ $ 61,750 $ 82,247 $ 86,443 Admissions.................................................................... 1,983 15,300 Food, beverage and other...................................................... 10,050 11,065 5,203 --------- --------- ---------- 71,800 95,295 106,946 Less promotional allowances................................................... (5,252) (6,822) (12,888) --------- --------- ---------- Net revenues.................................................................. 66,548 88,473 94,058 --------- --------- ---------- COSTS AND EXPENSES: Casino........................................................................ 33,568 43,733 41,883 Food, beverage and other...................................................... 8,583 9,552 4,934 Selling, general and administrative........................................... 11,871 13,399 13,590 Other operating expenses...................................................... 4,098 5,263 4,199 Depreciation and amortization................................................. 5,947 6,724 7,395 Preopening.................................................................... 392 Lease termination............................................................. 3,508 --------- --------- ---------- 64,067 82,571 72,001 --------- --------- ---------- Income from operations.......................................................... 2,481 5,902 22,057 --------- --------- ---------- OTHER INCOME (EXPENSE): Interest income............................................................... 231 40 Interest expense.............................................................. (5,162) (6,048) (3,626) --------- --------- ---------- (4,931) (6,008) (3,626) --------- --------- ---------- (Loss) income before income taxes............................................... (2,450) (106) 18,431 Income tax benefit (expense).................................................... 929 42 (6,875) --------- --------- ---------- Net (loss) income............................................................... $ (1,521) $ (64) $ 11,556 --------- --------- ---------- --------- --------- ----------
See accompanying notes to financial statements. 38 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, 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 Net loss............................................... (1,521) (1,521) ----- ----------- ----------- --------- ------------ Balance, December 31, 1997............................... 1,000 $ $ 5,000 $ 10,794 $ 15,794 ----- ----------- ----------- --------- ------------ ----- ----------- ----------- --------- ------------
See accompanying notes to financial statements. 39 THE MISSOURI GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 --------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................................................... $ (1,521) $ (64) $ 11,556 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization of fixed assets................................. 5,740 6,484 7,109 Amortization of other assets.................................................. 207 240 286 Deferred income taxes......................................................... 455 1,320 734 Lease termination costs....................................................... 1,941 Changes in operating assets and liabilities: Accounts receivable......................................................... (49) (91) (92) Other current assets........................................................ 85 505 182 Accounts payable............................................................ (2,153) 947 5,232 Accrued liabilities......................................................... (339) 812 601 Income taxes payable to affiliate........................................... (4,529) (1,587) 4,230 Other assets................................................................ 1,000 1,000 1,217 --------- ---------- ---------- Net cash (used in) provided by operating activities......................... (1,104) 11,507 31,055 --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................................... (998) (19,192) (31,496) --------- ---------- ---------- Net cash used in investing activities....................................... (998) (19,192) (31,496) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on installment contracts............................................. (94) (797) (5,277) Due from affiliate............................................................ (185) 10,294 4,762 Decrease in deposits.......................................................... (133) 200 --------- ---------- ---------- Net cash (used in) provided by financing activities......................... (412) 9,697 (515) --------- ---------- ---------- Net (decrease) increase in cash............................................... (2,514) 2,012 (956) Cash, beginning of year....................................................... 6,143 4,131 5,087 --------- ---------- ---------- Cash, end of year............................................................. $ 3,629 $ 6,143 $ 4,131 --------- ---------- ---------- --------- ---------- ----------
See accompanying notes to financial statements. 40 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Missouri Gaming Company ("Company") (a Missouri company and a wholly owned subsidiary of Argosy Gaming Company, ("Argosy")) owns and operates a Riverboat casino and related facilities in Riverside, Missouri. The Company operated from a temporary facility while its permanent facility was under construction. 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. Certain amounts in 1996 and 1995 have been reclassified to conform to the 1997 presentation. CASH AND CASH EQUIVALENTS The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment 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 and food and beverage and other items which were provided to customers without charge, has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in operating costs and expenses as follows:
1997 1996 1995 --------- --------- --------- Admissions.................................................... $ $ 315 $ 4,601 Food, beverage and other...................................... 2,419 1,902 522
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. 41 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1997, 1996 and 1995 was $2,548, $3,214 and $2,619, 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, ---------------------- 1997 1996 ---------- ---------- Land and improvements $ 14,658 $ 14,658 Buildings and improvements...................................................... 29,107 28,542 Riverboat, dock and improvements................................................ 23,810 24,115 Furniture, fixtures and equipment............................................... 18,501 18,033 ---------- ---------- 86,076 85,348 Accumulated depreciation and amortization....................................... (15,198) (9,575) ---------- ---------- Net property and equipment...................................................... $ 70,878 $ 75,773 ---------- ---------- ---------- ----------
3. RIVERSIDE AGREEMENT The Company entered into a Lease and Development Agreement ("Agreement") with the City of Riverside, Missouri. The Agreement, as amended, required the Company to pay $1,600 for the construction of a city park and for the development of a golf course. These payments were capitalized, are included as an intangible asset in the accompanying balance sheet, and are being amortized over ten years using the straight-line method. The unamortized portion of these payments is included in other assets in the accompanying balance sheets. Under the terms of the Agreement, the Company leases its site from the City of Riverside. The $5,000 minimum rent due for the initial five-year term of the lease was paid in advance as required by the Agreement. In addition to minimum rent, during the initial five-year lease term, percentage rent is payable at 3% of revenues, as defined, over $100 million annually. The Company has the option to extend the Agreement for three successive five-year terms. In all extension periods, there will be no minimum rent and percentage rent will be payable as follows: (i) 3% on the first $50 million of revenues; (ii) 4% on revenues between $50 million and $100 million; and (iii) 5% on revenues in excess of $100 million. The Agreement requires the Company to maintain a net worth of $5,000 at all times, unless approved by the City of Riverside. 42 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax benefit (expense) for years ended December 31, 1997, 1996 and 1995 consists of the following:
1997 1996 1995 --------- --------- --------- Current: Federal................................................................. $ 1,240 $ 1,200 $ (5,419) State................................................................... 144 162 (722) --------- --------- --------- 1,384.... 1,362 (6,141) --------- --------- --------- Deferred: Federal................................................................. (417) (1,162) (646) State................................................................... (38) (158) (88) --------- --------- --------- (455) (1,320) (734) --------- --------- --------- Income tax benefit (expense)............................................ $ 929 $ 42 $ (6,875) --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1997, 1996 and 1995 differs from that computed at the Federal Statutory corporate tax rate as follows:
1997 1996 1995 --------- --------- --------- Federal statutory rate................................................. (34.0)% (35.0)% 35.0% State income taxes, net of federal benefit............................. (4.1) (4.8) 4.4 Nondeductible contributions............................................ Other.................................................................. 0.2 (2.4) --------- --------- --- (37.9)% (39.8)% 37.0% --------- --------- --- --------- --------- ---
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Start-up costs..................................................................... $ 323 $ 565 Depreciation....................................................................... (2,174) (1,472) Other, net......................................................................... 370 (119) --------- --------- Net deferred tax liability......................................................... $ (1,481) $ (1,026) --------- --------- --------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment of $135 and $1,681 in 1996 and 1995, respectively which was financed through installment contracts. The Company paid $5,393, $8,043 and $273 for interest and $3,518, $225 and $1,911 for taxes in 1997, 1996 and 1995, respectively. 43 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. RELATED PARTY TRANSACTIONS The Company participates in Argosy's property, general liability, worker's compensation and other insurance programs. The Company's estimated share of these costs, which is allocated directly to the Company by Argosy, was $2,603, $2,853 and $2,584 for the years ended December 31, 1997, 1996 and 1995, respectively. The Company has outstanding long-term debt with Argosy in the amounts of $56,007 and $56,345 at December 31, 1997 and 1996, 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 portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was $422, $441 and $490 for the years ended December 31, 1997, 1996 and 1995, respectively. 8. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1997, are as follows:
YEAR ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1998.................................................................................. $ 277 1999.................................................................................. 58 2000.................................................................................. 35 2001.................................................................................. 26
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $1,539, $1,874 and $3,447, 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") 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. 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. 44 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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Argosy of Louisiana, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP New Orleans, Louisiana February 13, 1998 45 ARGOSY OF LOUISIANA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1997 1996 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................. $ 3,429 $ 3,051 Accounts receivable, net of allowance for doubtful accounts of $838 and $856, respectively............................................................................ 484 611 Deferred income taxes..................................................................... 427 Income taxes receivable from related party................................................ 742 879 Other current assets...................................................................... 429 859 --------- --------- Total current assets.................................................................... 5,084 5,827 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 43,896 49,021 OTHER ASSETS: Deferred lease acquisition cost, net...................................................... 1,808 1,915 Other..................................................................................... 13 291 --------- --------- Total other assets...................................................................... 1,821 2,206 --------- --------- TOTAL ASSETS................................................................................ $ 50,801 57,054 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 771 $ 1,127 Accrued payroll and related expenses...................................................... 919 749 Other accrued liabilities................................................................. 999 1,697 Due to affiliates......................................................................... 1,795 Accrued interest-related party............................................................ 902 Accrued insurance......................................................................... 1,693 448 Accrued gaming taxes...................................................................... 500 580 Notes payable and current maturities of long-term debt-related party...................... 10,268 5,578 --------- --------- Total current liabilities............................................................... 17,847 10,179 --------- --------- LONG-TERM DEBT-RELATED PARTY................................................................ 37,842 42,812 DEFERRED INCOME TAXES 1,183 MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................................... 2,672 3,174 STOCKHOLDER'S DEFICIT: Common stock-$1 par value, 1,000 shares authorized, issued and outstanding................ 1 1 Accumulated deficit....................................................................... (7,561) (295) --------- --------- (7,560) (294) --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................................................. $ 50,801 $ 57,054 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 46 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- REVENUES: Casino......................................................................... $ 47,628 $ 51,007 $ 48,427 Food, beverage and other....................................................... 7,046 7,641 4,945 --------- --------- --------- 54,674 58,648 53,372 Less promotional allowances...................................................... (4,238) (5,228) (3,566) --------- --------- --------- Net revenues..................................................................... 50,436 53,420 49,806 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 27,887 26,923 25,547 Food, beverage and other....................................................... 6,799 4,894 3,772 Other operating expenses....................................................... 5,147 4,757 4,013 Selling, general and administrative............................................ 12,346 10,939 10,164 Depreciation and amortization.................................................. 5,468 6,379 5,430 Referendum expenses............................................................ 1,347 --------- --------- --------- 57,647 55,239 48,926 --------- --------- --------- (Loss) income from operations.................................................... (7,211) (1,819) 880 --------- --------- --------- INTEREST EXPENSE (INCOME) NET: Interest to related party...................................................... 1,402 1,603 Interest....................................................................... (89) (119) 92 --------- --------- --------- (Loss) income before income taxes and minority interest.......................... (8,524) (3,303) 788 Income tax benefit (expense)..................................................... 756 1,061 (333) Minority interest................................................................ 502 145 36 --------- --------- --------- Net (loss) income................................................................ $ (7,266) $ (2,097) $ 491 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 47 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RETAINED COMMON EARNINGS SHARES STOCK (DEFICIT) TOTAL ----------- ------------- ----------- --------- 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 loss............................................................... (2,097) (2,097) -- ----- ----------- --------- Balance, December 31, 1996............................................... 1,000 1 (295) (294) Net loss............................................................... (7,266) (7,266) -- ----- ----------- --------- Balance, December 31, 1997............................................... 1,000 $ 1 $ (7,561) $ (7,560) -- -- ----- ----------- --------- ----- ----------- ---------
See accompanying notes to consolidated financial statements. 48 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income................................................................ $ (7,266) $ (2,097) $ 491 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation................................................................... 5,083 5,780 4,951 Amortization................................................................... 385 599 479 Minority interest.............................................................. (502) (145) (36) Deferred income taxes.......................................................... (756) (1,061) 1,143 Changes in operating assets and liabilities: Accounts receivable.......................................................... 127 185 (593) Income tax receivable from related party..................................... 137 Accrued interest to related party............................................ 902 Other current assets......................................................... 430 (166) (645) Accounts payable............................................................. (356) (191) 282 Accrued payroll and related expenses......................................... 170 138 (392) Other accrued liabilities.................................................... 467 1,047 (469) --------- --------- ---------- Net cash (used in) provided by operating activities........................ (1,179) 4,089 5,211 --------- --------- ---------- --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.............................................. (444) (713) (13,914) Proceeds from sale of equipment to affiliates.................................... 486 --------- --------- ---------- Net cash provided by (used in) investing activities........................ 42 (713) (13,914) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in amounts due to affiliates............................................ 1,795 (Decrease) increase in notes payable and long-term debt.......................... 8,160 Payments on notes payable and long-term debt..................................... (280) (5,595) (3,048) Notes receivable-affiliate....................................................... 2,801 Decrease (increase) in other assets.............................................. 69 (82) --------- --------- ---------- Net cash provided by (used in) financing activities........................ 1,515 (5,526) 7,831 --------- --------- ---------- Net increase (decrease) in cash and cash equivalents............................. 378 (2,150) (872) Cash and cash equivalents, beginning of year..................................... 3,051 5,201 6,073 --------- --------- ---------- Cash and cash equivalents, end of year........................................... $ 3,429 $ 3,051 $ 5,201 --------- --------- ---------- --------- --------- ----------
See accompanying notes to consolidated financial statements. 49 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Argosy of Louisiana, Inc. (collectively with its controlled partnership Catfish Queen Partnership in Commendam ("Partnership") "the Company") was formed on July 29, 1993. The Company entered a partnership agreement with Jazz Enterprises, Inc. ("Jazz") to form the Partnership to provide riverboat gaming and related entertainment in Baton Rouge, Louisiana. The Company, 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 November 5, 1996 the voters of East Baton Rouge Parish voted to continue to allow riverboat gaming in the parish. Costs associated with the Partnership's efforts to pass this referendum have been reflected in the accompanying statement of operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany accounts and transactions have been eliminated. Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. CASH AND CASH EQUIVALENTS The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value at December 31, 1997 and 1996. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the estimated useful lives or lease period as follows: Riverboat, dock and improvements 15 to 20 years Furniture, fixtures and equipment 5 to 7 years DEFERRED LEASE ACQUISITION COSTS Deferred lease acquisition costs resulted from the contribution of certain leases by Jazz to the Partnership. This cost is amortized on the straight-line method over 20 years. Accumulated amortization was $350 and $243 at December 31, 1997 and 1996, 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, beverage and other items which were 50 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances for food and beverages and other items was $2,493, $2,534 and $2,166 in 1997, 1996 and 1995, respectively, and has been included in food and beverage and other items costs and expenses. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense was $1,656, $1,527 and $1,580 in 1997, 1996 and 1995, respectively. INCOME TAXES Earnings or losses from the Company are included in the consolidated tax returns of Argosy. The Company computes federal and state taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- Leasehold and shore improvements.......................................................... $ 6,967 $ 6,948 Riverboat, docks and improvements......................................................... 36,072 36,051 Furniture, fixtures and equipment......................................................... 16,825 17,136 Construction in progress.................................................................. 317 317 ---------- ---------- 60,181 60,452 Less accumulated depreciation and amortization............................................ (16,285) (11,431) ---------- ---------- Net property and equipment................................................................ $ 43,896 $ 49,021 ---------- ---------- ---------- ----------
3. LONG-TERM DEBT-RELATED PARTY Notes payable and long term debt consists of the following:
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- 8% unsecured note payable to Argosy in quarterly installments of $930,815 including interest, through July 2001.............................................................. $ 17,527 $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 1998............................. 1,844 1,844 Noninterest-bearing advances from Argosy, no stated maturity.............................. 28,739 29,019 ---------- ---------- 48,110 48,390 Less current maturities................................................................... (10,268) (5,578) ---------- ---------- $ 37,842 $ 42,812 ---------- ---------- ---------- ----------
During 1996, the right to a note payable from the Partnership to the Company was assigned to Argosy. 51 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The carrying value of long term debt approximates fair value at December 31, 1997 and 1996. During 1997, the Company did not make scheduled debt payments to Argosy. Argosy has agreed to provide operating support to the Company and to the extent necessary will not demand payment on the current portion of the long-term debt during 1998 and has agreed to not demand payment on the noninterest bearing advances prior to January 1, 1999. Maturities of long term debt, excluding the noninterest bearing advances, but including scheduled payments under the notes payable to Argosy which were due prior to December 31, 1997 and which have not yet been paid are as follows: 1998 $10,268 1999 3,082 2000 3,337 2001 2,684 4. INCOME TAXES Income tax benefit (expense) consists of the following:
YEARS ENDED DECEMBER 31, -------------------------------- 1997 1996 1995 --------- --------- ---------- Current: Federal........................................................................... $ 718 State............................................................................. 92 --------- --------- ---------- Total current....................................................................... 810 --------- --------- ---------- Deferred: Federal........................................................................... 691 934 (1,000) State............................................................................. 65 127 (143) --------- --------- ---------- Total deferred...................................................................... 756 1,061 (1,143) --------- --------- ---------- Income tax benefit (expense)........................................................ $ 756 $ 1,061 $ (333) --------- --------- ---------- --------- --------- ----------
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Tax over book depreciation................................................................... $ (5,025) $ (4,688) Net operating loss carryforward.............................................................. 6,790 3,108 Pre-opening.................................................................................. 222 397 Other, net................................................................................... 450 427 --------- --------- 2,437 (756) Valuation allowance.......................................................................... (2,437) --------- --------- Net deferred tax assets (liabilities)........................................................ $ $ (756) --------- --------- --------- ---------
52 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Tax at U. S. statutory rates.................................................... (35.0)% (35.0 )% 35.0 % State income tax, net of federal tax benefit.................................... (5.3 ) (3.9 ) 5.7 Nondeductible referendum expenses............................................... 16.4 Prior year taxes................................................................ (4.6 ) Valuation allowance............................................................. 28.6 Targeted jobs tax credits, net.................................................. (3.3 ) Other, net...................................................................... 2.8 (5.0 ) 4.9 ----- ----- ----- (8.9 )% (32.1 )% 42.3 % ----- ----- ----- ----- ----- -----
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. 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 $3,398, $3,539 and $2,202 in 1997, 1996 and 1995, respectively. Approximately $2,920, $3,091 and $1,800 in 1997, 1996 and 1995, 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 $2,511, $1,989 and $2,183 in 1997, 1996 and 1995, 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 may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was approximately $392, $320 and $503 in 1997, 1996 and 1995, respectively. 7. SUPPLEMENTAL CASH FLOW INFORMATION In 1995, the Company entered into capital lease obligations totaling $376 for the acquisition of property and equipment. The Company paid interest of $500, $2,811 and $943 in 1997, 1996 and 1995, respectively. 53 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) During 1996, Argosy transferred property and equipment to the Company with a fair value of $1,844, subject to an unsecured note payable. During 1996, the Company transferred property and equipment to Jazz with a fair value of $12,471 and recorded a receivable from Jazz in the same amount. The rights to this receivable was assigned to Argosy and reduced the amounts due to Argosy from non-interest bearing advances. 8. COMMITMENTS AND CONTINGENCIES On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional passenger fee, which is now $2.50 per passenger, until actual construction of a hotel commences by Jazz or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1997, the Company has paid all admission payments due under the above agreements. Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1997 are as follows: 1998 $485 1999 351 2000 319 2001 342 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. 54 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, 1997 and 1996, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP New Orleans, Louisiana February 13, 1998 55 CATFISH QUEEN PARTNERSHIP IN COMMENDAM BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1997 1996 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................. $ 3,429 $ 3,051 Accounts receivable, net of allowance for doubtful accounts of $838 and $856.............. 484 611 Inventories............................................................................... 145 203 Other current assets...................................................................... 173 320 --------- --------- Total current assets.................................................................... 4,231 4,185 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 43,579 48,704 OTHER ASSETS: Deferred lease acquisition costs, net..................................................... 1,808 1,915 Other..................................................................................... 13 291 --------- --------- Total other assets...................................................................... 1,821 2,206 --------- --------- TOTAL ASSETS................................................................................ $ 49,631 $ 55,095 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 771 $ 1,127 Accrued payroll and related expenses...................................................... 919 749 Accrued gaming taxes...................................................................... 500 580 Accrued insurance......................................................................... 1,693 448 Other accrued liabilities................................................................. 959 1,720 Accrued interest-related party............................................................ 902 Due to affiliates......................................................................... 1,795 Notes payable and current maturities of long-term debt.................................... 10,268 5,578 --------- --------- Total current liabilities............................................................... 17,807 10,202 --------- --------- LONG-TERM DEBT.............................................................................. 9,103 13,793 PARTNERS' EQUITY............................................................................ 22,721 31,100 --------- --------- TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 49,631 $ 55,095 --------- --------- --------- ---------
See accompanying notes to financial statements. 56 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- REVENUES: Casino......................................................................... $ 47,628 $ 51,007 $ 48,427 Food, beverage and other....................................................... 7,046 7,641 4,945 --------- --------- --------- 54,674 58,648 53,372 Less promotional allowances.................................................... (4,238) (5,228) (3,566) --------- --------- --------- Net revenues..................................................................... 50,436 53,420 49,806 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 27,887 26,923 25,547 Food, beverage and other....................................................... 6,799 4,894 3,772 Other operating expenses....................................................... 5,147 4,757 4,013 Selling, general and administrative............................................ 12,201 10,786 9,954 Depreciation and amortization.................................................. 5,468 5,644 5,430 Referendum expenses............................................................ 1,347 --------- --------- --------- 57,502 54,351 48,716 --------- --------- --------- (Loss) income from operations.................................................... (7,066) (931) 1,090 INTEREST EXPENSE (INCOME)(NET): Related parties................................................................ 1,402 1,603 1,603 Other.......................................................................... (89) (119) 92 --------- --------- --------- (1,313) 1,484 1,695 --------- --------- --------- Net loss......................................................................... $ (8,379) $ (2,415) $ (605) --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 57 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
ARGOSY OF JAZZ TOTAL LOUISIANA, ENTERPRISES, PARTNERS' INC. INC. EQUITY ----------- ----------- --------- Partners' equity at December 31, 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 Net loss.................................................................... (7,541) (838) (8,379) ----------- ----------- --------- Partners' equity at December 31, 1997......................................... $ 20,449 $ 2,272 $ 22,721 ----------- ----------- --------- ----------- ----------- ---------
See accompanying notes to financial statements. 58 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.......................................................................... $ (8,379) $ (2,415) $ (605) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation.................................................................... 5,083 5,045 4,951 Amortization.................................................................... 385 599 479 Changes in operating assets and liabilities: Accounts receivable........................................................... 127 185 (593) Other current assets.......................................................... 205 353 (700) Accounts payable.............................................................. (356) (167) 257 Accrued payroll and related expenses.......................................... 170 138 (376) Accrued interest to related parties........................................... 902 (1,195) 803 Other accrued liabilities..................................................... 404 889 299 --------- --------- --------- Net cash (used in) provided by operating activities............................... (1,459) 3,432 4,515 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................... (444) (713) (952) Proceeds from sale of equipment to affiliates..................................... 486 --------- --------- --------- Net cash provided by (used in) financing activities............................. 42 (713) (952) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in advances from affiliates................................... 1,795 (1,754) Payment on notes payable and long-term debt....................................... (4,938) (2,487) (Increase) decrease in other assets............................................... 69 (82) --------- --------- --------- Net cash provided by (used in) financing activities............................. 1,795 (4,869) (4,323) --------- --------- --------- Net increase (decrease) in cash and cash equivalents.............................. 378 (2,150) (760) Cash and cash equivalents, beginning of period.................................... 3,051 5,201 5,961 --------- --------- --------- Cash and cash equivalents, end of period.......................................... $ 3,429 $ 3,051 $ 5,201 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 59 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Catfish Queen Partnership in Commendam ("Partnership") provides riverboat gaming and related entertainment in Baton Rouge, Louisiana. The Partnership is comprised of a 90% general partner, Argosy of Louisiana, Inc. ("General Partner"), 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 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. Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. CASH AND CASH EQUIVALENTS The Partnership considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value at December 31, 1997 and 1996. 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: 15 to 20 Riverboat, dock and improvements..................... years Furniture, fixtures and equipment.................... 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS Deferred lease acquisition costs resulted from the contribution of certain leases by Jazz to the Partnership. These costs are amortized on the straight-line method over 20 years. Accumulated amortization was $350 and $243 at December 31, 1997 and 1996, 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 60 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances for food and beverages and other items was $2,493, $2,534 and $2,166 in 1997, 1996 and 1995, respectively, and has been included in food and beverage costs and expenses. ADVERTISING COSTS The Partnership expenses advertising costs as incurred. Advertising expense was $1,656, $1,527 and $1,580 in 1997, 1996 and 1995, respectively. INCOME TAXES No provision (credit) for federal or state income taxes is recorded in the financial statements, as income taxes are the responsibility of the individual partners. 2. PROPERTY EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Leasehold and shore improvements.................................................. $ 6,967 $ 6,948 Riverboat, docks and improvements................................................. 36,072 36,051 Furniture, fixtures and equipment................................................. 16,825 17,136 --------- --------- 59,864 60,135 Less accumulated depreciation and amortization.................................... (16,285) (11,431) --------- --------- Net property and equipment........................................................ $ 43,579 $ 48,704 --------- --------- --------- ---------
3. LONG-TERM DEBT Notes payable and long term debt consists of the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- 8% unsecured note payable to Argosy in quarterly installments of $930,815, including interest, through July 2001............................................ $ 17,527 $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 1998..................... 1,844 1,844 --------- --------- 19,371 19,371 Less current maturities........................................................... (10,268) (5,578) --------- --------- $ 9,103 $ 13,793 --------- --------- --------- ---------
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. 61 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The carrying value of long term debt approximates fair value at December 31, 1997 and 1996. During 1997, the Partnership did not make scheduled debt payments to Argosy. Argosy has agreed to provide operating support to the Partnership and, to the extent necessary, will not demand payment on the current portion of the long-term debt during 1998. Maturities of long term debt, including scheduled payments under the notes payable to Argosy, which were due prior to December 31, 1997 and which have not yet been paid are as follows: 1998....................................................... $ 10,268 1999....................................................... 3,082 2000....................................................... 3,337 2001....................................................... 2,684
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 $3,398, $3,539 and $2,202 in 1997, 1996 and 1995, respectively. Approximately $2,920, $3,091 and $1,800 in 1997, 1996 and 1995, respectively, resulted from the above mentioned lease with Jazz. The Partnership participates in Argosy's property, general liability, workers compensation and other insurance programs. The Partnership's estimated share of these costs, which is allocated directly to the Partnership by Argosy, was approximately $2,511, $1,989 and $2,183 for the years ended December 31, 1997, 1996 and 1995, respectively. Indirect costs incurred by Argosy, on behalf of the Partnership, are not allocated as they are immaterial. 5. EMPLOYEES BENEFIT PLAN The Partnership participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan which covers substantially all of its full-time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Partnership will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized by the Partnership under the Plan was approximately $392, $320 and $503 in 1997, 1996 and 1995, 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. 62 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The Partnership paid interest of $500, $2,811 and $943 in 1997, 1996 and 1995, respectively. During 1996, Argosy transferred property and equipment with a fair value of $1,844, subject to an unsecured note payable to Argosy. 7. COMMITMENTS AND CONTINGENCIES On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to 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, 1997, the Partnership has paid all admission payments due under the above agreements. Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1997 are as follows: 1998......................................................... $ 485 1999......................................................... 351 2000......................................................... 319 2001......................................................... 342
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 Partnership are pledged as collateral, and the Partnership is a guarantor, under the terms of the Mortgage Notes. 63 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, 1997 and 1996, and the related statements of operations, stockholder's deficit and cash flows for the years ended December 31, 1997 and 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, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997 and 1996 and the seven months ended December 31, 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois February 13, 1998 64 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 year ended February 28, 1995 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 audit. We conducted our audit 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 audit provides 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 the year ended February 28, 1995 of Jazz Enterprises, Inc. in conformity with generally accepted accounting principles. Grant Thornton LLP Reno, Nevada July 10, 1995 65 JAZZ ENTERPRISES, INC. BALANCE SHEETS (IN THOUSANDS)
COMPANY -------------------- DECEMBER 31, -------------------- 1997 1996 --------- --------- CURRENT ASSETS: Cash and cash equivalents............................................................. $ 20 Prepaid insurance..................................................................... 109 $ 78 Other current assets.................................................................. 28 --------- --------- Total current assets................................................................ 157 78 --------- --------- NET PROPERTY AND EQUIPMENT.............................................................. 54,593 57,297 GOODWILL, NET........................................................................... 19,922 20,519 NOTE RECEIVABLE......................................................................... 1,892 1,892 OTHER ASSETS: Deposits.............................................................................. 196 196 Investment in partnership............................................................. 2,183 3,021 Other current assets.................................................................. 1,011 468 --------- --------- Total other assets.................................................................. 3,390 3,685 --------- --------- TOTAL ASSETS............................................................................ $ 79,954 $ 83,471 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable and accrued liabilities.............................................. $ 3,000 $ 3,478 Current maturities of long-term debt.................................................. 491 --------- --------- Total current liabilities........................................................... 3,491 3,478 --------- --------- LONG-TERM DEBT.......................................................................... 81,237 81,485 STOCKHOLDER'S DEFICIT: Common stock, no par value, 100,000 shares authorized, 200 shares issued and outstanding Accumulated deficit................................................................... (4,774) (1,492) --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................................. $ 79,954 $ 83,471 --------- --------- --------- ---------
See accompanying notes to financial statements. 66 JAZZ ENTERPRISES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
COMPANY ----------------------------------------- PREDECESSOR COMPANY SEVEN MONTHS --------------------------- YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28, 1997 1996 1995 1995 ------------ ------------ ------------- THREE MONTHS ------------ ENDED MAY 30, 1995 ------------- (UNAUDITED) REVENUES: Lease revenue........................... $ 2,920 $ 3,091 $ 1,786 $ 813 Rent revenue............................ 378 354 382 817 ------------ ------------ ------ ----- ------------ 3,298 3,445 2,168 1,630 ------------ ------------ ------ ----- ------------ COSTS AND EXPENSES: Operating expenses...................... 1,071 593 104 48 788 Selling, general and administrative..... 1,608 1,714 1,086 Depreciation and amortization........... 2,354 1,382 405 Preopening costs........................ 100 597 5,642 ------------ ------------ ------ ----- ------------ 5,033 3,789 1,595 645 6,430 ------------ ------------ ------ ----- ------------ (Loss) income from operations (1,735) (344) 573 (645) (4,800) OTHER EXPENSE (INCOME): Interest expense........................ 909 951 490 94 282 Equity in loss of unconsolidated partnership........................... 838 242 8 Interest income......................... (200) (31) (83) Gain on sale of assets.................. (60) ------------ ------------ ------ ----- ------------ (Loss) income before income taxes......... (3,282) (1,537) 75 (708) (4,939) Income tax expense........................ (30) (65) (65) ------------ ------------ ------ ----- ------------ Net (loss) income......................... $ (3,282) $ (1,537) $ 45 $ (773) $ (5,004) ------------ ------------ ------ ----- ------------ ------------ ------------ ------ ----- ------------
See accompanying notes to financial statements. 67 JAZZ ENTERPRISES, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL ---------------------- PAID-IN ACCUMULATED PREDECESSOR COMPANY SHARES AMOUNT CAPITAL DEFICIT TOTAL - --------------------------------------------------------- ----------- --------- ----------- ------------ --------- Balance at February 28, 1994............................. 200 $ $ 100 $ (2,057) $ (1,957) Capital contributions.................................. 2,448 2,448 Net income............................................. (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 EARNINGS COMPANY SHARES STOCK (DEFICIT) TOTAL - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Balance, June 1, 1995................................................... 200 $ $ $ Net income............................................................ 45 45 --- ---------- --------- --------- Balance, December 31, 1995.............................................. 200 45 45 Net loss.............................................................. (1,537) (1,537) --- ---------- --------- --------- Balance, December 31, 1996.............................................. 200 (1,492) (1,492) Net loss.............................................................. (3,282) (3,282) --- ---------- --------- --------- Balance, December 31, 1997.............................................. 200 $ (4,774) $ (4,774) --- ---------- --------- --------- --- ---------- --------- ---------
See accompanying notes to financial statements. 68 JAZZ ENTERPRISES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
COMPANY ----------------------------------------- PREDECESSOR COMPANY SEVEN MONTHS ---------------------------- YEAR ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28, 1997 1996 1995 1995 ------------- ------------ ------------ THREE MONTHS ------------- ENDED MAY 30, 1995 ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................... $ (3,282) $ (1,537) $ 45 $ (773) $ (5,004) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization........... 2,354 1,382 405 35 104 Write down associated with real estate owned................................. 1,386 Gain on sale of assets.................. (60) Equity in losses of unconsolidated partnership........................... 838 242 8 (700) Current assets.......................... (27) 90 (4) (12) Prepaid expenses........................ (32) 9 (93) Other assets............................ 35 Accounts payable and accrued liabilities........................... (478) 24 80 191 1,371 Increase in income taxes payable........ 65 27 ------------- ------------ ------------ ----- ------------- Net cash (used in) provided by operating activities................ (627) 201 534 (473) (2,946) ------------- ------------ ------------ ----- ------------- 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 Capital expenditures...................... (897) (22,988) (2,538) (85) (5,331) Loans and advances to related parties..... (31) (1,054) ------------- ------------ ------------ ----- ------------- Net cash used in investing activities.......................... (897) (22,988) (11,926) (350) (5,795) ------------- ------------ ------------ ----- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings-- related party............................ 7,879 Increase in long-term debt................ 760 52 Principal payments on long-term debt...... (115) (2,191) (184) Advances from affiliate................... 1,442 25,414 11,608 180 935 Increase in other assets.................. (543) (468) Contributed capital....................... 647 1,869 Decrease in construction related payable.. (2,132) ------------- ------------ ------------ ----- ------------- Net cash provided by financing activities.......................... 1,544 22,755 11,424 827 8,603 ------------- ------------ ------------ ----- ------------- Net increase (decrease) in cash and cash equivalents.............................. 20 (32) 32 4 (138) Cash and cash equivalents at beginning of period................................... 32 2 140 ------------- ------------ ------------ ----- ------------- Cash and cash equivalents at end of period................................... $ 20 $ $ 32 $ 6 $ 2 ------------- ------------ ------------ ----- ------------- ------------- ------------ ------------ ----- -------------
See accompanying notes to financial statements. 69 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 ("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 totaling $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 in the accompanying balance sheets. 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 totaling approximately $7,300 and paid expenses of approximately $900. Under terms of the Purchase Agreement substantially all other obligations of Jazz existing at the time of the purchase remain the responsibility of the former owners of Jazz. 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. Certain 1996 and 1995 amounts have been reclassified to conform to the 1997 presentation. CASH AND CASH EQUIVALENTS The Company and Predecessor Company consider cash and all liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value at December 31, 1997. 70 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) GOODWILL Goodwill represents the cost in excess of fair value of net assets acquired, at the date of acquisition, and is amortized over 40 years. Accumulated amortization is $1,541 and $944 at December 31, 1997 and 1996, 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. 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 5 to 7 Furniture, fixtures and equipment...................... years
RENTAL INCOME Rental income is recognized over the life of the associated lease. Minimum future rents to be received under operating leases are: 1998................................................... $ 488 1999................................................... 563 2000................................................... 698 2001................................................... 721 2002................................................... 737 Thereafter............................................. 1,296
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 $0, $53, $0, $27 and $66 for 1997, 1996, the seven months ended December 31, 1995, the three months ended May 30, 1995 and the year ended February 28, 1995, 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. 71 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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." 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. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Land........................................................................................ $ 8,187 $ 8,187 Buildings and improvements.................................................................. 47,012 48,192 Furniture, fixtures and equipment........................................................... 2,444 2,444 Construction in progress.................................................................... 50 --------- --------- 57,643 58,873 Less accumulated depreciation and amortization.............................................. (3,050) (1,576) --------- --------- Net property and equipment.................................................................. $ 54,593 $ 57,297 --------- --------- --------- ---------
3. LONG-TERM DEBT Notes payable and long-term debt consists of the following:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Notes payable to former owner, principal and interest due quarterly through September 2015, discounted at 10.5%........................................................................ $ 7,656 $ 7,011 Noninterest bearing advances from Argosy, no stated maturity................................ 74,072 74,474 --------- --------- 81,728 81,485 Less current maturities..................................................................... (491) --------- --------- $ 81,237 $ 81,485 --------- --------- --------- ---------
72 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) The carrying value of long term debt approximates fair value at December 31, 1997. Maturities of long term debt, excluding the noninterest bearing advances from Argosy, are as follows: 1998....................................................... $ 491 1999....................................................... 545 2000....................................................... 604 2001....................................................... 670 2002....................................................... 743 Thereafter................................................. 4,603
Argosy has indicated that it will not demand payment on the noninterest bearing advances prior to January 1, 1999. 4. INCOME TAXES Income tax expense consists of the following:
COMPANY PREDECESSOR COMPANY ---------------------------------------- -------------------------- SEVEN MONTHS THREE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31, 1995 FEBRUARY 28, 1997 1996 1995 (UNAUDITED) 1995 ------------ ------------ ------------ ------------ ------------ Current: Federal................................ $ $ $ 30 $ $ State.................................. 65 65 ------------ ------------ ------------ ------------ ------------ Total current............................ 30 65 65 ------------ ------------ ------------ ------------ ------------ Income tax expense....................... $ $ $ 30 $ 65 $ 65 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The tax effects of significant temporary differences of the Company representing deferred tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Tax over book depreciation................................................. $ (828) $ (440) Preopening................................................................. 824 (833) Effects of NOL Carryforward................................................ 2,287 728 Other, net................................................................. 20 34 --------- --------- 2,303 1,155 Valuation allowance........................................................ (2,303) (1,155) --------- --------- 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 $5,517 which expire from 2008 through 2012. 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 73 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) adjusted gross receipts, as defined. Approximately $2,920, $3,091 and $1,786 in 1997, 1996 and for the seven months ended December 31, 1995, respectively, resulted from this lease with the Partnership. 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 carrying value of $12,471 from Argosy and this amount increased the noninterest bearing advances from related parties. The Company paid interest of $909, $951 and $490 in 1997, 1996 and for the seven months ended December 31, 1995, respectively. During the year ended February 28, 1995, the Predecessor Company acquired equipment financed by vendors totaling $19. During 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. 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, 1997, the Partnership has paid all admission payments due under the above agreements. 74 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1997 are as follows: 1998....................................................... $ 214 1999....................................................... 214 2000....................................................... 202 2001....................................................... 202 2002....................................................... 202 Thereafter................................................. 14,942
Rent expense for the years ended December 31, 1997, 1996, the seven months ended December 31, 1995, the three months ended May 30, 1995 and the year ended February 28, 1995 was $244, $283, $265, $48 and $788, 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 the Mortgage Notes. 75 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, 1997 and 1996, 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, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Indiana Gaming Company at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Indianapolis, Indiana February 13, 1998 76 THE INDIANA GAMING COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................................................... $ 41,257 $ 9,216 Accounts receivable, net of allowance for doubtful accounts of $347 and $22, respectively.......................................................................... 382 138 Deferred income taxes................................................................... 74 Other current assets.................................................................... 1,179 1,706 ---------- ---------- Total current assets.............................................................. 42,892 11,060 ---------- ---------- NET PROPERTY AND EQUIPMENT................................................................ 176,407 69,392 OTHER ASSETS: Deposits................................................................................ 530 5 Restricted cash and cash equivalents.................................................... 13,114 14,919 Intangible assets, net of accumulated amortization of $1,292 and $61, respectively...... 30,844 31,459 Deferred income taxes................................................................... 2,785 ---------- ---------- Total other assets................................................................ 47,273 46,383 ---------- ---------- TOTAL ASSETS.............................................................................. $ 266,572 $ 126,835 ---------- ---------- ---------- ---------- CURRENT LIABILITIES: Accounts payable........................................................................ $ 5,936 $ 3,115 Accrued payroll and related expenses.................................................... 2,924 912 Accrued interest and dividends payable-related parties.................................. 5,260 2,198 Installment contracts payable........................................................... 3,288 3,252 Other accrued liabilities............................................................... 5,824 1,452 Income taxes payable.................................................................... 5,915 Current maturities of long-term debt.................................................... 12,856 2,900 Current maturities of other long-term obligations....................................... 4,583 5,169 ---------- ---------- Total current liabilities......................................................... 46,586 18,998 ---------- ---------- LONG-TERM DEBT............................................................................ 195,405 86,612 OTHER LONG-TERM OBLIGATIONS............................................................... 2,000 15,000 MINORITY INTERESTS........................................................................ 17,656 14,490 STOCKHOLDER'S EQUITY Common stock -- $.01 par value, 1,000 shares authorized, issued and outstanding......... Accumulated earnings (deficit).......................................................... 4,925 (8,265) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................ $ 266,572 $ 126,835 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 77 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---------- ---------- --------- REVENUES: Casino....................................................................... $ 127,908 $ 3,930 $ Admissions................................................................... 16,809 776 Food, beverage and other..................................................... 7,005 167 ---------- ---------- --------- 151,722 4,873 Less promotional allowances.................................................. (14,698) (462) ---------- ---------- --------- Net revenues................................................................... 137,024 4,411 ---------- ---------- --------- COSTS AND EXPENSES: Casino....................................................................... 58,081 2,116 Food, beverage and other..................................................... 5,746 149 Other operating expenses..................................................... 13,119 711 Selling, general and administrative.......................................... 21,606 783 Depreciation and amortization................................................ 10,922 378 Management fees-related parties.............................................. 1,924 38 Preopening................................................................... 11,036 2,143 ---------- ---------- --------- 111,398 15,211 2,143 ---------- ---------- --------- Income (loss) from operations.................................................. 25,626 (10,800) (2,143) ---------- ---------- --------- OTHER INCOME (EXPENSE): Interest income.............................................................. 1,400 127 Interest expense............................................................. (3,588) (192) ---------- ---------- --------- (2,188) (65) ---------- ---------- --------- Income (loss) before minority interests and income taxes....................... 23,438 (10,865) (2,143) Minority interests............................................................. (6,989) 4,721 906 Income tax expense............................................................. (3,259) ---------- ---------- --------- Net income (loss).............................................................. $ 13,190 $ (6,144) $ (1,237) ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 78 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL ACCUMULATED STOCKHOLDER'S COMMON (DEFICIT) (DEFICIT) SHARES STOCK EARNINGS EQUITY ----------- ----------- ---------------- -------------- 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) Net income............................................... 13,190 13,190 ----- ----- ------- ------- Balance, December 31, 1997................................. 1,000 $ 4,925 $ 4,925 ----- ----- ------- ------- ----- ----- ------- -------
See accompanying notes to consolidated financial statements. 79 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------- ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss)............................................................ $ 13,190 $ (6,144) $ (1,237) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................................ 10,922 453 20 Deferred taxes........................................................... (2,859) Minority interests....................................................... 6,989 (4,721) (906) Changes in operating assets and liabilities: Accounts receivable...................................................... (244) (138) 238 Other current assets..................................................... 527 (941) (201) Accounts payable......................................................... 2,821 1,630 1,965 Accrued interest payable................................................. 1,917 656 Income taxes payable..................................................... 5,915 Accrued liabilities...................................................... 6,381 2,289 75 ----------- ---------- ---------- Net cash provided by (used in) operating activities........................ 45,559 (6,916) (46) ----------- ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow............................................. 1,805 (14,919) Purchases of property and equipment........................................ (113,141) (52,879) (7,566) Payments under development agreement....................................... (13,586) (6,946) (4,405) ----------- ---------- ---------- Net cash used in investing activities...................................... (124,922) (74,744) (11,971) ----------- ---------- ---------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Increase in advances from affiliates....................................... 49,812 50,438 10,535 Payments on installment contracts.......................................... (4,116) (1,805) Repayment of long-term debt................................................ (2,710) Payment of preferred equity return to partner.............................. (1,163) Partnership equity distributions........................................... (1,514) Proceeds from contributed capital.......................................... 19,044 1,484 Proceeds from long-term debt............................................... 71,648 23,197 Other...................................................................... (553) ----------- ---------- ---------- Net cash provided by financing activities.................................... 111,404 90,874 12,019 ----------- ---------- ---------- Net increase in cash and cash equivalents.................................... 32,041 9,214 2 Cash and cash equivalents, beginning of year................................. 9,216 2 ----------- ---------- ---------- Cash and cash equivalents, end of year....................................... $ 41,257 $ 9,216 $ 2 ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to consolidated financial statements. 80 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 Partnership opened its permanent pavilion on December 10, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany transactions have been eliminated. 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 5-31 Leasehold and shore improvements years 5-20 Riverboat, docks and improvements years 5-10 Furniture, fixtures and equipment 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 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, 1997 and 1996. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $141 and $11 at December 31, 1997 and 1996, respectively. REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1997 1996 --------- --------- Admissions................................................................... $ 6,935 $ 190 Food, beverage and other..................................................... 1,200 4
PREOPENING COSTS -- Preopening costs, which consisted primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. ADVERTISING COSTS -- The Company expenses advertising costs as incurred. Advertising expense was $4,877, $503 and $112 for the years ended December 31, 1997, 1996 and 1995, respectively. 81 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 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, --------------------- 1997 1996 ---------- --------- Land................................................................... $ 16,045 $ 16,015 Leasehold and shore improvements....................................... 103,427 5,892 Riverboat, docks and improvements...................................... 40,815 Furniture, fixtures and equipment...................................... 21,809 9,367 Construction in progress............................................... 4,753 38,534 ---------- --------- 186,849 69,808 Less accumulated depreciation and amortization......................... (10,442) (416) ---------- --------- Net property and equipment............................................. $ 176,407 $ 69,392 ---------- --------- ---------- ---------
3. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997 and 1996:
1997 1996 ---------- --------- Capital loans payable to Argosy, noninterest bearing, no stated due date.................................................................. $ 116,127 $ 66,315 Capital loans payable to Conseco, interest at prime plus 6% (14.5% at December 31, 1997) principal paid in equal annual installments through 2004.................................................................. 67,134 23,197 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (9.5% at December 31, 1997)................................................................. 25,000 ---------- --------- 208,261 89,512 Less current maturities................................................ (12,856) (2,900) ---------- --------- $ 195,405 $ 86,612 ---------- --------- ---------- ---------
Interest expense on the capital loans from Conseco compounds quarterly to the extent unpaid. Principal on the capital loans is amortized in equal annual installments through 2004. 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 amounted to $3,588 (net of $8,391 capitalized) and $192 (net of $1,680 capitalized) in the years ended December 31, 1997 and 1996, respectively. 82 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Maturities of long-term debt, excluding the capital loans payable to Argosy, at December 31, 1997 are as follows:
1998............................................... $ 12,856 1999............................................... 13,181 2000............................................... 13,532 2001............................................... 23,794 2002............................................... 9,591 Thereafter......................................... 19,180
4. INCOME TAXES Income tax expense for years ended December 31, 1997, 1996 and 1995 consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Current: Federal..................................................... $ 5,337 State....................................................... 781 --------- --------- --------- Total current................................................. 6,118 --------- --------- --------- Deferred: Federal..................................................... (2,466) State....................................................... (393) --------- --------- --------- Total deferred................................................ (2,859) --------- --------- --------- Income tax expense............................................ $ 3,259 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the year ended December 31, 1997, 1996 and 1995 differs from that computed at the Federal Statutory tax rate as follows:
1997 1996 1995 --------- --------- --------- Federal statutory rate................................................ 35.0% (35.0)% (35.0)% State income taxes, net of federal benefit............................ 5.1 (5.1) (5.1) Valuation allowance................................................... (20.0) 39.0 39.1 Other................................................................. (0.3) 1.1 1.0 --------- --------- --------- 19.8% % % --------- --------- --------- --------- --------- ---------
The tax effects of significant temporary differences representing deferred tax assets at December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Preopening................................................................ $ 2,785 $ 3,239 NOL carryforward.......................................................... 60 Other, net................................................................ 74 5 --------- --------- 2,859 3,304 Valuation allowance....................................................... (3,304) --------- --------- $ 2,859 $ --------- --------- --------- ---------
83 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) In 1996, the Company recorded a valuation allowance against all of its deferred tax assets due to the uncertainty of realization. The Company utilized a net operating loss carryforward for income tax purposes of approximately $260 during 1997. 5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $4,154 and $5,056 in 1997 and 1996, respectively, which was financed through installment contracts. The Company paid $5,300 (including $5,007 to related parties) and $207 in interest for the years ended December 31, 1997 and 1996. No interest was paid in 1995. The Company paid $143 in taxes for the year ended December 31, 1997. No taxes were paid in 1996 or 1995. Indirect costs incurred by Argosy, on behalf of the Company, are not allocated as they are immaterial. 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, 1997, are as follows:
YEARS ENDING DECEMBER 31, - ------------------------------------------------------------------ 1998.............................................................. $ 420 1999.............................................................. 402 2000.............................................................. 179
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $6,459, $2,837 and $148, respectively. 7. RELATED PARTY TRANSACTIONS The Partnership has entered into a Management Agreement, as amended ("Management Agreement"), with the Company, as the sole and exclusive manager of all operations of the Partnership. The term of the Management Agreement is twenty years, however, the term may be extended in the event that the term of the Partnership is extended beyond the year 2014. The Partnership will pay to the Company a Management Fee in the amount of 12.5% of the operating profit of the Partnership, as defined. Under a separate financial advisory agreement the Company has agreed to pay Conseco a financial advisory fee equal to 40% of the management fee. The partnership agreement stipulates that the Partnership shall distribute excess cash flow, as defined, to the partners at least quarterly, in the following order: (i) partner tax distributions, (ii) prepayment of principal on capital loans, (iii) accrued preferred equity return, (iv) return of preferred equity and, (v) return of common equity. The Company entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals are approximately $500 for these facilities. Total expense recognized under the leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases ended in 1997. 84 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Argosy provides certain services for the Company, primarily, centralized reservations and insurance. Reimbursement for these expenses has been included in the income statement in the appropriate cost categories. The Company has entered into leases with shareholders of a limited partner for parking lots and outdoor advertising. Total expense recognized under these leases was $107 and $133 in 1997 and 1996, respectively. 8. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan which covers substantially all of its full-time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized under the Plan was $517, $52 and $5 for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the Development Agreement. Accumulated amortization was $1,151 and $50 for the years ended December 31, 1997 and 1996, respectively. Included in other long term obligations is $6,583 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"). The remaining amount is payable as follows: $4,583 in 1998 and $2,000 in 1999. BONDING OBLIGATION -- The Company is required, by Indiana Gaming Statute, to post a bond in favor of the Indiana Gaming Commission to collateralize certain obligations to the City of Lawrenceburg under the Development Agreement, and to the State of Indiana. This bond is collateralized by certain real estate of the Company. TERMINATION OF LAWRENCEBURG PARTNERSHIP -- Under the terms of the partnership agreement, after 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 the terms of the Mortgage Notes. Additionally, the Company is a guarantor of the Mortgage Notes. 85 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, 1997 and 1996, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Indianapolis, Indiana February 13, 1998 86 INDIANA GAMING COMPANY, L.P. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................................................... $ 41,257 $ 9,216 Accounts receivable, net of allowance for doubtful accounts of $347 and $22, respectively.......................................................................... 382 138 Other current assets.................................................................... 1,179 1,706 ---------- ---------- Total current assets.................................................................. 42,818 11,060 ---------- ---------- NET PROPERTY AND EQUIPMENT................................................................ 175,030 68,349 OTHER ASSETS: Deposits................................................................................ 589 5 Restricted cash and cash equivalents.................................................... 13,114 14,919 Intangible assets, net of accumulated amortization of $1,292 and $61, respectively...... 30,844 31,459 ---------- ---------- Total other assets.................................................................... 44,547 46,383 ---------- ---------- TOTAL ASSETS.............................................................................. $ 262,395 $ 125,792 ---------- ---------- ---------- ---------- CURRENT LIABILITIES: Accounts payable........................................................................ $ 5,936 $ 2,963 Accrued payroll and related expenses.................................................... 2,924 912 Accrued interest and preferred equity return............................................ 12,571 5,240 Installment contracts payable........................................................... 3,288 3,252 Other accrued liabilities............................................................... 5,503 1,452 Due to affiliates....................................................................... 1,182 1,278 Current maturities of other long-term obligations....................................... 4,583 5,169 Current maturities of long-term debt.................................................... 25,832 7,066 ---------- ---------- Total current liabilities............................................................. 61,819 27,332 ---------- ---------- LONG-TERM DEBT............................................................................ 157,139 49,463 OTHER LONG-TERM OBLIGATIONS............................................................... 2,000 15,000 PARTNERS' EQUITY: General partner......................................................................... 23,826 19,549 Limited partners........................................................................ 17,611 14,448 ---------- ---------- Total partners' equity................................................................ 41,437 33,997 ---------- ---------- TOTAL LIABILITIES AND PARTNERS' EQUITY.................................................... $ 262,395 $ 125,792 ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 87 INDIANA GAMING COMPANY, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---------- ---------- --------- REVENUES: Casino....................................................................... $ 127,908 $ 3,930 $ Admissions................................................................... 16,809 776 Food, beverage and other..................................................... 7,005 167 ---------- ---------- --------- 151,722 4,873 Less promotional allowances.................................................. (14,698) (462) ---------- ---------- --------- Net revenues................................................................... 137,024 4,411 ---------- ---------- --------- COSTS AND EXPENSES: Casino....................................................................... 58,081 2,116 Food, beverage and other..................................................... 5,746 149 Other operating expenses..................................................... 13,119 711 Selling, general and administrative.......................................... 21,606 685 Depreciation and amortization................................................ 10,922 378 Management fees-related parties.............................................. 4,809 94 Preopening................................................................... 10,979 2,131 ---------- ---------- --------- 114,283 15,112 2,131 ---------- ---------- --------- Income (loss) from operations.................................................. 22,740 (10,701) (2,131) OTHER INCOME (EXPENSE): Interest income.............................................................. 1,400 127 Interest expense............................................................. (7,694) (534) ---------- ---------- --------- (6,294) (407) ---------- ---------- --------- Net income (loss) prior to preferred equity return............................. 16,446 (11,108) (2,131) Preferred equity return........................................................ (5,443) (3,726) ---------- ---------- --------- Net income (loss) attributable to common equity partners....................... $ 11,003 $ (14,834) $ (2,131) ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to financial statements. 88 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, 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 Net income prior to preferred equity return................................. 9,456 6,990 16,446 16,446 Preferred equity return.................. (3,130) (2,313) (5,443) 3,136 2,307 5,443 Accrued preferred equity distribution.... (3,136) (2,307) (5,443) (5,443) Common equity distributions.............. (2,049) (1,514) (3,563) (3,563) ----------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1997................. $ 3,270 $ 2,417 $ 5,687 $ 20,556 $ 15,194 $ 35,750 $ 41,437 ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ----------- --------- -----------
See accompanying notes to financial statements. 89 INDIANA GAMING COMPANY, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ----------- ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) attributable to common equity partners................... $ 11,003 $ (14,834) $ (2,131) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................................ 10,922 453 20 Accrued preferred equity dividends....................................... 5,443 3,726 Changes in operating assets and liabilities: Accounts receivable...................................................... (244) (138) 238 Other current assets..................................................... 527 (941) (201) Accounts payable......................................................... 3,502 1,977 1,965 Accrued interest payable................................................. 4,625 1,514 Accrued liabilities...................................................... 5,436 2,289 75 ----------- ---------- ---------- Net cash provided by (used in) operating activities.................... 41,214 (5,954) (34) ----------- ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow............................................. 1,805 (14,919) Purchases of property and equipment........................................ (112,867) (51,955) (7,445) Payments under development agreement....................................... (13,586) (6,946) (4,405) ----------- ---------- ---------- Net cash used in investing activities.................................. (124,648) (73,820) (11,850) ----------- ---------- ---------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: Payments on installment contracts.......................................... (4,116) (1,805) Payment of preferred return to partners.................................... (2,736) Proceeds from contributed capital.......................................... 34,264 11,886 Repayment of long-term debt-related party.................................. (6,369) Proceeds from long-term debt............................................... 132,812 56,529 Partnership equity distributions........................................... (3,563) Other...................................................................... (553) ----------- ---------- ---------- Net cash provided by financing activities.............................. 115,475 88,988 11,886 ----------- ---------- ---------- Net increase in cash and cash equivalents.................................... 32,041 9,214 2 Cash and cash equivalents, beginning of year................................. 9,216 2 ----------- ---------- ---------- Cash and cash equivalents, end of year....................................... $ 41,257 $ 9,216 $ 2 ----------- ---------- ---------- ----------- ---------- ----------
See accompanying notes to financial statements. 90 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 opened its permanent pavilion on December 10, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 5-31 Leasehold and shore improvements................................. years 5-20 Riverboat, docks and improvements................................ years 5-10 Furniture, fixtures and equipment................................ 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, 1997 and 1996. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $141 and $11 at December 31, 1997 and 1996, respectively. REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of 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 direct cost of providing promotional allowances has been included in costs and expenses as follows:
1997 1996 --------- --------- Admissions............................................................. $ 6,935 $ 190 Food, beverage and other............................................... 1,200 4
PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. 91 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $4,877, $503 and $112 for the years ended December 31, 1997, 1996 and 1995, respectively. INCOME TAXES--No provision (credit) for federal or state income taxes is recorded in the financial statements, as income taxes are the responsibility of the individual partners. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------------- 1997 1996 ---------- --------- Land............................................................................. $ 16,045 $ 16,015 Leasehold and shore improvements................................................. 102,050 5,892 Riverboat, docks and improvements................................................ 40,815 Furniture, fixtures and equipment................................................ 21,809 9,367 Construction in progress......................................................... 4,753 37,491 ---------- --------- 185,472 68,765 Less accumulated depreciation and amortization................................... (10,442) (416) ---------- --------- Net property and equipment....................................................... $ 175,030 $ 68,349 ---------- --------- ---------- ---------
3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, --------------------- 1997 1996 ---------- --------- Capital loans payable to partners, interest at prime plus 6% (14.5% at December 31, 1997), principal paid in equal annual installments through 2004............. $ 157,971 $ 56,529 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (9.5% at December 31, 1997)................... 25,000 ---------- --------- 182,971 56,529 Less current maturities.......................................................... (25,832) (7,066) ---------- --------- $ 157,139 $ 49,463 ---------- --------- ---------- ---------
Interest expense on the capital loans from the partners compounds quarterly to the extent unpaid. Principal on the capital loans is amortized in equal annual installments through 2004. The Partnership is obligated to pay contemporaneously with distributions of Cash Flow, as defined, current and accrued interest, first, and then principal, on the Capital Loans to the Partners, pro rata, in relation to the principal balances of their respective Capital Loans then outstanding. The Notes payable are collateralized by the vessel and certain equipment. Interest expense to related parties amounted to $7,320 (net of $8,321 capitalized) and $636 (net of $874 capitalized) for the years ended December 31, 1997 and 1996, respectively. 92 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) Maturities of long-term debt at December 31, 1997 are as follows: 1998....................................................... $ 25,832 1999....................................................... 26,156 2000....................................................... 26,507 2001....................................................... 36,769 2002....................................................... 22,566 Thereafter................................................. 45,141
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 $4,154 and $5,056 in 1997 and 1996, respectively, which was financed through installment contracts. The Partnership paid $12,004 ($11,712 to related parties) and $207 in interest for the years ended December 31, 1997 and 1996, respectively. No interest was paid in 1995. 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, 1997, are as follows:
YEARS ENDING DECEMBER 31, - ---------------------------------------------------------------------------- 1998........................................................................ $ 420 1999........................................................................ 402 2000........................................................................ 179
Rent expense, including related party leases, for the years ended December 31, 1997, 1996 and 1995 was $6,459, $2,837, and $148, 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. 93 INDIANA GAMING COMPANY, L.P. NOTES TO 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 Partnership entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals were approximately $500 for these facilities. Total expense recognized under the leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases ended in 1997. Argosy provides certain services for the Partnership, primarily, centralized reservations and insurance. Reimbursement for these expenses has been included in the income statement in the appropriate cost categories. The Partnership has entered into leases with shareholders of a limited partner for parking lots and outdoor advertising. Total expense recognized under these leases was $107 and $133 in 1997 and 1996, respectively. 8. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan, which covers substantially all of its full time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was $517, $52 and $5 for the years ended December 31, 1997, 1996 and 1995, respectively. 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, 1997 and 1996. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the Development Agreement. Accumulated amortization was $1,151 and $50 at December 31, 1997 and 1996, respectively. Included in other long term obligations is $6,583 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"). The remaining amount is payable as follows: $4,583 in 1998 and $2,000 in 1999. 94 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) BONDING OBLIGATION--The Partnership is required, by Indiana Gaming Statute, to post a bond in favor of the Indiana Gaming Commission to collateralize certain obligations to the City of Lawrenceburg under the Development Agreement, and to the State of Indiana. This bond is collateralized by certain real estate of the Partnership. TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership Agreement, after 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 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. 96 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, 1997 and 1996. Consolidated Statements of Operations--years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity--years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. The financial statement schedules of the Company have been omitted because they are either not required, or not applicable or the required information is shown in the financial statements or notes thereto. 3. The exhibits listed on the "Index to Exhibits" on page 98 are filed with this Form 10-K or incorporated by reference as set forth below. 97 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Certification of Incorporation of the Company) previously filed with the Securities and Exchange Commission ("SEC") as an Exhibit to the company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 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).
98
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and the Company, as Pledgor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference).
99
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.8 Employment Agreement between the Company and Virginia M. McDowell. 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).
100
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 10, 1994 and incorporated herein by reference). 10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana Gaming Company as amended by Amendment No. 1 to Management Agreement dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino-New York, Inc. and The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K dated March 31, 1995 and incorporated herein by reference). 10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as obligee with USF&G, as surety. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.22 Employment Agreement between the Company and James B. Perry. 10.23 Employment Agreement between the Company and James G. Gulbrandsen.
101
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 13 Portions of the 1997 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of Contents (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 18, 1998 and incorporated herein by reference). 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, 1997: None (c) The Exhibits filed herewith, if any, are identified on the 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 25th day of March, 1998. ARGOSY GAMING COMPANY By: /s/ JAMES B. PERRY ----------------------------------------- James B. Perry PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the date indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ JAMES B. PERRY - ------------------------------ President and Chief March 25, 1998 James B. Perry Executive Officer Vice President-Chief /s/ DALE R. BLACK Financial Officer - ------------------------------ (Principal Accounting March 25, 1998 Dale R. Black Officer) /s/ EDWARD F. BRENNAN* - ------------------------------ Director Edward F. Brennan /s/ FELIX LANCE CALLIS* - ------------------------------ Director Felix Lance Callis /s/ WILLIAM F. CELLINI* - ------------------------------ Director William F. Cellini /s/ JIMMY F. GALLAGHER* - ------------------------------ Director Jimmy F. Gallagher /s/ JOHN BIGGS PRATT, SR.* - ------------------------------ Director John Biggs Pratt, Sr. /s/ WILLIAM MCENERY* - ------------------------------ Director William McEnery *BY: /s/ JAMES B. PERRY ------------------------- James B. Perry ATTORNEY-IN-FACT March 25, 1998 103 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1997 AND 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ---------------------- 1997 1996 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................................................. $ 5,787 $ 14,516 Income taxes receivable............................................................... 1,176 11,111 Receivables........................................................................... 698 828 Deferred income taxes................................................................. 768 Other current assets.................................................................. 1,677 2,898 ---------- ---------- Total current assets................................................................ 10,106 29,353 Net property and equipment............................................................ 1,153 15,475 Restricted cash and cash equivalents.................................................. 12,431 69,632 Investment in and advances to consolidated subsidiaries............................... 351,356 297,601 Other assets.......................................................................... 14,907 12,422 Deferred taxes........................................................................ 1,521 8,743 ---------- ---------- TOTAL ASSETS............................................................................ $ 391,474 $ 433,226 ---------- ---------- ---------- ---------- CURRENT LIABILITIES: Accounts payable and accrued liabilities.............................................. $ 8,811 $ 10,525 Long-term debt........................................................................ 350,000 350,000 Deferred income taxes................................................................. Stockholders' equity: Common stock, $01 par; 60,000,000 shares authorized; 24,498,353 and 24,333,333 shares issued and outstanding in 1997 and 1996, respectively............................... 245 243 Capital in excess of par.............................................................. 72,038 71,865 Retained (deficit) earnings........................................................... (39,620) 593 ---------- ---------- 32,663 72,701 ---------- ---------- ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................................. $ 391,474 $ 433,226 ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 104 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) DECEMBER 31, 1997, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- REVENUES Management fees and other..................................................... $ 5,795 $ 4,875 $ 4,071 COSTS AND EXPENSES General and administrative.................................................... 23,035 15,208 13,101 Development and preopening costs.............................................. 595 835 1,060 ---------- ---------- ---------- 23,630 16,043 14,161 ---------- ---------- ---------- Loss from operations.......................................................... (17,835) (11,168) (10,090) Net interest expense.......................................................... (32,145) (22,177) (8,964) Equity in net income (loss) of consolidated subsidiaries...................... 7,287 (6,769) 18,042 ---------- ---------- ---------- Loss before income taxes and extraordinary items.............................. (42,693) (40,114) (1,012) Income tax benefit............................................................ 2,480 16,165 7,965 ---------- ---------- ---------- Net loss before extraordinary item............................................ (40,213) (23,949) 6,953 ---------- ---------- ---------- Extraordinary loss on extinguishment of debt (net of income tax benefit of $594)....................................................................... (890) ---------- ---------- ---------- Net (loss) income............................................................. $ (40,213) $ (24,839) $ 6,953 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 105 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) DECEMBER 31, 1997, 1996 AND 1995 (ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ----------------------------------- 1997 1996 1995 ---------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.......................................................... $ (40,213) $ (24,839) $ 6,953 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation............................................................... 2,100 1,671 1,437 Amortization............................................................... 1,933 1,761 1,568 Extraordinary item......................................................... 890 Writedown of assets held for sale.......................................... 9,600 Compensation expense recognized on issuance of stock....................... 175 Deferred income taxes...................................................... 6,454 (8,596) 486 Changes in operating assets and liabilities: Other current assets..................................................... 11,254 (11,741) (1,019) Accounts payable and accrued liabilities................................. (1,714) 2,866 4,500 ---------- ----------- ---------- Net cash (used in) provided by operating activities.................... (10,411) (37,988) 13,925 ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of marketable securities............................................. 1,952 548 Purchases of marketable securities......................................... (126) Investment in and advances to subsidiaries................................. (53,350) (52,719) (54,592) Restricted cash held by trustee............................................ 57,201 (69,632) Purchases of property and equipment........................................ (2,084) (7,641) (5,509) ---------- ----------- ---------- Net cash provided by (used in) investing activities...................... 1,767 (128,166) (59,553) ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit............................................... 44,500 49,500 Retirement of line of credit............................................... (90,000) (4,000) Proceeds from the issuance of long term debt............................... 235,000 Increase in other assets................................................... (180) Increase in deferred finance costs......................................... (85) (9,716) (2,441) ---------- ----------- ---------- Net cash (used in) provided by financing activities...................... (85) 179,784 42,879 ---------- ----------- ---------- Net (decrease) increase in cash and cash equivalents......................... (8,729) 13,630 (2,749) Cash and cash equivalents, beginning of year................................. 14,516 886 3,635 ---------- ----------- ---------- Cash and cash equivalents, end of year....................................... $ 5,787 $ 14,516 $ 886 ---------- ----------- ---------- ---------- ----------- ----------
See accompanying notes to financial statements. 106 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY ONLY) DECEMBER 31, 1997, 1996 AND 1995 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-10.8 2 EMPLOYEE AGREEMENT V. MCDOWELL May 20, 1997 Ms. Virginia McDowell 10 Henry Drive Northfield, N.J. 08225 Re: Employment Agreement with Argosy Gaming Company Dear Ms. McDowell, I am pleased to offer you employment with Argosy Gaming Company (the "Company") under the following terms: 1. TITLE AND DUTIES. Your title shall be Vice President of Sales and Marketing. As such, you shall report to the Chief Executive Officer. You shall have all of the authority and duties usual and customary to the Vice President of Sales and Marketing of a publicly-traded corporation. 2. PLACE OF WORK. Headquarters for the Company is currently in Alton, Illinois. You shall maintain an office at headquarters. 3. TERM. The Term of this Agreement shall be three (3) years from June 1, 1997 ("Effective Date"), subject to the termination pursuant to Section 11. 4. BASIC COMPENSATION Your basic compensation shall be $175,000 annually payable in substantially equal monthly payments commencing from the Effective Date, subject to usual and customary deductions for taxes, governmental charges, and customary contributions to health, welfare and insurance programs maintained by the Company for the senior officers of the Company. 5. ADDITIONAL COMPENSATION Promptly after your execution of this Agreement, the Company shall issue to you from the authorized and unissued shares, 25,000 shares of common stock ("Additional Compensation") and such shares when issued shall be held in escrow for you. Issuance of such shares shall be subject to listing on the New York Stock Exchange and such shares shall be "restricted securities" under the federal securities laws. At the end of 18 months from the Effective Date 40% of the Shares held in escrow shall be released form escrow and delivered to you if you are still employed by the Company and at the end of the Term the balance of the shares held in escrow shall be released from escrow and delivered to you if you are still employed by the Company. You shall be entitled to any dividends (stock or cash) or the benefits of any stock split with respect to the shares distributed to you from the escrow. You shall also have the right to vote the Shares. 6. EXPENSES. You shall be entitled to reimbursement for all expenses reasonably associated with the Company's business. 7. AUTOMOBILE. You shall receive an allowance for an automobile in the amount of $600.00 monthly, which shall include the cost of owning or leasing of the car, mileage, maintenance, gas, oil and insurance, and covers your car usage in Alton and New Jersey while in your commuting mode. 8. EXECUTIVE AND MANAGEMENT OPTIONS. The Stock Option Committee will grant you 75,000 option shares and such shares shall vest in equal amounts (ie., 1/3) over a three year period to track the Term. The 75,000 option shares shall be granted on the Effective Date (at the closing market price on the date of the grant). 9. BENEFITS. You shall be eligible to participate in all benefit plans as provided to any officer of the Company. These benefits may change from time to time. At this time it is believed the benefits include (a) family medical and dental benefits, (b) a 401K plan, (c) a group life insurance plan, (d) a disability plan. The current specific benefits are described in the Employee Benefits Handbook. Additionally, you shall be entitled to coverage or reimbursement for any family medical and dental costs not covered by the Company's plans, subject to regulatory guidelines. 10. VACATION/SICK LEAVE You shall be entitled to four weeks annual paid vacation which may be taken during your first year of employment and each succeeding year. You shall be entitled to 30 continuous days sick leave for when you are ill, with 60 days on an annual basis. If unable to return to your duties at the end of 30 days with reasonable accommodation, you should be eligible to participate in the long term disability described in Paragraph 9 and your office shall be considered vacant and your employment terminated. 11. TERMINATION Your employment with the Company during the Term may be terminated (a) by the Company for cause (as defined below); (b) by the Company at any time without cause, or (c) by you at any time. "Cause" shall mean the following: (i) fraud or embezzlement with respect to the Company by you; (ii) material breach by you of this Agreement; (iii) failure to adhere to any reasonable and lawful rule or directive of the Board; (iv) gross or willful neglect of duties; (v) alcohol or drug dependency; (vi) death; (vii) permanent disability preventing the performance of your duties with reasonable accommodation of more than 30 continuous days or 60 days in any 12 month period; or (viii) your failure to qualify (or having so qualified being thereafter disqualified) under any suitability or licensing requirement to which you may be subject by reason of your position with the Company under any gaming laws or regulations as determined by any applicable gaming authority. If the purported cause of termination is the reasons set forth in (ii), (iii) or (iv) above the Company must give notice to you of the cause in writing specifying the purported cause and allow you 60 days to cure the purported cause. If your employment with the Company is terminated by the Company for "cause" or if you voluntarily terminate your employment prior to the end of the Term you shall only be entitled to (i) your basic compensation and other benefits to the date of termination; and (ii) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited. If your employment with the Company is terminated by the Company other than for "cause" then you shall be entitled to (i) your basic compensation ($175,000) in monthly installments for the 12 months following termination unless and/or until you go to work for a competitor which competes with the Company in any jurisdiction (as defined in paragraph 17); (ii) out- placement services for 6 months following termination; (iii) relocation expenses up to $25,000; (iv) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited; and (v) unless you go to work for a competitor you shall have 90 days after the date of termination to exercise your vested stock options. 12. MOVING EXPENSES. The Company shall reimburse you for all reasonable costs related to the move of your personal belongings and family from New Jersey to the Alton/St. Louis area. Relocation expenses shall include the commission on the sale of your New Jersey home. 13. RELOCATION EXPENSES. The Company shall reimburse you for certain lodging expenses incurred by you and your family while seeking a new home in the Alton/St. Louis area including, a temporary residence. This benefit shall be limited to a period equal to the lesser of 12 months or as long as you own your current home and such reimbursement shall be equal to the actual difference between the rent received for your existing home and your monthly obligation on your existing home (including principal, interest and taxes). Notwithstanding the foregoing in no event shall the benefit exceed $700.00 per month. If any expenses reimbursed pursuant to Paragraphs 12 and 13 herein result in federal or state income taxation associated with the reimbursement, the Company shall reimburse you for the taxes actually paid. 14. REPRESENTATION. As part of the inducement for you to accept this offer, the Company has represented to you that its public financial statements reflect fully and accurately in all material respects the Company's financial operations and development status (including without limitation, Lawrenceburg, Indiana) with no material omissions. 15. NO ASSIGNMENT This Agreement may not be assigned. 16. CHANGE OF CONTROL. Should more than 51% of the common stock of the Company be sold to, purchased by or otherwise subject to the control of a third party not currently owning more than 5% of the common stock or should substantially all of the assets of the Company be sold, then you shall be entitled to the following if you are terminated: (i) Additional Compensation held in escrow; (ii) all your stock options shall vest and (iii) you shall be entitled to the items set forth in Section 11 as if you were terminated by the Company other than for "cause." 17. NON-COMPETE. Should you voluntarily terminate your employment hereunder or be terminated with cause, you shall not compete with the Company in any jurisdictions where it currently maintains gaming facilities (including managed properties) for a period of 12 months following such resignation or termination and you agree not to solicit any of the Company's management employees for such 12 month period. Should your employment hereunder be terminated without cause you shall not compete with the Company in any jurisdiction where it currently maintains gaming facilities (including managed properties) for as long as the Company is paying you. In the event you elect to accept employment with a competitor which competes with the Company in any jurisdiction during the period in which the Company is paying you the Company's obligation to pay you shall terminate and cease on and as of the date of your acceptance of employment. For purposes of this Paragraph 17 "jurisdiction" shall mean a distance equal to 150 miles from any location in which the Company maintains gaming facilities (including managed properties). 18. CONFIDENTIALITY. As a condition of this Agreement and you employment with the Company, you must sign and honor our employee confidentiality and non-disclosure agreement presently in effect by the Company 19. ENTIRE AGREEMENT/AUTHORIZATION/BINDING/NO WAIVER/GOVERNING LAW. This writing represents the entire Agreement between the parties and may only be modified in writing signed by the parties. The signer of this offer is fully authorized by the Company to make the offer contained herein. This Agreement is binding on the employer and its successors and assigns. No waiver of any provision shall constitute a general waiver for future purposes. This Agreement may be signed in counterparts. This Agreement shall be governed by the laws of the State of Illinois. I believe the above sets out the terms of our agreement. I look forward to working with you. Please acknowledge you acceptance of this offer by signing below and returning a copy to me by 5:00 p.m. Central time on May 21, 1997. Very truly yours, ARGOSY GAMING COMPANY By: /s/ James B. Perry __________________________ Title: President & CEO _______________________ AGREED AND ACCEPTED By: /s/ Virginia McDowell ____________________________ Dated: 5/20/97 _________________________ EX-10.22 3 EMPLOYEE AGREEMENT J PERRY EXHIBIT 10.22 April 14, 1997 Mr. James B. Perry 2211 Burroughs Avenue Linwood, NJ 08221 Re: Employment Agreement with Argosy Gaming Company Dear Mr. Perry: I am pleased to offer you employment with Argosy Gaming Company (the "Company") under the following terms: 1. TITLE AND DUTIES. Your title shall be President and Chief Executive Officer. As such, you shall report to the Executive Committee and full Board of Directors. You shall have all of the authority and duties usual and customary to the Chief Executive Officer of a publicly-traded corporation, including but not limited to the power to direct and control the activities of the senior officers and employees of the Company or their equivalent including, but not limited to, the Chief Financial Officer, Vice President Operations, General Counsel, Vice President Development/Facilities and Vice President Sales and Marketing. As to the officers and general managers of the Company the Board of Directors will consider your recommendations as to hirings and terminations. As to all other employees of the Company you shall have the power and authority to hire and terminate. 2. PLACE OF WORK. Headquarters for the Company is currently in Alton, Illinois. You shall maintain an office at headquarters. 3. TERM. The Term of this Agreement shall be three (3) years from April 21, 1997 ("Effective Date"), subject to the termination pursuant to Section 11. April 14, 1997 Page 2 4. BASIC COMPENSATION. Your basic compensation shall be $400,000 annually payable in substantially equal monthly payments commencing from the Effective Date, subject to usual and customary deductions for taxes, governmental charges, and customary contributions to health, welfare and insurance programs maintained by the Company for the senior officers of the Company. 5. ADDITIONAL COMPENSATION. Promptly after your execution of this Agreement, the Company shall issue to you, from the authorized and unissued shares, 100,000 shares of common stock ("Additional Compensation") and such shares when issued shall be held in escrow for you. Issuance of such shares shall be subject to listing on the New York Stock Exchange and such shares shall be "restricted securities" under the federal securities laws. At the end of 18 months from the Effective Date 40% of the Shares held in escrow shall be released from escrow and delivered to you if you are still employed by the Company and at the end of the Term the balance of the shares held in escrow shall be released from escrow and delivered to you if you are still employed by the Company. You shall be entitled to any dividends (stock or cash) or the benefits of any stock split with respect to the shares distributed to you from the escrow. You shall also have the right to vote the Shares. 6. EXPENSES. You shall be entitled to reimbursement for all expenses reasonably associated with the Company's business. 7. AUTOMOBILE. You shall receive an allowance for an automobile in the amount of $800.00 monthly, which shall include the cost of owning or leasing of the car, mileage, maintenance, gas, oil and insurance, and covers your car usage in Alton and New Jersey while in your commuting mode. 8. EXECUTIVE AND MANAGEMENT OPTIONS. (a) You acknowledge that at the present time the Company's Stock Option Plan ("Option Plan") has less than 200,000 shares of Common Stock available for grant. The Board of Directors is currently considering several alternatives to increase the number of shares available to grant under the Option Plan. Several of the alternatives being considered will require the approval of the stockholders of the Company which will not occur until the 1998 annual meeting. It is the April 14, 1997 Page 3 Board's desire to have the number of shares available for grant under the Option Plan to be at least 1,000,000 shares. (b) Subject to increasing the shares available for grant under the Plan (or having them available from retired options), the Stock Option Committee will consider your recommendations for option grants to all executive and management employees, including, without limitation the following executives: Chief Financial Officer, General Counsel, Vice President Operations, Vice President Sales & Marketing and Vice President Development/Facilities. All options granted under the Option Plan must be issued at or above the closing price on the date of grant. The options will be subject to the other terms of the Option Plan. (c) Subject to increasing the shares available for grant under the Plan, the Stock Option Committee will grant you 300,000 option shares and such shares shall vest in equal amounts (ie., 1/3) over a three year period to track the Term. The 300,000 option shares shall be granted by June 30, 1997 with 100,000 shares available and granted (at market on date of grant) as soon after signing as reasonable, and the remaining 200,000 shares set at the market price when granted on or before June 30, 1997. (It is understood that the Compensation Committee and/or the Board can grant option shares in June by increasing the number of shares reserved under the Option Plan, subject to approval of Shareholders at the next Annual Meeting). 9. BENEFITS. You shall be eligible to participate in all benefit plans as provided to any officer of the Company. These benefits may change from time to time. At this time it is believed the benefits include (a) family medical and dental benefits, (b) a qualified profit-sharing plan, (c) a group life insurance plan, (d) a disability plan. The current specific benefits are described in the Employee Benefits Handbook. Additionally, you shall be entitled to coverage or reimbursement for any family medical and dental costs not covered by the Company's plans, subject to regulatory guidelines. 10. VACATION/SICK LEAVE. You shall be entitled to four weeks annual paid vacation which may be taken during your first year of employment and each succeeding year. You shall be entitled to 30 continuous days sick leave for when you are ill, with 60 days on an annual basis. If unable to return to your duties at the end of 30 days with reasonable accommodation, you should be eligible to participate in the long term disability described in Paragraph 9 and your office shall be considered vacant and your employment terminated. April 14, 1997 Page 4 11. TERMINATION. Your employment with the Company during the Term may be terminated (a) by the Company for cause (as defined below); (b) by the Company at any time without cause; or (c) by you at any time. "Cause" shall mean the following: (i) fraud or embezzlement with respect to the Company by you; (ii) material breach by you of this Agreement; (iii) failure to adhere to any reasonable and lawful rule or directive of the Board; (iv) gross or willful neglect of duties; (v) alcohol or drug dependency; (vi) death; (vii) permanent disability preventing the performance of your duties with reasonable accommodation for more than 30 continuous days or 60 days in any 12 month period; or (viii) your failure to qualify (or having so qualified being thereafter disqualified) under any suitability or licensing requirement to which you may be subject by reason of your position with the Company under any gaming laws or regulations as determined by any applicable gaming authority. If the purported cause of termination is the reasons set forth in (ii), (iii) or (iv) above the Company must give notice to you of the cause in writing specifying the purported cause and allow you 60 days to cure the purported cause. If your employment with the Company is terminated by the Company for "cause" or if you voluntarily terminate your employment prior to the end of the Term you shall only be entitled to (i) your basic compensation and other benefits to the date of termination; and (ii) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited. If your employment with the Company is terminated by the Company other than for "cause" then you shall be entitled to receive (i) your basic compensation ($400,000) in monthly installments for the 12 months following termination; (ii) out-placement services for 6 months following termination; (iii) relocation expenses up to $40,000; (iv) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited; and (v) unless you go to work for a competitor you shall have 90 days after the date of termination to exercise your vested stock options. 12. MOVING EXPENSES. The Company shall reimburse you for all reasonable costs related to the move of your personal belongings and family from New Jersey to the Alton/St. Louis area. Relocation expenses shall include the commission on the sale of your New Jersey home. April 14, 1997 Page 5 13. RELOCATION EXPENSES. The Company shall reimburse you for actual lodging expenses incurred by you and your family while seeking a new home in the Alton/St. Louis area including, a temporary residence not to exceed $3,500 per month. This benefit shall be limited to a period equal to the lesser of 12 months or as long as you own your current home, provided your home is listed and at a reasonable price. If any expenses reimbursed pursuant to Paragraphs 12 and 13 herein result in federal or state income taxation associated with the reimbursement, the Company shall reimburse you for the taxes actually paid. 14. REPRESENTATION. As part of the inducement for you to accept this offer, the Company has represented to you that its public financial statements reflect fully and accurately in all material respects the Company's financial operations and development status (including without limitation, Lawrenceburg, Indiana) with no material omissions. 15. NO ASSIGNMENT. This Agreement may not be assigned. 16. CHANGE OF CONTROL. Should more than 51% of the common stock of the Company be sold to, purchased by or otherwise subject to the control of a third party not currently owning more than 5% of the common stock or should substantially all of the assets of the Company be sold, then you shall be entitled to the following if you are terminated: (i) Additional Compensation held in escrow; (ii) all your stock options shall vest and (iii) you shall be entitled to the items set forth in Section 11 as if you were terminated by the Company other than for "cause." 17. NON-COMPETE. Should you voluntarily terminate your employment hereunder or be terminated with cause, you shall not compete with the Company in any jurisdictions where it currently maintains gaming facilities (including managed properties) for a period of 12 months following such resignation or termination and you agree not to solicit any of the Company's management employees for such 12 month period. Should your employment hereunder be terminated without cause you shall not compete with the Company in any jurisdictions where it currently maintains gaming facilities (including managed properties) for as long as the Company is paying you. April 14, 1997 Page 6 18. CONFIDENTIALITY. As a condition of this Agreement and your employment with the Company, you must sign and honor our employee confidentiality and non-disclosure agreement presently in effect by the Company. 19. ENTIRE AGREEMENT/AUTHORIZATION/BINDING/NO WAIVER/GOVERNING LAW. This writing represents the entire Agreement between the parties and may only be modified in writing signed by the parties. The signer of this offer is fully authorized by the Company to make the offer contained herein. This Agreement is binding on the employer and its successors and assigns. No waiver of any provision shall constitute a general waiver for future purposes. This Agreement may be signed in counterparts. This Agreement shall be governed by the laws of the State of Illinois. I believe the above sets out the terms of our agreement. I look forward to working with you. Please acknowledge your acceptance of this offer by signing below and returning a copy to me by 5:00 p.m. Chicago time on April 15, 1997. Very truly yours, ARGOSY GAMING COMPANY By: /s/ William F. Cellini ------------------------------ Title: Chairman ------------------------------ AGREED AND ACCEPTED By: /s/ James B. Perry ------------------------ Dated: 4-14-97 ----------------------- EX-10.23 4 EXHIBIT 10.23 EMPLOYEE AGREEMENT J. GULBRANDSEN May 20, 1997 James A. Gulbrandsen 3215 Orion Drive Colorado Springs, CO 80906 Re: Employment Agreement with Argosy Gaming Company Dear Mr. Gulbrandsen: I am pleased to offer you employment with Argosy Gaming Company (the "Company") under the following terms: 1. TITLE AND DUTIES. Your title shall be Vice President of Operations. As such, you shall report to the Chief Executive Officer. You shall have all of the authority and duties usual and customary to the Vice President of Operations of a publicly-traded corporation. 2. PLACE OF WORK. Headquarters for the Company is currently in Alton, Illinois. You shall maintain an office at headquarters. 3. TERM. The Term of this Agreement shall be three (3) years from June 1, 1997 ("Effective Date"), subject to the termination pursuant to Section 11. 4. BASIC COMPENSATION Your basic compensation shall be $225,000 annually payable in substantially equal monthly payments commencing from the Effective Date, subject to usual and customary deductions for taxes, governmental charges, and customary contributions to health, welfare and insurance programs maintained by the Company for the senior officers of the Company. 5. ADDITIONAL COMPENSATION Promptly after your execution of this Agreement, the Company shall issue to you from the authorized and unissued shares, 40,000 shares of common stock ("Additional Compensation") and such shares when issued shall be held in escrow for you. Issuance of such shares shall be subject to listing on the New York Stock Exchange and such shares shall be "restricted securities" under the federal securities laws. At the end of 18 months from the Effective Date 40% of the Shares held in escrow shall be released form escrow and delivered to you if you are still employed by the Company and at the end of the Term the balance of the shares held in escrow shall be released from escrow and delivered to you if you are still employed by the Company. You shall be entitled to any dividends (stock or cash) or the benefits of any stock split with respect to the shares distributed to you from the escrow. You shall also have the right to vote the Shares. 6. EXPENSES. You shall be entitled to reimbursement for all expenses reasonably associated with the Company's business. 7. AUTOMOBILE. You shall receive an allowance for an automobile in the amount of $600.00 monthly, which shall include the cost of owning or leasing of the car, mileage, maintenance, gas, oil and insurance, and covers your car usage in Alton and Colorado while in your commuting mode. 8. EXECUTIVE AND MANAGEMENT OPTIONS. The Stock Option Committee will grant you 105,000 option shares and such shares shall vest in equal amounts (ie., 1/3) over a three year period to track the Term. The 105,000 option shares shall be granted on the Effective Date (at the closing market price on the date of the grant). 9. BENEFITS. You shall be eligible to participate in all benefit plans as provided to any officer of the Company. These benefits may change from time to time. At this time it is believed the benefits include (a) family medical and dental benefits, (b) a 401K plan, (c) a group life insurance plan, (d) a disability plan. The current specific benefits are described in the Employee Benefits Handbook. Additionally, you shall be entitled to coverage or reimbursement for any family medical and dental costs not covered by the Company's plans, subject to regulatory guidelines. 10. VACATION/SICK LEAVE You shall be entitled to four weeks annual paid vacation which may be taken during your first year of employment and each succeeding year. You shall be entitled to 30 continuous days sick leave for when you are ill, with 60 days on an annual basis. If unable to return to your duties at the end of 30 days with reasonable accommodation, you should be eligible to participate in the long term disability described in Paragraph 9 and your office shall be considered vacant and your employment terminated. 11. TERMINATION Your employment with the Company during the Term may be terminated (a) by the Company for cause (as defined below); (b) by the Company at any time without cause, or (c) by you at any time. "Cause" shall mean the following: (i) fraud or embezzlement with respect to the Company by you; (ii) material breach by you of this Agreement; (iii) failure to adhere to any reasonable and lawful rule or directive of the Board; (iv) gross or willful neglect of duties; (v) alcohol or drug dependency; (vi) death; (vii) permanent disability preventing the performance of your duties with reasonable accommodation of more than 30 continuous days or 60 days in any 12 month period; or (viii) your failure to qualify (or having so qualified being thereafter disqualified) under any suitability or licensing requirement to which you may be subject by reason of your position with the Company under any gaming laws or regulations as determined by any applicable gaming authority. If the purported cause of termination is the reasons set forth in (ii), (iii) or (iv) above the Company must give notice to you of the cause in writing specifying the purported cause and allow you 60 days to cure the purported cause. If your employment with the Company is terminated by the Company for "cause" or if you voluntarily terminate your employment prior to the end of the Term you shall only be entitled to (i) your basic compensation and other benefits to the date of termination; and (ii) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited. If you employment with the Company is terminated by the Company other than for "cause" then you shall be entitled to (i) your basic compensation ($225,000) in monthly installments for the 12 months following termination; (ii) out- placement service for 6 months following termination; (iii) relocation expenses up to $25,000; (iv) the portion, if any, of the Additional Compensation delivered to you prior to termination; however, the portion then held in escrow shall be forfeited; and (v) unless you go to work for a competitor you shall have 90 days after the date of termination to exercise your vested stock options. 12. MOVING EXPENSES. The Company shall reimburse you for all reasonable costs related to the move of your personal belongings and family from Colorado to the Alton/St. Louis area. Relocation expenses shall include the commission on the sale of your Colorado home. 13. RELOCATION EXPENSES. The Company shall reimburse you for actual lodging expenses incurred by you and your family while seeking a new home in the Alton/St. Louis area including, a temporary residence not to exceed $2,500 per month. This benefit shall be limited to a period equal to the lesser of 12 months or as long as you own your current home, provided your home is listed and at a reasonable price. If any expenses reimbursed pursuant to Paragraphs 12 and 13 herein result in federal or state income taxation associated with the reimbursement, the Company shall reimburse you for the taxes actually paid. 14. REPRESENTATION. As part of the inducement for you to accept this offer, the Company has represented to you that its public financial statements reflect fully and accurately in all material respects the Company's financial operations and development status (including without limitation, Lawrenceburg, Indiana) with no material omissions. 15. NO ASSIGNMENT This Agreement may not be assigned. 16. CHANGE OF CONTROL. Should more than 51% of the common stock of the Company be sold to, purchased by or otherwise subject to the control of a third party not currently owning more than 5% of the common stock or should substantially all of the assets of the Company be sold, then you shall be entitled to the following if you are terminated: (i) Additional Compensation held in escrow; (ii) all your stock options shall vest and (iii) you shall be entitled to the items set forth in Section 11 as if you were terminated by the Company other than for "cause." 17. NON-COMPETE. Should you voluntarily terminate your employment hereunder or be terminated with cause, you shall not compete with the Company in any jurisdictions where it currently maintains gaming facilities (including managed properties) for a period of 12 months following such resignation or termination and you agree not to solicit any of the Company's management employees for such 12 month period. Should your employment hereunder be terminated without cause you shall not compete with the Company in any jurisdictions where it currently maintains gaming facilitated (including managed properties) for as long as the Company is paying you. 18. CONFIDENTIALITY. As a condition of this Agreement and you employment with the Company, you must sign and honor our employee confidentiality and non-disclosure agreement presently in effect by the Company. 19. ENTIRE AGREEMENT/AUTHORIZATION/BINDING/NO WAIVER/GOVERNING LAW. This writing represents the entire Agreement between the parties and may only be modified in writing signed by the parties. The signer of this offer is fully authorized by the Company to make the offer contained herein. This Agreement is binding on the employer and its successors and assigns. No waiver of any provision shall constitute a general waiver for future purposes. This Agreement may be signed in counterparts. This Agreement shall be governed by the laws of the State of Illinois. I believe the above sets out the terms of our agreement. I look forward to working with you. Please acknowledge you acceptance of this offer by signing below and returning a copy to me by 5:00 p.m. central time on May 21, 1997. Very truly yours, ARGOSY GAMING COMPANY By: /s/ James B. Perry ______________________________ Title: President & CEO ___________________________ AGREED AND ACCEPTED By: /s/ James A. Gulbrandsen _________________________ Dated: 5/21/97 ______________________ EX-21 5 EXHIBIT 21 LIST OF SUBSIDIARIES 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 6 EXHIBIT 24.1 CONSENT OF ERNST & YOUNG 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 13, 1998, included in the 1997 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. Ernst & Young LLP Chicago, Illinois March 23, 1998 EX-24.2 7 EXHIBIT 24.2 CONSENT OF GRANT THORNTON LLP 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, 1997. 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 20, 1998 EX-25 8 EXHIBIT 25 POWER OF ATTORNEY 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, 1997 hereby constitutes and appoints James B. Perry and Dale R. Black and each of them, his true and lawful attorneys-in-fact and agents with full power to act without the other, to sign such Annual Report and to file such Annual Report and the exhibits thereto and any and all other documents in connection therewith with the Securities and Exchange Commission, and to do and perform any and all acts and things requisite and necessary to be done in connection with the foregoing as fully as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. Dated: March 5, 1998 /s/ Edward F. Brennan ---------------------------------------- Edward F. Brennan Director /s/ George L. Bristol ---------------------------------------- George L. Bristol Director /s/ Felix Lance Callis ---------------------------------------- Felix Lance Callis Director /s/ William F. Cellini ---------------------------------------- William F. Cellini Director /s/ Jimmy F. Gallagher ---------------------------------------- Jimmy F. Gallagher Director /s/ John Biggs Pratt, Sr. ---------------------------------------- John Biggs Pratt, Sr. Director /s/ William McEnery ---------------------------------------- William McEnery Director -----END PRIVACY-ENHANCED MESSAGE-----