-----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, KXVUBNa8Vyc2HtDPGPEPR49MonHZyjE0iMS2tLeVHc8U86tPN5PfnyhMC2lHHiYQ 6IEBM5jSKW3l9pteB67NSA== 0001047469-98-036305.txt : 19981005 0001047469-98-036305.hdr.sgml : 19981005 ACCESSION NUMBER: 0001047469-98-036305 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981002 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/A SEC ACT: SEC FILE NUMBER: 001-11853 FILM NUMBER: 98720219 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/A 1 10-K/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ FORM 10-K/A /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997 COMMISSION FILE NUMBER: 1-11853 ARGOSY GAMING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 37-1304247 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 219 PIASA STREET, ALTON, ILLINOIS 62002 -------------------------------------- -------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (618) 474-7500 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- --------------------- 13-1/4 % First Mortgage Notes due 2004 New York 12% Convertible Subordinated Notes due 2001 New York Common Stock, par value $.01 per share New York Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 24, 1998, the aggregate market value of the registrant's Common Stock held by non-affiliates was $53,725,260. The closing price of the Common Stock on March 24, 1998 as reported on the New York Stock Exchange, was $3-3/4. As of March 24, 1998, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 24,498,333. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997, and of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 23, 1998 as described in the Cross Reference Sheet and a Table of Contents included herewith, is incorporated herein by reference into Parts II and III of this Report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- AMENDING ITEMS: 1, 2, 3, 6, 7 AND 13 ------------------------------------ ------------------------------------ CROSS REFERENCE SHEET AND TABLE OF CONTENTS PAGE REFERENCE OR REFERENCE(1) ---------------- PART I ITEM 1. BUSINESS 1 ITEM 2. PROPERTIES 18 ITEM 3. LEGAL PROCEEDINGS 19 PART II ITEM 6. SELECTED FINANCIAL DATA 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 26 CONDITION AND RESULTS OF OPERATIONS PART III ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (2) 34 (1) Certain information is incorporated by reference, as indicated below, from the Annual Report to Stockholders for the fiscal year ended December 31, 1997 (the "Annual Report") and the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 23, 1998, (the "Proxy Statement"). (2) Proxy Statement sections entitled "Executive Compensation" and "Certain Transactions." 1 PART I ITEM 1. BUSINESS GENERAL Argosy Gaming Company (the "Company") is a multi-jurisdictional developer, owner and operator of riverboat casinos and related entertainment facilities in the midwestern and southern United States. The Company, through its subsidiaries, owns and operates riverboat casinos in Alton, Illinois, Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux City, Iowa. Unless the context otherwise requires, "Company" and "Argosy" shall mean Argosy Gaming Company and its subsidiaries. The Company's principal executive offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone number is (618) 474-7500. CURRENT OPERATIONS ALTON BELLE CASINO - Alton, Illinois, is located on a leased site on the Mississippi River approximately 20 miles northeast of downtown St. Louis, and consists of 22,800 gaming square feet, 684 slot machines and 35 table games. The facility also includes a 37,000 square foot, three-level floating entertainment pavilion which features a sports/entertainment lounge, buffet and restaurant facilities, conference facilities and the market's only off-track betting parlor. ARGOSY CASINO OF GREATER KANSAS CITY - Riverside, Missouri, is located on a 55-acre owned site approximately five miles from downtown Kansas City on the Missouri River and consists of 35,863 gaming square feet, 965 slot machines and 54 table games. The riverboat casino is complemented by an 85,000 square foot land-based entertainment facility featuring specialty and buffet restaurants, a sports/entertainment lounge, and 14,000 square feet of banquet/conference facilities. BELLE OF BATON ROUGE - Baton Rouge, Louisiana, is located on a site on the Mississippi River in downtown Baton Rouge and consists of 27,971 gaming square feet, 776 slot machines and 43 table games. The riverboat casino is complemented by Argosy's adjacent land-based entertainment development known as Catfish Town. The Catfish Town development includes a 50,000 square foot festival atrium, entertainment/sports lounge, buffet/coffee shop, conference facilities and approximately 150,000 square feet of leasable retail space. BELLE OF SIOUX CITY - Sioux City, Iowa, is located on a leased site in downtown Sioux City on the Missouri River and consists of 12,500 gaming square feet, 419 slot machines and 24 table games, a bar and gift shop. The casino is complemented by adjacent barge facilities featuring buffet dining, meeting space and administrative support offices. LAWRENCEBURG CASINO - In June 1995, Indiana Gaming Company, L.P., a joint-venture subsidiary of the Company ("Indiana Partnership"), was awarded the right to develop and operate a riverboat casino and entertainment complex on the Ohio River in Lawrenceburg, Indiana, which is located approximately 15 miles west of Cincinnati, Ohio. The Company is the sole general partner of, and holds a 57.5% general partnership interest in the Indiana partnership. Conseco Entertainment L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited partnership interest and certain other investors, including H. Steven Norton, a former employee of the Company, who brought the opportunity to the Company concurrent with his initial employment, hold the remaining 13.5% limited partnership interest in the Indiana Partnership. The Company manages the development, construction and operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA and Conseco receives a financial advisory fee of 5% of EBITDA. 1 The Lawrenceburg casino opened December 10, 1996 and, through September 30, 1997, the Indiana Partnership operated at a temporary site utilizing a leased vessel with approximately 20,500 square feet of gaming space. The vessel, which had a capacity of 1,600 passengers, featured approximately 870 slot machines and 52 table games for a total of approximately 1,275 gaming positions. In addition, the Indiana Partnership leased, from the Company, an approximately 24,000 square foot floating entertainment and support facility which featured ticketing and holding areas, a food court, two bars and a gift kiosk. Parking for the temporary facility was provided at a 1,400 space satellite lot. The Indiana Partnership provided free shuttle service for the parking lot to the temporary site. On October 1, 1997, the Indiana Partnership began operating its permanent vessel at the temporary site. The vessel features approximately 74,300 square feet of gaming space on three levels and has approximately 2,470 gaming positions consisting of approximately 1,735 slots and 97 table games. The vessel can accommodate approximately 4,400 passengers and crew members. On December 10, 1997, the Indiana Partnership moved the riverboat casino from the temporary site to its permanent facility which includes a 1,750 space parking garage and a 120,000 square foot land-based entertainment pavilion and support facility featuring a 350 seat buffet restaurant, two specialty restaurants, and an entertainment lounge. The Company continues to utilize the satellite parking lot for employee and overflow parking. The final component of the Lawrenceburg property, a 300 room hotel is expected to open in the second quarter of 1998. The partnership agreement governing the Indiana Partnership provides the $225 million budgeted construction cost of the Lawrenceburg Casino development would be funded 57.5% by the Company and 42.5% by Conseco. The Company believes that the Lawrenceburg casino project will be completed within the budgeted amount and that funds sufficient to meet its obligations are on hand in its restricted cash account at December 31, 1997. For a further description of the terms of the Indiana Partnership, see "Lawrenceburg Casino Partnership Agreement". CORPORATE STRATEGY In 1997, the Company implemented a change in operating strategy in an attempt to build strength and gain momentum as a leading riverboat casino operator. This strategy includes assembling a new management team with significant experience and expertise in gaming industry operations and marketing, adopting new marketing strategies with an emphasis on direct marketing, and prudently investing in gaming and gaming-related assets for its properties. Argosy's corporate strategy involves the following elements: EXPERIENCED MANAGEMENT TEAM. Argosy's Board of Directors assembled a new, experienced management team during 1997 to emphasize a renewed commitment to Company-wide operations. In April 1997, the Board of Directors named James B. Perry President and CEO of the Company. In June 1997, Mr. Perry recruited Vice President of Operations, James A. Gulbrandsen, and Vice President of Sales and Marketing, Virginia M. McDowell. In addition, general managers with significant gaming industry experience were hired at three of Argosy's properties during the third and fourth quarters of 1997. EXPANDED SALES AND MARKETING EFFORTS. The Company adopted a new marketing strategy designed to confront heightened competition in each of its markets with stronger, coordinated marketing, increased promotions and targeted entertainment events. During 1998, Argosy anticipates replacing or upgrading the player tracking systems at each property. These enhancements will enable the Company to provide targeted bonusing based upon customers' playing habits. In addition, Argosy's marketing department will seek to strengthen brand recognition in Alton, Baton Rouge and Sioux City by including the Argosy brand name in the marketing and entertainment efforts of those properties. 2 Finally, the Company has analyzed the database at each property, and has refocused its entertainment events, including concerts, private parties and sporting events, to attract and reward the targeted Argosy consumer. OPERATIONS. The Company's operating strategy is to provide a superior customer experience to sophisticated gaming customers by offering a competitive gaming product and by emphasizing prompt, friendly customer service. CAPITAL IMPROVEMENTS. Argosy's management team has developed a capital plan that emphasizes prudent capital investment to enhance the Company's operations. Anticipated capital expenditures include replacing older, less competitive slot machines with newer products and replacing or upgrading player tracking and database systems in order to better implement the Company's enhanced marketing plan. In addition, the Company anticipates improving its physical plant, including parking, public areas, restaurants, etc., as necessary, to accommodate customers' needs and improve current operating inefficiencies. POTENTIAL FUTURE PROJECTS BATON ROUGE DEVELOPMENT. Argosy has entered into a joint venture agreement and a development agreement with a developer for the ownership and construction of a 300-room convention hotel adjacent to the Company's Catfish Town Atrium development. The hotel joint venture is negotiating with a major national hotel chain to manage the hotel. The consummation of the hotel transaction is subject to numerous conditions precedent including, without limitation, obtaining separate non-recourse project financing. The proposed hotel would be the only nationally franchised hotel in downtown Baton Rouge and would be located across from the Baton Rouge Convention Center. COMPETITION The Company's Alton Casino faces competition from four other riverboat casino facilities currently operating in the St. Louis area and expects the level of competition to remain intense in the future. The most recent casino complex to open includes two independently owned facilities, each of which operate two dockside vessels. This casino complex, which increased gaming capacity in St. Louis by approximately 55%, opened in March of 1997. The Company's Riverside Casino faces competition from four casino companies in the Kansas City area that offer dockside gaming, two of which offer two gaming vessels each. The Company's Baton Rouge Casino faces competition from one casino located in downtown Baton Rouge, a nearby native American casino and multiple casinos throughout Louisiana. Currently, the Company faces competition in Sioux City, Iowa, from two land-based Native American casinos, slot machines at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in January 1996. The Indiana Partnership faces competition from one other riverboat casino in the Cincinnati market, which opened in October 1996. There could be further unanticipated competition in any market which the Company operates as a result of legislative changes or other events. The Company expects each market in which it participates, both current and prospective, to be highly competitive. EMPLOYEES As of December 31, 1997, the Company had approximately 3,955 full-time and 473 part-time employees. Approximately 2,125 employees are represented by the Seafarers International Union of North America. The Company has collective bargaining agreements with that union which expire at various times between June 2001 and June 2003. Twelve employees are represented by the International Brotherhood of Electrical Workers. In addition, approximately 75 employees have recently voted to be represented by the United Plant Guard Workers of America and 40 employees have recently voted to be represented by American Maritime Officers Union. The Company is currently negotiating collective bargaining agreements with each group. 3 The Company has not experienced any work stoppages and believes its relations with its employees are generally satisfactory. LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT GENERAL The Indiana Partnership operates pursuant to a partnership agreement entered into among the partners as of April 11, 1994, as amended and restated as of February 21, 1996. The Indiana Gaming Company manages the partnership pursuant to a management agreement and as general partner, subject only to certain actions or major decisions requiring the consent of a majority in interest of the limited partners. Under the provisions of the partnership agreement and the management agreement, the Company manages the development, construction and operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA (as defined in the partnership agreement) and Conseco receives a financial advisory fee of 5% of EBITDA. PROJECT FUNDING The partnership agreement governing the Indiana Partnership provides that the $225 million budgeted construction cost of the Lawrenceburg Casino development would be funded 57.5% by the Company and 42.5% by Conseco. The Indiana Partnership has been funded with $52.5 million of capital contributions by the partners of which $16.75 million constitutes common equity and $35.75 million constitutes preferred equity. The Company has contributed approximately $9.6 million of common equity, and approximately $20.6 million of preferred equity. The remainder of the common and preferred equity has been contributed by Conseco. The remainder of the cost of the Lawrenceburg Casino has been funded by third party financing of $25.0 million and capital loans from the Company and Conseco of approximately $147.5 million. The capital loans have been funded 57.5% by the Company and 42.5% by Conseco. In addition to the $225 million budgeted construction cost of the Lawrenceburg Casino described above, the Company has incurred approximately $15 million of pre-opening, administrative, training and other soft costs in connection with opening the temporary and permanent Lawrenceburg Casinos. Pursuant to the terms of the partnership agreement, the Company had the sole obligation to fund these costs. PARTNER DISTRIBUTIONS The Lawrenceburg Casino partnership agreement sets forth the manner in which cash flow of the Indiana Partnership is distributed. Pursuant to the agreement, principal on capital loans is repaid on an eight-year amortizing schedule and cash flow (after repayment of principal of, and interest on, capital loans) is distributed by the general partner not less frequently than quarterly: (i) first, to the partners pro rata for tax payments in an amount equal to their taxable net income for such period; (ii) second, to the partners as a prepayment of principal on capital loans to be applied in the inverse order of maturity, up to 75% of the remaining cash flow; (iii) third, in payment of a preferred return of 14% on any preferred equity contributed by the partners; (iv) fourth, as a return of the preferred equity contributed by the partners; (v) fifth, as a return of common equity contributed by the partners; and (vi) sixth, to the partners in accordance with their respective percentage interests. The partnership agreement provides that the net cash proceeds from a sale or refinancing are distributed by the general partner in the same order as cash flow except that the proceeds will be used to repay 100% of outstanding capital loans by the partners. 4 GENERAL PARTNER REMOVAL The Lawrenceburg Casino partnership agreement provides that the Company's wholly-owned subsidiary, The Indiana Gaming Company, can be removed as general partner of the partnership by the limited partners under certain limited circumstances, including: (i) a material breach (after notice and expiration of applicable cure periods) of certain material provisions of the partnership agreement dealing with such things as distributions to partners or the failure to obtain the required consent of the limited partners for certain major decisions; (ii) conviction of embezzlement or fraud; (iii) certain bankruptcy events; (iv) reduction in the Indiana Gaming Company's partnership interest to less than 40% due to sales or dilution for failure to pay required capital; (v) a final unappealable judgment against The Indiana Gaming Company in excess of $25 million which is uninsured and remains unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts constituting "gross mismanagement"; (vii) failure of The Indiana Gaming Company to fund project costs in excess of $215 million (after expiration of applicable notice and cure periods); and (viii) foreclosure by the Trustee under the Company's loan agreement on The Indiana Gaming Company's pledge of its partnership interest the Indiana Partnership. Upon removal as general partner, the general partnership interest of The Indiana Gaming Company becomes a "special limited partner" interest with rights to partner distributions but only limited voting rights on partnership matters. Also, if the reason for the removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii) above the limited partners may acquire all, but not less than all, of The Indiana Gaming Company's interest for the fair market value thereof determined by an appraisal process. LIMITED PARTNERS' SALE RIGHTS The Lawrenceburg Casino partnership agreement provides that: (i) after the third anniversary date of commencement of operations at the Lawrenceburg Casino, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests) or (ii) after a deadlock by the parties with respect to significant items in any annual operating budget of the partnership for budget year 1999 and thereafter, any partner has a right to sell its interest to the other partners (the limited partner pursuant to clause (i) and the partner desiring to sell pursuant to clause (ii) is hereinafter referred to as a "Selling Partner" and the non-selling partners are hereinafter referred to as the "Non-Selling Partners"). The partnership agreement provides that after the Selling Partner gives notice of its intent to sell, the Selling Partner and Non-Selling Partners shall have 60 days to attempt in good faith to agree to a purchase price. If within such period of time no such agreement is reached, then the Selling Partner's interest shall be appraised pursuant to an appraisal process to determine the fair market value thereof. After the fair market value of the Selling Partner's interest is determined by the appraisal process, the Non-Selling Partners have 60 days to reject such sale at that price, and if the Non-Selling Partners decline to purchase the interest of the Selling Partner at the appraisal price then the general partner is to solicit bids and sell all of the assets of the partnership within twelve months to the highest bidder and the partnership will be dissolved within a 12-month period. No assurances can be given that The Indiana Gaming Company, if it is a Non-Selling Partner, will have or will be able to obtain sufficient funds to acquire any Selling Partner's interest in the circumstances provided for above and therefore the assets of the partnership would have to be sold to the highest bidder as provided above. In addition, the partnership agreement provides all partners with a right of first refusal on transfers of partnership interests. A foreclosure by the Trustee on the Company's pledge of its partnership interest shall be deemed a transfer giving rise to the right of first refusal. REGULATORY MATTERS ILLINOIS In February 1990, the State of Illinois pursuant to the Riverboat Gambling Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act authorizes riverboat gaming upon any navigable stream within or forming a boundary of the State of Illinois other than Lake Michigan. The Riverboat Act does not, however, authorize riverboat gaming or the docking of a riverboat conducting gaming within a county having a population in excess of 3,000,000. The Riverboat Act grants the Illinois Gaming Board specific powers and 5 duties, and all other powers which are necessary and proper to effectuate the Riverboat Act. The Illinois Gaming Board's jurisdiction extends to every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. The Riverboat Act authorized a five member Illinois Gaming Board to issue up to ten owner's licenses statewide. Each owner's license permits the operation of up to two boats as a part of a single riverboat gaming operation with a combined maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board). No person, firm or corporation may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner may hold up to 10% of a second riverboat gaming operation in Illinois. In addition to the ten owner's licenses which may be authorized under the Riverboat Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming and to conduct such gaming on a specified date or series of dates. Riverboat gaming under such a license may take place on a riverboat not normally used for riverboat gaming. An owner's license is issued for an initial period of three years (with a fee of $25,000 for the first year and $5,000 for each of the following two years) and must be renewed annually thereafter (with a fee of $5,000 for each year). The Company's Illinois gaming license is subject to renewal in October, 1998. An owner's license is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Gaming Board that the licensee continues to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board also requires that officers, directors and employees of a gaming operation be licensed. Licenses issued by the Illinois Gaming Board may not be transferred to another person or entity. All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Pursuant to its rule making authority under the Illinois Riverboat Act, the Illinois Gaming Board has adopted certain regulations that provide that any beneficial owner of the legal or beneficial interests of a gaming company may be required, and in the case of a beneficial owner of 5% or more of the legal or beneficial interests (a "5% Holder") is required, to furnish a detailed personal disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the personal disclosure form as the basis for its investigation to determine such holder's suitability as a stockholder of the company. In the case of a 5% Holder, the Illinois Gaming Board conducts such an investigation. The Illinois Gaming Board's decisions as to suitability are based on the same criteria used for a finding of preliminary suitability for licensure including character, reputation, experience and financial integrity of such holder. If the Illinois Gaming Board determines that a holder is not suitable, the holder is entitled to request a hearing; however, if no hearing is requested after such determination or such finding is upheld after a hearing, the holder is required to divest his shares of common stock of the company. After a holder is required to divest and until divestiture, the licensee is unable to distribute profits to such stockholder. The Illinois Gaming Board has adopted a regulation that provides that a licensee can only make distributions to shareholders to the extent such distributions would not impair the financial viability of the licensee. Factors which would be considered by the Illinois Gaming Board include working capital requirements, debt service requirements, requirements for repairs and maintenance and capital expenditure requirements. Illinois Gaming Board approval is required for certain changes, including, among other things, to the type of entity, debt and equity offerings by a company, issuances of debt, riverboat capacity or significant design changes, changes in the number of gaming positions and pro forma budgets and financial statements. Minimum and maximum wagers on games are set by the licensee. Wagering may not be conducted with money or negotiable currency. No person under the age of 21 is permitted to wager in Illinois, and wagers may only be taken from a person present on a licensed riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. Under the Riverboat Act, vessels must have the capacity to hold a minimum of 500 persons if operating on the Mississippi River or the Illinois River south of Marshall County, and a minimum of 400 persons on any other waterway. In addition, all riverboats must be accessible to disabled persons, must be either a replica of a 19th century Illinois riverboat or be a casino cruise ship design and must comply with applicable federal and state laws, including but not limited to U.S. Coast Guard regulations. 6 Gaming may only be conducted on a gaming excursion, which is limited to a maximum period of four hours. A gaming excursion is deemed to have started upon the commencement of gaming. For the purpose of orderly ingress of passengers to a riverboat, gaming is deemed to commence when the first passenger boards a riverboat for an excursion and may continue while other passengers are boarding for a period not to exceed thirty minutes, at which time the gangplank or its equivalent must be pulled up and further boarding is not permitted. For the purpose of orderly egress of passengers from a riverboat at the end of an excursion, gaming may continue for a period not to exceed thirty minutes after the gangplank or its equivalent is lowered. During this thirty minute period of egress, new passengers may not board a riverboat. These periods of time do not extend the four-hour maximum. Special event extended cruises may be authorized by the Illinois Gaming Board. Although the Riverboat Act provides that no gambling may be conducted while a riverboat is docked, an Illinois Gaming Board rule currently permits dockside gaming during the 30-minute time periods prior to and following a cruise. Furthermore, if the captain of the riverboat reasonably determines that for reasons of safety, although seaworthy, the riverboat should not leave the dock or should return immediately thereto due to inclement weather, mechanical or structural problems, or river icing, then a gaming excursion may commence or continue while the gang plank or its equipment is raised and remains raised, and ingress is prohibited until completion of the excursion, in which case the riverboat is not considered docked. If such a situation occurs, the holder of the owner's license must promptly file a report with the administrator of the Illinois Gaming Board detailing the basis for its decision not to cruise. Recent pronouncements by the Illinois Gaming Board indicate that the explanations for failure to cruise pursuant to the rule will be scrutinized and that any abuse of the rule will result in disciplinary actions, which may include, among other things, any of the following: cancellation of future cruises, penalties, fines, suspension and/or revocation of a license. The Riverboat Act imposes a graduated wagering tax based on adjusted gross receipts ("AGR") from gambling games at a rate of 15% on AGR up to $25 million, 20% on AGR between $25 million and $50 million, 25% on AGR between $50 million and $75 million, 30% on AGR between $75 million and $100 million, and 35% on AGR in excess of $100 million. The tax imposed is to be paid by the licensed owner to the Illinois Gaming Board on the day after the day when the wagers were made. The Riverboat Act also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. In addition, all use, occupancy and excise taxes that apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. The Company also pays $.25 admission tax to the City of Alton for each person admitted to the Alton Belle Casino. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming as it may deem necessary and proper and into alleged violations of the Riverboat Act. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to riverboat gaming operations at all times. A holder of any license is subject to the imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit and in compliance with applicable laws of Illinois regarding administrative procedures and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Gaming Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. 7 The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interests of the public and the gaming industry. INDIANA In June 1993, the Indiana legislature adopted legislation permitting riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and Patoka Lake. The legislation granted authority to supervise gaming activities to the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission"). The Indiana Gaming Commission is empowered to administer, regulate and enforce the system of riverboat gaming established under Indiana's Riverboat Gambling Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all riverboat gaming operations in Indiana, as well as all persons on riverboats where gaming operations are conducted. The Indiana Gaming Commission has broad powers to regulate riverboat gaming operations and to approve the form of ownership and financial structure of not only riverboat owner licensees, but also their entity qualifiers, and intermediary and holding companies. The following description reflects both adopted and proposed rules. Further, the Indiana General Assembly has the power to promulgate new laws and implement amendments to the Riverboat Gambling Act, which can materially affect the operation or economic viability of the gaming industry in Indiana. No one may operate a riverboat gaming operation in Indiana without holding a riverboat owner's license. The Indiana Gaming Commission has implemented strict regulations with respect to the suitability of riverboat license owners, their key personnel, and employees. The Indiana Gaming Commission utilizes a "class based" licensing structure that subjects all individuals associated with a riverboat licensee or a riverboat license applicant to varying degrees of background investigations. Under current Indiana law a maximum of 11 owner's licenses may be in effect at any time with an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to Lake Michigan, an aggregate of five licenses to be issued to owners whose home port is a county which is contiguous to the Ohio River and one license to be issued to an owner whose home port is a county contiguous to Lake Patoka. For counties contiguous to the Ohio River, the Indiana Gaming Commission may not issue a license unless an ordinance has been passed permitting the docking of a riverboat by the specified local entity and the voters of the county have approved riverboat gambling in the county. A license holder is required to pay an initial license fee of $25,000, (which covers the first 5 years of operation), a renewal fee of $5,000 per year thereafter and post a bond to guaranty performance of the licensee's obligations under the legislation. Gaming will be permitted only on riverboats which (i) have a valid certificate of inspection from the U.S. Coast Guard for the carrying of at least 500 passengers, (ii) are at least 150 feet in length, and (iii) for riverboats operating on the Ohio River, replicate historic Indiana steamboat passenger vessels of the 19th century. No person or entity may simultaneously own an interest in more than two riverboat owner's licenses. A person or entity may simultaneously own up to 100% in one riverboat owner's license and no more than 10% in a second riverboat owner's license. A riverboat owner licensee must possess a level of skill, experience, or knowledge necessary to conduct a riverboat gaming operation that will have a positive economic impact on the host site, as well as the entire State of Indiana. Additional representative, but not exclusive, qualification criteria with respect to the holder of a riverboat owner's license include character, reputation, financial integrity, the facilities or proposed facilities for the conduct of riverboat gaming including related non-gaming projects such as hotel development, and the good faith affirmative action plan to recruit, train and upgrade minorities and women in all employment classifications. The Indiana Gaming Commission shall require persons holding owner's licenses to adopt policies concerning the preferential hiring of residents of the city in which the riverboat docks for riverboat jobs. The Indiana Gaming Commission has broad discretion in regard to the issuance, renewal, revocation and suspension of licenses and approvals, and the Indiana Gaming Commission is empowered to regulate a wide variety of gaming and non-gaming related activities, including the licensing of suppliers to, and employees at, riverboat gaming operations, and effectively to approve the form of ownership and financial structure of not only riverboat owner and supplier licensees, but also their subsidiaries and affiliates. A riverboat owner's licensee or any other person may not lease, hypothecate, borrow money against or loan money against a riverboat owner's license. An ownership interest in a riverboat owner's license may only be transferred in accordance with the regulations promulgated under the Riverboat Gambling Act. An applicant 8 for the approval of the transfer of a riverboat owner's license must comply with application procedures prescribed by the Indiana Gaming Commission and present evidence that it meets or possesses the standards, qualifications, and other criteria under Indiana gaming laws, and pay an investigative fee in the amount of $50,000 with the application. If the Indiana Gaming Commission denies the application to transfer an ownership interest, it shall issue notice of denial to the applicant. Unless specifically stated to the contrary, a notice of denial of an application for transfer shall not constitute a finding that the applicant is not suitable for licensure. A person who is served with notice of denial under this rule may request an administrative hearing. "Certificates of Suitability" are issued following selection by the Indiana Gaming Commission. The "Certificate of Suitability" is valid for 180 days unless extended by the Indiana Gaming Commission. During this period the prospective riverboat licensee must among other things: obtain a permit to develop the riverboat gaming operation from the United States Army Corps of Engineers; obtain a valid certificate of inspection from the United States Coast Guard for the vessel on which the riverboat gaming operation will be conducted; apply for and receive the appropriate permits or certificates from the Indiana Alcoholic Beverage Commission, fire marshall, and other appropriate local, state and federal agencies which issue permits including, but not limited to, health permits, building permits and zoning permits; closing the financing necessary to complete the development of the gaming operation; post a bond in compliance with the applicable law; obtain the insurance deemed necessary by the Indiana Gaming Commission; receive licensure for electronic gaming devices and other gaming equipment under applicable law; submit an emergency response plan in compliance with applicable laws; and take any other action that the Indiana Gaming Commission deems necessary for compliance under Indiana gaming laws. Further, the Indiana Gaming Commission may place restrictions, conditions or requirements on the permanent riverboat owner's license. An owner's initial license expires five years after the effective date of the license, and unless the owner's license is terminated, expires or is revoked, the owner's license may be renewed annually by the Indiana Gaming Commission upon satisfaction of certain conditions contained in the Riverboat Gambling Act. Pursuant to rules promulgated by the Indiana Gaming Commission, any person (other than an institutional investor) who individually, or in association with others, acquires directly or indirectly the beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee, directly or indirectly, through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for finding of suitability within 45 days after acquiring the securities. Each institutional investor who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall notify the Indiana Gaming Commission within 10 days after the institutional investor acquires the securities and shall provide additional information and may be subject to a finding of suitability as required by the Indiana Gaming Commission. An institutional investor who would otherwise be subject to a suitability finding shall, within 45 days, after acquiring the interests submit information to the Indiana Gaming Commission including the following: a description of the institutional investor's business and a statement as to why the institutional investor satisfies the definitional requirements of an institutional investor under Indiana gaming rule requirements; a certification made under oath that the voting securities were acquired and are held for investment purposes only and were acquired and are held in the ordinary course of business as an institutional investor; the name, address, telephone number, social security number or federal tax identification number of each person who has the power to direct or control the institutional investor's exercise of its voting rights as a holder of voting securities of the riverboat licensee; the name of each person who beneficially owns 5% or more of the institutional investor's voting securities or equivalent; a list of the institutional investor's affiliates; a list of all securities of the riverboat licensee that are or were beneficially owned by the institutional investor or its affiliates within the preceding one year; a disclosure of all criminal and regulatory sanctions imposed during the preceding ten years; a copy of any filing made under 15 U.S.C. 18(a); and any other additional information the Indiana Gaming Commission may request to insure compliance with Indiana gaming laws. 9 Each institutional investor who, individually or in association with others, acquires, directly or indirectly, the beneficial ownership of 15% or more of any class of voting securities of a publicly-traded corporation that owns a riverboat owner's license or 15% or more of the beneficial interest in a riverboat licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for a finding of suitability within 45 days after acquiring the securities. An institutional investor means any of the following: a retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees; an investment company registered under the Investment Company Act of 1940; a collective investment trust organized by banks under Part 9 of the Rules of the Comptroller of the Currency; a closed end investment trust; a chartered or licensed life insurance company or property and casualty insurance company; a banking, chartered or licensed lending institution; an investment adviser registered under the Investment Advisers Act of 1940; and any other entity the Indiana Gaming Commission determines constitutes an institutional investor. The Riverboat Gambling Act imposes a tax on admissions to gaming excursions at a rate of $3.00 for each person admitted to the gaming excursion. This admission tax is imposed upon the license owner conducting the gaming excursion on a per-person basis without regard to the actual fee paid by the person using the ticket, with the exception that no tax shall be paid by admittees who are actual and necessary officials, employees of the licensee or other persons actually working on the riverboat. A tax is imposed on the adjusted gross receipts received from gaming games under the Riverboat Gambling Act at a rate of twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted gross receipts is defined as the total of all cash and property (including checks received by a licensee), whether collected or not, received by a licensee from gaming operations less the total of all cash paid out as winnings to patrons including a provision for uncollectible gaming receivables as is further set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from time to time, impose other fees and assessments on riverboat owner licensees. In addition, all use, excise and retail taxes apply to sales aboard riverboats. In general, riverboat excursions are limited to a duration of at least two and no more than four hours, and no gaming may be conducted while the riverboat is docked, with the exception of (i) the 30 minutes during passenger embarkation and disembarkation and (ii) when weather, water or traffic prevent the riverboat from cruising. Minimum and maximum wagers on games are set by the licensee, and wagering may not be conducted with money or other negotiable currency. No person under the age of 21 is permitted to be present on a riverboat, and wagers may only be taken from a person present on a licensed riverboat. No riverboat licensee or riverboat license applicant may enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received as determined at the time the contract is executed. Any contract entered into by a riverboat licensee or riverboat license applicant that exceeds the total dollar amount of $50,000 shall be a written contract. A riverboat license applicant means an applicant for a riverboat owner's license that has been issued a certificate of suitability. Pursuant to Indiana Gaming Commission rules, riverboat licensees and riverboat license applicants must submit an internal control procedure regarding purchasing transactions which must contain provisions regarding ethical standards, compliance with state and federal laws, and prohibitions on the acceptance of gifts and gratuities by purchasing and contracting personnel from suppliers of goods or services. The rules also require any riverboat licensee or applicant to submit any contract, transaction or series of transactions greater than $500,000 in any 12-month period to the Indiana Gaming Commission within 10 days of execution, and to submit a summary of all contracts or transactions greater than $50,000 in any 12-month period on a quarterly basis. The rules provide that contracts submitted to the Indiana Gaming Commission are not submitted for approval, but grant the Indiana Gaming Commission authority to cancel or terminate any contract not in compliance with Indiana law and Indiana Gaming Commission rules. 10 Indiana gaming laws provide that the opportunity for full minority and women's business enterprise participation in the riverboat industry in Indiana is essential to social and economic parity for minority and women business persons. The Indiana Gaming Commission has the power to review compliance with the goals of participation by minority and women business persons and impose appropriate conditions on licensees to insure that goals for such business enterprises are met. Under the Riverboat Gambling Act, a riverboat licensee or a riverboat license applicant shall designate certain minimum percentages of the value of its contracts for goods and services to be expended with minority business enterprises and womens' business enterprises such that 10% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with minority enterprises and 5% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with women's business enterprises. Expenditures with minority and women business enterprises are not mutually exclusive. Licensees are required to report the dollar value and percentage of contracts awarded to minority business enterprises and women's business enterprises annually. If the Indiana Gaming Commission determines that a licensee has not met these requirements, it may suspend, limit or revoke the owner's license or fine or impose appropriate conditions on the licensee. All licensees subject to the jurisdiction of the Indiana Gaming Commission have a continuing duty to maintain suitability for licensure. The Indiana Gaming Commission may initiate an investigation or disciplinary action or both against a licensee about whom the commission has reason to believe is not maintaining suitability for licensure, is not complying with licensure conditions, and/or is not complying with Indiana gaming laws or regulations. The Indiana Gaming Commission may suspend, revoke, restrict or place conditions on the license of a licensee; require the removal of a licensee or an employee of a licensee; impose a civil penalty or take any other action deemed necessary by the Indiana Gaming Commission to insure compliance with Indiana gaming laws. IOWA In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and Missouri Rivers and certain other waterways located in Iowa. The Excursion Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa Commission") jurisdiction over all gambling operations. The legislation authorized the granting of licenses to conduct riverboat gaming to not-for-profit corporations which, in turn, are permitted to enter into operating agreements with persons who are licensed by the Iowa Commission to operate riverboat casinos. The number of licenses which may be granted is not limited by statute or regulation. Gaming is permitted only on riverboats which recreate, as nearly as practicable, Iowa's riverboat history and have a capacity for at least 250 persons with tickets. In addition the licensee must utilize Iowa resources, goods and services in the operation of the riverboat. An excursion gambling boat must operate at least one excursion each day for 100 days during the excursion season, (from April 1 through October 31). Excursions consist of a minimum two hours during the excursion season. While an excursion gambling boat is docked, passengers may embark or disembark at any time during its business hours. If during the excursion season it is determined that it would be unsafe to complete any portion of an excursion, or if mechanical problems prevent the completion of any portion of an excursion, the boat may be allowed to remain dockside. A gaming license will be issued for not more than three years and is subject to annual renewals thereafter. The Iowa Commission has broad discretion with regard to such renewals. The annual license fee to operate an excursion gambling boat shall be based on the passenger carrying capacity, including crew, for which the excursion gambling boat is registered. The annual fee shall be five dollars per person capacity. Licenses issued by the Iowa Commission may not be transferred to another person or entity. The Company must submit detailed financial and operating reports to the Iowa Commission. 11 Iowa statute stipulates that a referendum must be held in 2002 to reaffirm gaming in each county that has gaming and further stipulates that similar referenda be held every eight years thereafter. Minimum and maximum wagers on games are set by the licensee. Wagering may only be conducted with chips, wagering debit cards or coins. Wagers may only be made by persons 21 years of age and older. A licensee shall not accept a credit card to purchase coins, tokens or other forms of credit to be wagered on gambling games. The legislation imposes a graduated tax based on adjusted gross receipts at a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any amount over $3 million. The tax is to be paid by the licensee within 10 days after the close of business of the day when the wagers were made. The legislation also permits the Iowa Commission to impose an admission fee for each person embarking on an excursion vessel, and the city or county in which gaming is conducted is permitted to impose an admission fee of not greater than 50 cents. Pursuant to its rule making authority, the Iowa Commission requires officers, directors and certain key employees of the Company to be licensed by the Iowa Commission. In addition, anyone having a material relationship or involvement with the Company may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove a change in position by such officers or key employees and the power to require the Company to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Commission finds unsuitable to act in such capacities. Any contract in excess of $50,000 must be submitted to and approved by the Iowa Commission. The Iowa Commission may also require any individual who has a material relationship with the Company to be investigated and licensed or found suitable. Any person who acquires 5% or more of the Company's equity securities must be approved by the Iowa Commission prior to such acquisition. The applicant stockholder is required to pay all costs of such investigation. Iowa Governor Terry Branstad has proposed that the Iowa legislature impose a five-year moratorium on the expansion of gaming. LOUISIANA In July 1991, the Louisiana legislature adopted legislation permitting certain types of gaming activity on certain rivers and waterways in Louisiana. The legislation granted authority to supervise riverboat gaming activities to the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement Division of the Louisiana State Police (the "Louisiana Enforcement Division"). The Louisiana Riverboat Gaming Commission was authorized to hear and determine all appeals relative to the granting, suspension, revocation, condition or renewal of all licenses, permits and applications. In addition, the Louisiana Riverboat Gaming Commission was to establish rules providing for and determining, among other things, authorized routes, duration of excursions and the stops a riverboat may make, minimum levels of insurance, construction of riverboats, periodic inspections and procedures for negotiable instrument transactions involving patrons. The Louisiana Enforcement Division was authorized, among other things, to investigate applicants and issue licenses, investigate violations of the statute, conduct continuing reviews of gaming activities and exercise other broad oversight powers. In an April 1996 special session of the Louisiana legislature, Louisiana lawmakers passed a measure which established the Louisiana Gaming Control Board and provides that such board shall be the successor to all prior authorities, and the sole and exclusive authority, with regard to the regulation and supervision of gaming operations and activities in Louisiana except for the regulation of horse racing and offtrack betting and the conducting of charitable gaming operations. Effective May 1, 1996, the powers, duties, functions, and responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana Enforcement Division, including those with respect to riverboat gaming, are transferred to the Louisiana Gaming Control Board. The Department of Public Safety and Corrections, Office of State Police, retains certain enforcement powers and responsibilities relative to investigations, audits, and cruising procedures. 12 The transfer of a license or permit or an interest in a license or permit is prohibited. The sale, purchase, assignment, transfer, pledge or other hypothecation, lease, disposition or acquisition (a "Transfer") by any person of securities which represents 5% or more of the total outstanding shares issued by a corporation that holds a license is subject to Louisiana Gaming Control Board disapproval. A security issued by a corporation that holds a license must disclose these restrictions. Prior Louisiana Gaming Control Board approval is required for the Transfer of any "ownership interest" of 5% or more in any licensee or for the Transfer of any "economic interest" of 5% or more in any licensee or Affiliated Gaming Person. No such prior approval is required for the transfer of any ownership interest of 5% or more in any corporate licensee. An "economic interest" is defined for purposes of a Transfer as any interest whereby a person receives or is entitled to receive, by agreement or otherwise, a profit, gain, thing of value, loss, credit, security interest, ownership interest or other benefit. A licensee must notify the Louisiana Gaming Control Board in writing within five (5) days of the completion of the following transactions: 1. Withdrawal of capital in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 2. The granting of a loan or any other extension of credit in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 3. Any advance or other distribution of any type of asset in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; No prior approval of any such withdrawal, loan, advance or distribution is required, but such transaction is ineffective if subsequently disapproved by the Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board may issue an emergency order for not more than 10 days prohibiting payment of profits, income or accruals by, or investments in, a licensee. Riverboat gaming licensees and their Affiliated Gaming Persons are required to notify the Louisiana Gaming Control Board within 30 days after any such person applies for, receives or accepts a loan, or makes use of any cash, property, credit, loan or line of credit, or guarantees, or grants other form of security for a loan (a "Loan") unless such transaction involves publicly registered debt and securities (in which event such person shall file the registration statement and other materials with the Louisiana Gaming Control Board), unless more stringent conditions are imposed by the Louisiana Gaming Control Board, or the amount of the Loan is below certain specified thresholds. The Louisiana Gaming Control Board is required to investigate the reported Loan, and to either approve or disapprove the transaction. If disapproved, the Loan must be rescinded by the Licensee or Affiliated Gaming Person. Fees for conducting gaming activities on a riverboat include (i) $50,000 per riverboat for the first year of operation and $100,000 per year per riverboat thereafter; (ii) a state franchise fee of 15% of net gaming proceeds; (iii) a state license fee of 3.5% of net gaming proceeds; and (iv) a local fee of up to $2.50 per passenger. In April 1996, the Louisiana legislature approved legislation mandating local option elections to determine whether to prohibit or continue to permit three individual types of gaming in Louisiana on a parish-by-parish basis. The referendum was brought before the Louisiana voters at the time of the November 1996 presidential election. Voters elected to permit riverboat gaming in all parishes where it is presently conducted and to allow land-based casino gaming in Orleans Parish. Voters in 31 parishes elected to permit video draw poker devices, but in 33 parishes, including East Baton Rouge Parish, voters elected to prohibit the devices. Current operators of video poker devices in East Baton Rouge Parish (and the other parishes where voters elected to prohibit video poker) will be allowed to operate only until the end of their current license plus two extensions. Typically video poker licenses have a maximum one year duration. 13 MISSOURI Gaming was originally authorized in the State of Missouri on November 3, 1992, although no governmental action was taken to enforce or implement the original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law which replaced the original law and established the Missouri Gaming Commission, which is responsible for the licensing and regulation of riverboat gaming in Missouri. The number of licenses which may be granted is not limited by statute or regulation. The Missouri Gaming Law grants specific powers and duties to the Missouri Gaming Commission to supervise riverboat gaming and implement the Missouri Gaming Law and take any other action as may be reasonable or appropriate to enforce the Missouri Gaming Law. The Missouri Gaming Commission has discretion to approve permanently moored ("dockside") riverboat casinos if it finds that the best interest of Missouri and the safety of the public indicate the need for continuous docking of an excursion gambling boat. Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. If a company is granted a gaming license in Missouri, such company, any subsidiaries it may form and its officers, directors, significant shareholders and employees will be subject to regulations. The initial license and first subsequent license renewal of an excursion gambling boat operator shall be for a period of one year. Thereafter, license renewal periods shall be two years. However, the Missouri Gaming Commission may reopen license hearings at any time. In addition to the owners license and operators license for the riverboat, every individual participating in gaming operations in any capacity is required to have an occupational license from the Missouri Gaming Commission. Applicants and licensees are responsible to keep the application and any requested materials current at all times, and this responsibility shall continue throughout any period of licensure granted by the Missouri Gaming Commission. In addition, Missouri has extensive licensing disclosure requirements. The Missouri Gaming Commission may revoke or suspend gaming licenses and impose other penalties for violation of the Missouri Gaming Law and the rules and regulations which may be promulgated thereunder. Penalties include, but are not limited to, forfeiture of all gaming equipment used in the conduct of unauthorized gambling games and fines of up to three times a licensee's highest daily gross receipts derived from wagering on the gambling games, whether authorized or unauthorized, conducted during the preceding twelve months. In addition, the Missouri Gaming Commission requires 60 days notice of, and may disapprove or require delay pending further investigation of, transactions in excess of the greater of $500,000 or 30% of licensee's net worth, up to $1,000,000, which transactions involve or relate to the gaming licensee. The Missouri Gaming Law imposes operational requirements on riverboat operators, including a charge of two dollars per gaming customer per excursion that licensees must pay to the Missouri Gaming Commission, a minimum payout requirement of 80% for slot machines, a 20% tax on adjusted gross receipts, prohibitions against providing credit to gaming customers (except for the use of credit cards and cashing checks) and a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff necessary to protect the public on the licensee's riverboat. Licensees must also submit to the Commission on a quarterly basis an audit of compliance and of the financial transactions and condition of the licensee's total operations for the calendar quarter and pay the associated auditing fees. The Missouri Gaming Law provides for a loss limit of $500 per person per excursion. Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may be used for gaming, the Missouri Gaming Commission is empowered to impose such space limitations through the adoption of rules and regulations. Additionally, United States Coast Guard safety regulations could affect the amount of riverboat space that may be devoted to gaming. The Missouri Gaming Law also includes requirements as to the form of riverboats, which must resemble Missouri's riverboat history to the extent practicable and include certain non-gaming amenities. The licensee may receive wagers only from a person present on a licensed excursion gambling boat. Wagering shall not be conducted with money or other negotiable currency. A person under 21 years of age shall not make a wager on an excursion gambling boat and shall not be allowed in the area of the excursion boat where gambling is being conducted. 14 With respect to the availability of dockside gaming, which may be more profitable than cruise gaming, the Missouri Gaming Commission is empowered to determine on a site by site basis where such gaming is in the best interest of Missouri and the safety of the public and shall be permitted. Pursuant to its rule making authority, the Missouri Gaming Commission has adopted certain regulations which provide, among other things, that: (i) riverboat excursions are limited to a duration of four hours, and gaming may be conducted at any time during the excursion; (ii) no gaming licensee or occupational licensee may pledge, hypothecate or transfer in any way any license, or any interest in a license, issued by the Missouri Gaming Commission; (iii) without first notifying the Missouri Gaming Commission at least 60 days prior to such consummation of any of the following transactions (and during such period the Missouri Gaming Commission may disapprove the transaction or require the transaction to be delayed pending further investigation) (a) a gaming licensee or a holding company affiliated with a gaming licensee may not make a public issuance of debt, (b) a publicly held gaming licensee or a publicly held holding company may not make any issuance of an ownership interest equaling 5% or greater of the gaming licensee or holding company or (c) a person or entity may not pledge or hypothecate an ownership interest in a gaming licensee that is not a publicly held company or a holding company that is not a publicly held company provided that no such ownership interest may be transferred voluntarily or involuntarily pursuant to any pledge without separate notice to the Missouri Gaming Commission as required by the regulations; (iv) not later than 7 days after the consummation of any transfer of ownership interest in a publicly held gaming licensee, if such transfer would result in an entity or group of entities acting in concert owning, directly or indirectly, a total amount of ownership interest equaling 5% or greater of the ownership interest in the gaming licensee, the transferee must report such consummation to the Missouri Gaming Commission; (v) no withdrawals of capital, loans, advances or distribution of any type of assets in excess of 5% of accumulated earnings of a licensee to anyone with an ownership interest in the licensee may occur without prior Missouri Gaming Commission approval; and (vi) the Missouri Gaming Commission may take action against a licensee or other person who has been disciplined in another jurisdiction for gaming related activity. The Missouri Gaming Commission is authorized to enter the premises of excursion gambling boats, facilities, or other places of business of a licensee in Missouri to determine compliance with the Missouri Gaming Law and to investigate alleged violations of the Missouri Gaming Law or Missouri Gaming Commission rules, orders or final decisions. A holder of any license shall be subject to imposition of penalties, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees that is injurious to the public health, safety, morals, good order and general welfare of the people of the state of Missouri, or that would discredit the Missouri gaming industry or the state of Missouri. The Missouri Gaming Commission may waive any licensing requirement or procedure for any type of license if it determines that the waiver is in the best interests of the public. In addition, a supplier's license is required of persons who sell or lease gambling equipment, gambling supplies or both to any licensee. A licensee licensed to conduct gambling games shall acquire all gambling games or implements of gambling from a licensed supplier. On August 29, 1996, certain residents of St. Louis County (the "St. Louis Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and injunctive relief generally against the Missouri Gaming Commission and specifically against the granting of licenses by the Missouri Gaming Commission to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP ("Players") with respect to their casino development in Maryland Heights, Missouri. The suit alleged that (i) the Missouri legislature lacks the constitutional authority to authorize the Missouri Gaming Commission to license casinos except on excursion gambling boats and floating facilities "upon" the Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly construed a statute to permit it to grant gaming licenses to excursion gambling boats or floating facilities placed within artificial spaces and (iii) the Missouri Gaming Commission is not authorized to regulate gaming operations conducted upon floating facilities. In December 1996, the Missouri court dismissed the St. Louis Plaintiffs' claim and the St. Louis Plaintiffs appealed the decision to the Missouri Supreme Court. In December 1997, the Missouri Supreme Court ruled that the definition of the words "upon the Mississippi and Missouri Rivers" in the Missouri Constitution required that to be permitted an artificial basin must be contiguous to the river and that the artificial basin must be filled with river water and touch the surface stream of the river for considerable distances. 15 The Company conducts its gaming operations at the Argosy Casino in Riverside on a docked, excursion riverboat from a constructed harbor that is open to the Missouri River. The Company believes that, if necessary, it could modify its operations in Riverside so as to be in compliance with even the strictest construction of the St. Louis Plaintiffs' interpretation of Missouri gaming law. The Company is unable at this time to determine what effect, if any, this action would have on its business, results of operations, competitive position in the Kansas City and St. Louis markets or the merits of the St. Louis Plaintiffs' action. LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally prohibited form of lottery. In order to amend the Kansas constitution, two-thirds of the members of each house of the Kansas legislature and a majority of Kansas voters would have to approve a proposed amendment. The State of Kansas has approved Class III Indian compacts with four separate tribes authorizing the tribes to conduct table and keno games, but not slot machines, on their respective reservation lands. One such casino is open and is located approximately 60 miles from Kansas City. KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally prohibited form of lottery. In order to amend the Kentucky constitution, three-fifths of the members of each house of the Kentucky legislature and a majority of Kentucky voters would have to approve a proposed amendment. Several Kentucky racetracks have publicly lobbied for the right to conduct casino games. OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited form of lottery. In order to amend the Ohio constitution, three-fifths of the members of each house of the Ohio legislature and a majority of Ohio voters would have to approve any proposed amendment. NEBRASKA. A number of efforts to expand gaming in Nebraska failed during 1996. After an effort to present a statewide referendum on legalizing casino gaming failed in the Nebraska legislature, three separate voter petition drives also failed. FEDERAL AND NON-GAMING REGULATIONS The Company and its subsidiaries are subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in additional costs to the Company. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. All vessels operated by the Company must comply with U.S. Coast Guard requirements as to safety and must hold a Certificate of Seaworthiness. These requirements set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessel. Loss of the Certificate of Seaworthiness of a vessel would preclude its use as a riverboat. Every five years, vessels must be dry docked for an inspection of the outside of the hull resulting in a loss of service for a period of time. The U.S. Coast Guard is developing a pilot program which would utilize underwater equipment to complete a hull inspection while the vessel remains in service. This procedure was utilized to inspect the Alton Gaming Company riverboat casino in February 1998. If the procedure is disapproved by the U.S. Coast 16 Guard, Alton Gaming Company would be required to remove its riverboat from service and seek to lease another riverboat casino or discontinue operations for the inspection period. All shipboard employees of the Company employed on U.S. Coast Guard regulated vessels, including those who have nothing to do with the actual operation of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act which, among other things, exempts these employees from state limits on workers' compensation awards. The Company is subject to the provisions of the Americans With Disabilities Act but does not anticipate incurring significant expenses to bring its facilities or procedures into compliance with such Act. The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires banks, other financial institutions and casinos to monitor receipts and disbursements of currency in excess of $10,000 and report them to the United States Department of the Treasury (the "Treasury"). In management's opinion, the BSA may have resulted in a reduction in the volume of play by high level wagerers. The Treasury has proposed tentative amendments to the BSA which would apply solely to casinos and their reporting of currency transactions. The most significant proposed change in the BSA is a reduction in the threshold at which customer identification data must be obtained and documented by the casino, from $10,000 to $3,000 (which may include the aggregation of smaller denomination transactions). Additionally, the amendments would substantially increase the record-keeping requirements imposed upon casinos relating to customer data, currency and non-currency transactions. Management believes the proposed amendments, if enacted in their current form, could result in a further reduction in the volume of play by upper- and middle-level wagerers while adding operating costs associated with the more extensive record-keeping requirements. However, the effect on the Company's operations is not expected to be material. INSURANCE The Company carries property and casualty insurance on its land-based assets and its vessels generally in the amount of their replacement costs with a nominal deductible with respect to its land-based assets and a deductible equal to 2% of the replacement value of the vessels. The Company's land-based assets are not currently covered by flood insurance. The Company's general liability insurance with respect to land-based operations has a limit of $1 million per occurrence and $2 million in the aggregate with a $50,000 deductible. Its general liability insurance with respect to its marine operations has a $100,000 per occurrence deductible with per occurrence coverage up to a $75 million limit. With respect to worker's compensation the Company has a $250,000 per occurrence deductible with a $1 million per occurrence limit. The Company does not have business interruption insurance. 17 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 (1) Lease Expiration -------- ------------------------------------ ---------------- ALTON, ILLINOIS Office Building Leased Executive Offices August 1999 Alton Belle II Owned Riverboat Casino Support Barges Owned Landing, ticketing and office RIVERSIDE, MISSOURI Real Property Owned Permanent Landing Site Real Property Leased Landing rights Argosy IV Owned Riverboat Casino BATON ROUGE, LOUISIANA Real Property Owned Vessel Access Argosy III Owned Riverboat Casino Support Barge Owned Staging Barge LAWRENCEBURG, INDIANA(2) Real Property Owned Permanent Landing Site SIOUX CITY, IOWA Argosy V Owned Riverboat Casino Support Barge Owned Staging Barge OTHER Sprit of America Owned Temporary Lawrenceburg Staging Vessel Argosy I Owned Riverboat Casino
_______________ (1) A significant portion of the Company's land based assets are not covered by flood insurance for any loss or damage that may result from flooding, and the Company does not currently have any business interruption insurance. (2) Owned by a partnership pursuant to which the Company, through a wholly-owned subsidiary, has a 57.5% partnership interest and serves as general partner. 18 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time a party to legal proceedings arising in the ordinary course of business. Other than as disclosed below, the company is unaware of any legal proceedings which, even if the outcome were unfavorable to the Company, would have a material adverse impact on either its financial condition or results of operations. CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT On November 29, 1996, Schilling Casino Corporation d/b/a Empire Casino & Resort ("Empire"), an unsuccessful competing applicant for the riverboat owner's license in Lawrenceburg, Indiana that was awarded to the Indiana Partnership by the Indiana Gaming Commission (the "Commission"), filed with the Commission a purported "Request for Hearing" (the "Request") on the denial of Empire's application for the Lawrenceburg license. Empire's Request, which was referred to an Administrative Law Judge (the "ALJ"), did not seek a stay of the award of the license to the Indiana Partnership or of the Indiana Partnership's commencement of regular gaming operations from its temporary gaming facility at Lawrenceburg, which commenced December 10, 1996. The Company and the Indiana Partnership were granted leave to intervene in the administrative proceedings on the Empire Request. The grounds asserted in the Empire Request included claims that (i) the application process followed by the Commission did not afford Empire due process and violated Indiana laws; (ii) the Indiana Partnership failed to comply with conditions in the certificate and failed to open the temporary gaming facility in a timely fashion, (iii) the Indiana Partnership made misrepresentations to the Commission during the licensing hearings; (iv) the Commission could not lawfully have extended the certificate beyond June 30, 1996 (one year after the date of its initial award) without reconsidering all other applications; and (v) the endorsement of the Indiana Partnership by the City of Lawrenceburg was without legal authority and was given improper weight by the Commission. The Company and the Indiana Partnership filed with the ALJ a motion or summary judgment to dismiss Empire's Request; the Commission filed with the ALJ a motion for partial summary judgment on Empire's Request; and Empire filed with the ALJ its "discovery plan" describing discovery it wished to pursue in the matter, as to which the Company and the Indiana Partnership filed a motion for protective order. After briefing and a hearing before the ALJ, the ALJ issued on June 13, 1997 his findings of fact and conclusions of law and his recommended orders to the Commission (the "ALJ Entries") on the various matters presented. The ALJ Entries rejected the claims asserted in Empire's Request; granted the Commission's motion for partial summary judgment; and denied the discovery sought by Empire. The ALJ Entries treated the motion for summary judgment by the Company and the Indiana Partnership as moot (given the recommendation that the Commission's motion for partial summary judgment be granted); and denied the Company's and Indiana Partnership's motion to dismiss, which had been based in part on the claim that Empire's Request did not timely comply with procedural requirements. Finally, the ALJ Entries stated Empire would be entitled to an evidentiary hearing only for purposes of attempting to establish that it should have been awarded the Lawrenceburg license, an issue on which Commission regulations place the burden of proof on Empire. Empire submitted to the Commission exceptions and objections to the ALJ Entries. (The Company and the Indiana Partnership also filed exceptions to the ALJ Entries, to preserve for the record at any subsequent hearing or judicial review proceeding those points on which they disagreed with the ALJ Entries.) At a meeting on August 19, 1997, at which counsel for Empire and counsel for the Company and the Indiana Partnership addressed the Commission, the Commission considered the ALJ Entries and the exceptions and objections of the parties, and entered an order adopting the ALJ Entries in their entirety (the "Commission Order"). 19 On August 25, 1997, the Commission formally notified Empire that it had entered the Commission Order as the "final determination of the Commission" on Empire's Request, and advised that any person who wished to seek judicial review of the Commission Order was required to file a petition for review in an appropriate court within thirty days of service of the notice. The Commission notice also advised Empire that it could seek a hearing on the denial of its license application, as contemplated by the ALJ Entries. Empire has not filed any petition for judicial review of the Commission Order, and the time for filing of such a petition expired in late September 1997. Furthermore, in response to an order issued by the ALJ on September 3, 1997, Empire's counsel notified the ALJ in writing on September 15, 1997, that it would not seek a hearing before the ALJ on the denial of its license application. CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL. In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House") filed a cause of action in the U. S. District Court of the Middle District of Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and Argosy obtained the gaming license for Baton Rouge based upon false and fraudulent pretenses and declarations and financial misrepresentations. The complaint alleges tortious conduct as well as violations of RICO and seeks damages of $158 million plus court costs and attorneys' fees. The plaintiff was an applicant for a gaming license in Baton Rouge whose application was denied by the Louisiana Enforcement Division. The Company believes the allegations of the plaintiff are without merit and intends to vigorously defend such cause of action. On June 7, 1995, the Company consummated its purchase of all of the outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company intends to seek indemnification from the Former Jazz Shareholders for any liability the Company, Argosy Louisiana or Jazz suffers as a result of such cause of action. As part of the consideration payable by the Company to the Former Jazz Shareholder for the acquisition of Jazz, the Company agreed at the time of such acquisition to annual deferred purchase price payments of $1,350,000 for each of the first ten years after closing and $500,000 for each of the next ten years. Payments are to be made quarterly by the Company. The definitive acquisition documents provide the Company with off-set rights against such deferred purchase price payments for indemnification claims of the Company against the Former Jazz Shareholders and for the liabilities that the Former Jazz Shareholder contractually agreed to retain. There can be no assurance that the Former Jazz Shareholders will have assets sufficient to satisfy any claim in excess of the Company's off-set rights. The defendants filed a Motion to Dismiss, or alternatively to abstain and stay the action, pending resolution of certain Louisiana state court claims filed by Capitol House. The trial court decided in favor of the defendants and dismissed the suit without prejudice to the rights of plaintiff to revive the suit after the conclusion of the pending state court matters. The plaintiff appealed this dismissal to the U. S. Fifth Circuit Court of Appeals. While the appeal was pending, several of the Louisiana state court claims were resolved. On March 11, 1997, the U. S. Fifth Circuit Court of Appeals vacated the trial court's dismissal and remanded the case to the district court for further proceedings. The defendants have re-urged the previously filed motion to dismiss. On November 17, 1997, the district court granted the motion and dismissed, with prejudice, all of the federal claims under RICO. The claims of Capitol House that arose under Louisiana state law were dismissed, without prejudice. Capitol House filed an appeal of the district court dismissal on January 9, 1998, and the matter will be appealed to the U. S. Fifth Circuit Court of Appeals. Additionally, Capitol House filed an amended petition in the Nineteenth Judicial District Court for East Baton Rouge Parish, State of Louisiana, Suit Number 418,525 on November 26, 1997, amending its previously filed but unserved suit against Richard Perryman, the person selected by the Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming license for East Baton Rouge Parish, and now adding its state law claims against Jazz, the former shareholders of Jazz, Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit alleges that these parties violated the Louisiana Unfair Trade Practices Act in connection with obtaining the gaming license which was issued to the Company. This suit alleges the same, or substantially similar, facts that formed the basis of the federal claim which was dismissed on November 17, 1997. The defendants have 20 obtained an extension of time to file their response and intend to file an Exception and/or a Motion to Dismiss in response to Capitol House's state court suit. An adverse ruling in this matter could have a material adverse effect on the Company. MARION COUNTY, INDIANA GRAND JURY On or after March 15, 1996, the Company, its partners in the Lawrenceburg casino project and certain other individuals and entities were served with document request subpoenas issued by the Office of the Prosecuting Attorney of Marion County, Indiana in connection with a grand jury investigation entitled: STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law requires that at the time a target of an investigation is determined, that entity or person must be so advised by the Office of the Prosecuting Attorney. On March 23, 1996 the Company was advised by the Marion County prosecutor that no target subpoenas had been issued by the grand jury in its investigation as of that date. As described below, the grand jury has since handed up indictments on April 28, 1997 against four persons, but the Company and the partners of the Indiana Partnership continue not to have been advised by the Marion County Prosecutor that any of them is a target of the investigation. However, there can be no assurance that further targets will not be identified as further information and documents are obtained and considered by the grand jury. Due to the confidential nature of grand jury proceedings, the Company is not aware of the specific subject matter or matters of the investigation, other than to the extent revealed by the April 28, 1997 indictments. The Company believes it has fully complied with its subpoena, and has been informed by its partners that they have done the same. The subpoenas requested information regarding the current or prior ownership interest in the Company and the partners of the Indiana Partnership by the individuals or entities described below. The subpoenas also requested that the Company and its partners produce a broad category of documents including documents regarding employment and other agreements, gifts, payments and correspondence between the Company and any of its partners on the one hand and several business entities and individuals, including a then-Indiana state legislator (Samuel Turpin), certain Indiana lobbyists, and certain Lawrenceburg, Indiana city officials and businessmen on the other hand. The Company has learned that this legislator (Turpin) has served as an employee of a subsidiary of Conseco, Inc., the parent company of the 29% limited partner in the Indiana Partnership since September 1995. Additionally, the Company has learned that Turpin has served since September 1993 as a consultant to American Consulting Engineers, Inc. ("ACE"), a major Indiana engineering firm that is engaged in many state and local government funded construction projects. ACE also serves as lead engineer for the Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative Ethics Committee voted to reprimand, but take no further action against, Turpin for failing to properly report the foregoing employment and consulting arrangements on his 1993, 1994 and 1995 statements of economic interests. On June 27, 1996, Turpin announced his resignation as chairman of the Indiana House Ways and Means Committee. Turpin did not seek re-election in 1996 and is no longer a member of the Indiana House of Representatives. On April 28, 1997, the grand jury made a "First and Partial Report" that handed up felony indictments against (1) Willis Conner, co-owner of ACE; (2) Kenneth Cragen, president of and lobbyist for the Indiana Motor Truck Association ("IMTA"); (3) Turpin; and (4) James Wurster, co-owner of ACE. Conner, Wurster and Turpin are each charged with one count of bribery in connection with payments made by ACE to Turpin while he served in the Indiana General Assembly, which payments were stated to be for consulting fees for duties outside the legislative process, but which the indictment charges were in return for official acts by Turpin that promoted the economic interests of ACE. The press release by the Marion County prosecutor at the time of the indictments described those economic interests as including "the promoting of certain riverboat gaming interests in which ACE had a financial interest, the diverting of state funds into highway construction and, while Turpin was a member of the State Budget Committee, the release of state funds that benefited particular ACE public works projects." Turpin was also charged with five counts of filing fraudulent campaign finance reports, and one count of perjury in connection with a sworn statement to the Indiana Bureau of Motor Vehicles. Wurster was also charged with one count, and Cragen with two counts, of unlawful lobbying in connection with lobbying activities involving IMTA and ACE. 21 The company (including entities controlled by its employees) believes that it has not engaged in, or been informed by its partners that they have engaged in, any illegal conduct in the pursuit of or the granting of the gaming license to the Indiana partnership of Lawrenceburg. Because the grand jury proceedings were unlikely to be concluded quickly, on March 25, 1996, a former U.S. Attorney (James Richmond) and his law firm were retained to conduct, as special independent counsel (the "special independent counsel"), an internal investigation into the activities and actions of the Company and the entities controlled by any person employed by the Company with respect to (i) the hiring by Conseco, Inc. and the Indiana engineering firm of the then-state legislator, (Turpin) (ii) the endorsement of the Indiana Partnership by the City of Lawrenceburg and the financial affairs of certain Lawrenceburg officials with respect to such endorsement and the awarding of the certificate of suitability by the Indiana Gaming Commission, and (iii) their lobbying efforts in furtherance of the Indiana legislature's enactment of legislation authorizing gaming and limiting gaming licenses to one per county. A special committee of independent directors of the Company was appointed to supervise and coordinate the special independent counsel's investigation. The special independent counsel did not investigate Conseco, Inc. The Company was advised that Conseco, Inc. also retained independent counsel and such counsel conducted its own internal investigation of matters that may be the subject of the grand jury proceedings and such investigation found no wrongdoing by Conseco, Inc. or any person or entity it controls, or is controlled by. From March 25 to April 15, 1996, the special independent counsel conducted its investigation and issued an interim report in which it concluded that it found no evidence that the Company or any entity controlled by or person employed by the Company had any involvement in, or knowledge of, the relationship between the then-state legislator (Turpin) and Conseco, Inc. or the Indiana engineering firm (ACE), or attempted to improperly influence any City of Lawrenceburg official, state legislator or Indiana Gaming Commission member or staff member in connection with the endorsement of the partnership by the City of Lawrenceburg and the awarding of the certificate of suitability to the Indiana Partnership with regard to lobbying, including the lobbying with respect to one gaming license per county legislation. The special independent counsel found no evidence that the Company or any entity controlled by or person employed by the Company attempted to unduly influence any legislator in any way. However, no investigation was made of any lobbyist's records, activities or expenditures, nor were any outside lobbyists interviewed. The special independent counsel also audited the Company's compliance with the lobbying disclosure statute in Indiana and found only technical errors in the Company's lobbying disclosure statements. No evidence was found that these technical errors were intentional or designed to hide any lobbying activity. In conducting its investigation, the special independent counsel, among other things, reviewed numerous boxes of documents produced by the executive and Lawrenceburg offices of the Company and extensively interviewed the nine Company officers and employees most closely related to the Lawrenceburg Casino project, as well as the principal of R.J. Investments, Inc., a 4% limited partner of the Indiana Partnership. Several months after the completion of his investigation, the special independent counsel (Richmond) was retained as Acting General Counsel of the Company for the period January 14, 1997 through April 30, 1997. No assurance can be given, however, that the nature and scope of the investigation conducted by the special independent counsel for the Company and Conseco, was sufficient to uncover conduct that might be considered unlawful. In the event that the Company, any entity controlled by the Company, any person employed by the Company, the Indiana Partnership or any of its partners is found by the Marion County prosecutor to have engaged in unlawful conduct, there is no assurance what effect such action would have on the Indiana Partnership's gaming license. In the event that a partner is determined by the Indiana Gaming Commission to be unsuitable for ownership of a gaming license, the terms of the Indiana Partnership's partnership agreement provide that the Indiana Partnership shall redeem 100% of such unsuitable partner's interest for an amount equal to 90% of the "appraised value" of that partner's interest, determined in accordance with the terms of the partnership agreement. The purchase price is payable in five annual installments, only from available cash flow or sale or financing proceeds of the partnership, and bears interest at "prime". Also, there can be no assurance that the 22 Indiana Gaming Commission would not take other actions such as suspending, revoking or failing to renew the Indiana Partnership's gaming license. There can be no assurance that the grand jury investigation will not lead to events having a material adverse effect on the Company. MATTERS CONCERNING H. STEVEN NORTON In September, 1993, H. Steven Norton, an employee of the Company at the time, filed a cause of action against John T. Connors, a significant shareholder of the Company and a former officer of J. Connors Group Inc., a predecessor entity of the Company ("JCG"), seeking $50 million in damages. Mr. Norton alleged that Mr. Connors failed to fulfill his promise made in the summer of 1991 to establish a partnership with Mr. Norton in which each would have an equal 50% interest in JCG, which had a 25% partnership interest in the Company's predecessor entity that owned the Alton Belle casino. As a result of the reorganization effected immediately prior to its initial public offering, the Company succeeded to all the rights, properties and assets, and assumed all the liabilities, of all of its predecessor entities, including JCG. Subsequent to filing the lawsuit, Mr. Connors advised the Company that his dealings with Mr. Norton, which are the subject of the litigation, were in his capacity as an officer of JCG, and that the Company should assume the defense and reimburse Mr. Connors for the approximately $130,000 spent to date on legal fees, and that any liability resulting from the litigation was assumed by the Company as a result of the Company's reorganization. The Company responded to Mr. Connors that it believed that his actions and dealings with Mr. Norton were solely in his individual capacity as a shareholder of JCG, and the Company declined to assume the defense or reimburse him for previously incurred legal fees, and the Company denied that it has any liability with respect to such matter. If, however, JCG were to have been found liable to Mr. Norton as a result of the actions of Mr. Connors, then the Company could under certain circumstances be liable to Mr. Norton for any damages awarded against JCG. In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit against Mr. Connors and is again seeking $50 million in damages. The Company believes that Mr. Connors will again seek to cause the Company to indemnify and reimburse him from liability thereunder. Therefore, there can be no assurance that the lawsuit will not lead to events having a material adverse effect on the Company. Mr. Norton's employment with the Company terminated on February 27, 1998. Prior to the termination of his employment, Mr. Norton asserted that he was entitled to additional compensation from the Company in the amount of $1.4 Million for his efforts relating to the Lawrenceburg, Indiana casino. The Company's position is that it has no obligation to Mr. Norton relating to the Lawrenceburg, Indiana casino. The Company expects that if no agreement is reached with respect to Mr. Norton's Lawrenceburg claim and other severance related claims Mr. Norton will commence a cause of action against the Company, which the Company will vigorously defend. GAMING INDUSTRY CLASS ACTIONS The Company has been named, along with two gaming equipment suppliers, 41 of the country's largest gaming operators and four gaming distributors (the "Gaming Industry Defendants") in three class action lawsuits pending in Las Vegas, Nevada. The suits allege that the Gaming Industry Defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a course of fraudulent and misleading conduct intended to induce people to play their gaming machines based upon a false belief concerning how those gaming machines actually operate, as well as to the extend to which there is actually an opportunity to win on any given play. The suites seek unspecified compensatory and punitive damages. On January 14, 1997, the Court consolidated all three actions under the case name WILLIAM H. POULOS, ETC. V. CAESARS WORLD, INC., ET AL. On February 13, 1997 the plaintiffs filed a consolidated amended complaint. The Court subsequently dismissed this complaint, in part, and on January 8, 1998, the plaintiffs filed a second consolidated amended complaint. On February 11, 1998, the defendants filed their consolidated answer. On March 19, 1998, the court split discovery between merit discovery and class certification discovery and stayed merit discovery pending a decision on class certification. The Company is unable to determine what effect, if any, the suit would have on its business or operations. 23 CONSERVANCY DISTRICT LEASE LITIGATION IN DEARBORN COUNTY, INDIANA On March 21, 1997, Deborah S. Whitacre filed an action in the Circuit Court of Dearborn County, Indiana as Cause No. 15CO1-9703-CP-073, challenging the validity of a lease to the City by the Conservancy District of Lawrenceburg, Indiana (the "District") of certain land owned by the District, which land has in turn been subleased by the City to the Company's affiliate Indiana Gaming and is being used for development and operation of the riverboat gaming facility in the City for which Indiana Gaming has been awarded a riverboat owner's license by the Commission. Defendants are the District and its individual directors. In early 1998, Indiana Gaming petitioned to intervene to assist in defending the validity of the challenged lease, which petition is pending before the Court. The District and its directors have advised that they are contesting the action and intend to continue to do so vigorously. If permitted to intervene, Indiana Gaming also intends to contest the action vigorously. An adverse ruling in this matter could have a material adverse effect on the Company. PENDING INTERNAL REVENUE SERVICE AUDIT On November 1, 1994, the Company received a Notice of the beginning of an Administrative Proceeding from the Internal Revenue Service ("IRS") for the 1992 and 1993 tax years of Metro Entertainment & Tourism, Inc. ("Metro"). Metro was merged with and into the Company immediately prior to its initial public offering in February 1993. Metro along with J. Connors Group, Inc. ("Connors") were the partners of Alton Riverboat Gambling Partnership ("ARGP") which until the Company's initial public offering owned and operated the Alton, Illinois riverboat casino. The IRS has proposed certain adjustments with respect to the Company for its 1993 tax year in a 30-day letter. The IRS has also proposed adjustments for ARGP that flow through to Metro in a 60-day letter. Finally, on March 16, 1998 the IRS issued a 60-day letter to Metro for its tax years ending December 1992 and February 1993. The principal issues raised by the IRS in the Metro 60-day letter involve the status of Metro as an S Corporation and the deductibility of the $8.5 million accommodation fee paid to William McEnery in 1992 and 1993. The total Federal tax liability asserted by the IRS against the Company resulting from these proposed adjustments is approximately $11.0 million including interest through December 31, 1997 but excluding penalties, if any. The Company intends to protest these proposed adjustments to the Appeals Office of the IRS and vigorously contest these proposed adjustments. The required payment by the Company resulting from an adverse ruling of this matter could have a material effect on the Company's results of operations, financial condition and cash flows. 24 PART II ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------ (in thousands, except share and per share amounts) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA: Net revenues $344,083 $244,817 $252,691 $153,045 $67,525 Income (loss) from operations 6,530 (10,751) 27,662 22,994 14,327 Net Income (loss) (40,213) (24,839) 6,953 9,635 10,825 Net Income (loss) per share (1.65) (1.02) 0.29 0.40 Weighted average common shares outstanding 24,333,333 24,333,333 24,333,333 24,333,333 - ------------------------------------------------------------------------------------------------------------------------ PRO FORMA NET INCOME DATA (UNAUDITED): (1) Pro forma net income (loss) 5,712 5,393 9,105 Pro forma net income per share 0.23 0.22 0.38 Pro forma, shares outstanding 24,333,333 24,333,333 23,763,513 - ------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (AT END OF PERIOD): Total assets 559,856 530,528 309,882 232,831 94,635 Long-term debt, including current maturities 449,790 380,208 169,702 115,431 4,332 Total stockholders' equity 32,663 72,701 97,540 90,587 80,952 - ------------------------------------------------------------------------------------------------------------------------
(1) From their inception until a reorganization that was effected on February 25, 1993, certain predecessor entities of the Company elected to be treated as S-Corporations under the Internal Revenue Code and were not generally subject to corporate income taxes. The pro forma net income amount for the year ended December 31, 1993, has been determined assuming the reorganization had occurred on January 1, 1993, resulting in the Company being treated as a C-Corporation for tax purposes as of that date and to reflect the use of a portion of the net proceeds of the Company's initial public offering to retire debt. In addition, pro forma net income per share for the years ended December 31, 1995 and 1994, reflects the Company's June 7, 1995 acquisition of Jazz Enterprises, Inc. (the "Jazz Acquisition") as if the Jazz Acquisition had occurred on January 1, 1994. See Note 13 of the Notes to Consolidated Financial Statements. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company opened its first riverboat casino, the Alton Belle Casino, in Alton, Illinois in September 1991. Subsequently, the Company opened the Argosy Casino in Riverside, Missouri in June 1994; the Belle of Baton Rouge in Baton Rouge, Louisiana in September 1994; and the Belle of Sioux City in Sioux City, Iowa in October 1994. In addition, the Company, through its 57.5% equity interest in Indiana Gaming Company, L.P., opened a temporary casino in Lawrenceburg, Indiana on December 10, 1996 and opened the permanent pavilion on December 10, 1997. The Company's results of operations for the year ended December 31, 1997 were adversely affected by increased competition at its Alton and Riverside properties. In addition, revenues were adversely affected by a market decline in Baton Rouge caused by increased competition from neighboring Native American casinos and video poker outlets. The Company expects the competitive environment in each of its markets to remain intense. These factors have resulted in the Company reporting decreased revenues at its Alton, Riverside and Baton Rouge properties in 1997. The Company believes that the competitive pressures in these markets could continue to adversely effect the operating revenues and profitability at these properties. In addition, the Company has made significant capital expenditures in developing the Lawrenceburg casino project. These competitive pressures on revenues and the increased interest expense associated with the issuance, in June 1996, of $235 million of First Mortgage Notes ("Mortgage Notes"), will continue to adversely affect the Company's results of operations. The Company is in a net operating loss carryforward position at December 31, 1997 and, as such, the Company has not recorded any federal tax benefits on its 1997 operating losses due to the uncertainty of realization. Under the terms of the development agreement with the City of Baton Rouge, the Company is required to pay a head tax of $2.50 per passenger until such time as the Company commences construction on a hotel near the Company's Catfish Town facility. Once construction commences on the hotel, the head tax ceases and the Company would save approximately $3.5 million annually. The Company is in negotiations with several developers pertaining to the construction of a hotel. While the Company believes it will structure an agreement for the development of a hotel, no assurance can be given as to the timing of construction or as to the required financial commitment of the Company with respect to the development of a hotel. 26 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (In Thousands)
YEARS ENDED DECEMBER 31, ------------------------ 1997 1996 1995 -------- -------- -------- CASINO REVENUES Alton Belle Casino $ 61,877 $ 72,369 $ 81,413 Argosy Casino Riverside 61,750 82,247 86,443 Belle of Baton Rouge Casino 47,628 51,007 48,877 Belle of Sioux City Casino 20,667 18,835 20,880 Argosy Casino Lawrenceburg 127,908 3,930 -- Corporate -- -- -- Other -- -- -- -------- -------- -------- Total $319,830 $228,388 $237,613 -------- -------- -------- -------- -------- -------- NET REVENUES Alton Belle Casino $ 67,208 $ 77,933 $ 85,992 Argosy Casino Riverside 66,548 88,473 94,058 Belle of Baton Rouge Casino 50,436 53,420 49,805 Belle of Sioux City Casino 21,672 19,887 21,994 Argosy Casino Lawrenceburg 137,024 4,412 -- Corporate 816 337 -- Other 379 355 842 -------- -------- -------- Total $344,083 $244,817 $252,691 -------- -------- -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS(1) Alton Belle Casino $ 7,489 $ 12,240 $ 22,446 Argosy Casino Riverside(3) 2,481 9,410 22,057 Belle of Baton Rouge Casino(4) (4,146) 3,507 2,875 Belle of Sioux City Casino 848 295 3,137 Argosy Casino Lawrenceburg 25,625 334 -- Corporate (11,432) (14,207) (14,161) Other (2,954) (4,447) (2,865) -------- -------- -------- Total (5)(6) $ 17,911 $ 7,132 $ 33,489 -------- -------- -------- -------- -------- -------- EBITDA(1)(2) Alton Belle Casino $ 11,944 $ 16,446 $ 26,734 Argosy Casino Riverside(3) 8,428 16,134 29,452 Belle of Baton Rouge Casino(4) 1,322 9,151 8,305 Belle of Sioux City Casino 1,861 1,141 3,610 Argosy Casino Lawrenceburg 36,547 712 -- Corporate (9,324) (12,520) (12,586) Other 425 (1,516) (1,576) -------- -------- -------- Total (5)(6) $ 51,203 $ 29,548 $ 53,939 -------- -------- -------- -------- -------- --------
27 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (1) Income from operations and EBITDA are presented before consideration of any management fees paid to the Company and in the case of the Belle of Sioux City and the Argosy Casino Lawrenceburg before the 30% and 42.5% minority interests, respectively. (2) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization and is presented before any management fees paid to Argosy. EBITDA should not be construed as an alternative to operating income or net income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or as an alternative to cash flows generated by operating, investing and financing activities (as determined in accordance with generally accepted accounting principles) as an indicator of cash flow or a measure of liquidity. EBITDA is presented solely as a supplemental disclosure because management believes that it is a widely used measure of operating performance in the gaming industry and for companies with a significant amount of depreciation and amortization. EBITDA may not be comparable to similarly titled measures reported by other companies. The Company has other significant uses of cash flows, including interest and capital expenditures, which are not reflected in EBITDA. (3) Excludes $3,508 for the year ended December 31, 1996 related to lease termination costs in connection with assets formerly used at the Riverside temporary facility. (4) Excludes operating expenses of $1,347 for the year ended December 31, 1996 related to referendum costs. (5) Excludes preopening expenses of $11,528 for the year ended December 31, 1996 and $2,350 for the year ended December 31, 1995. (6) Excludes severance expenses of $1,750 and a loss of $9,600 in connection with a writedown of assets held for sale for the year ended December 31, 1997, a charge of $1,500 in connection with the termination of a private placement for the year ended December 31, 1996 and $3,477 in connection with a cessation of the development of a downtown St. Louis riverboat casino site for the year ended December 31, 1995. 28 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 CASINO--Casino revenues for the year ended December 31, 1997 increased to $319.8 million from $228.4 million for the year ended December 31, 1996 due to the opening of the Lawrenceburg casino, which generated $127.9 million of casino revenues, offset by decreased revenues at three of the Company's other properties. Alton casino revenues decreased from $72.4 to $61.9 million and Riverside casino revenues decreased from $82.2 to $61.8 million due to the effects of increased competition. Baton Rouge casino revenues decreased from $51.0 million to $47.6 million due primarily to an overall decline in the Baton Rouge market. Casino expenses increased to $163.9 million for the year ended December 31, 1997 from $121.0 million for the year ended December 31, 1996 due primarily to the opening of the Lawrenceburg casino. Casino expenses decreased in Alton, Riverside and Baton Rouge in connection with the decline in revenues. ADMISSIONS--Admissions revenues (net of complimentary admissions) increased from $0.6 million in 1996 to $4.6 million in 1997 due to net admission fees in Lawrenceburg. FOOD AND BEVERAGE--Food, beverage and other revenues increased $5.6 million to $34.8 million for the year ended December 31, 1997 due primarily to the opening of the Lawrenceburg casino. Food, beverage and other expenses increased from $23.8 million in 1996 to $30.0 million in 1997 due primarily to the opening of the Lawrenceburg casino. OTHER OPERATING EXPENSES--Other operating expenses increased $9.6 million to $28.7 million for the year ended December 31, 1997. This increase is due primarily to costs associated with operating the Lawrenceburg casino offset somewhat by a $1.1 million decrease in Riverside due to cost control measures. SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative expenses increased $17.7 million to $69.7 million for the year ended December 31, 1997 due primarily to the opening of the Lawrenceburg casino resulting in an increase of $20.9 million. This amount was offset by decreased costs recognized through cost containment measures at the Company's other properties and the corporate office. This increase occurred in spite of 1996 expenses of approximately $1.5 million related to the Company's response to a Marion County, Indiana grand jury document subpoena and the related termination of a private placement of first mortgage notes. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $10.9 million from $22.4 million for the year ended December 31, 1996 to $33.3 million for the year ended December 31, 1997. This increase is due primarily to additional assets associated with the Lawrenceburg casino. DEVELOPMENT AND PREOPENING COSTS--Development and preopening costs decreased from $12.4 million for the year ended December 31, 1996 to $0.6 million for the year ended December 31, 1997 due primarily to expenses related to developing the casino in Lawrenceburg, Indiana in 1996. INTEREST EXPENSE--Net interest expense increased $10.6 million to $41.2 million for the year ended December 31, 1997. The increase is attributable to interest expense on borrowings on the Company's $235 million First Mortgage Notes which were issued in June, 1996. This increase was offset somewhat by $8.4 million of capitalized interest in 1997, as opposed to $3.0 million in 1996. NET LOSS--Net loss increased from $24.8 million for the year ended December 31, 1996 to $40.2 million for the year ended December 31, 1997 primarily for the reasons discussed above. In addition, in 1997, the Company recorded pretax charges of $9.6 million relating to the writedown of assets held for sale and $1.8 million for severance expenses. In 1996 the Company recorded a pretax charge of $3.5 million related to lease termination costs in connection with assets formerly used at its temporary facility in Riverside. Also, the Company recorded an 29 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) extraordinary loss of $0.9 million (net of tax) related to the writeoff of deferred finance costs associated with extinguishment of its revolving secured line of credit in 1996. The Company is in a net operating loss position and, therefore, has not recorded any federal tax benefits against its losses for the year ended December 31, 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 CASINO - Casino revenues for the year ended December 31, 1996 decreased to $228.4 million from $237.6 million for the year ended December 31, 1995. Alton casino revenues decreased from $81.4 million to $72.4 million due to severe weather conditions in January and February 1996, and the impact of increased competition. This decrease is also attributed to flooding in 1995, as Alton benefited when two competing riverboat casinos were temporarily closed in the St. Louis area. Riverside casino revenues decreased to $82.2 million from $86.4 million due to additional competition in the Kansas City market, which was partially offset by the opening of the Company's permanent land-based entertainment pavilion on January 15, 1996. Baton Rouge casino revenues increased $2.1 million from $48.9 million to $51.0 million. Sioux City casino revenues decreased $2.1 million to $18.8 million due to the effects of increased competition from two riverboat casinos which opened in January 1996, and from expanded operations at nearby Native American casinos. These decreases were partially offset by $3.9 million of casino revenues in Lawrenceburg. Casino expenses increased to $121.0 million for the year ended December 31, 1996 compared to $117.3 million for the year ended December 31, 1995 due primarily to $2.1 million of casino expenses in Lawrenceburg and $1.0 million of increased admission taxes in Riverside. In addition, admission taxes increased by $1.25 per passenger in Baton Rouge on October 1, 1996. ADMISSIONS- Admissions revenue (net of complementary admissions) decreased from $8.0 million for the year ended December 31, 1995 to $0.6 million for the year ended December 31, 1996. This decrease is due to the Company's elimination of admission fees in January 1996 in Riverside in reaction to competitive pressures in the Kansas City market. FOOD, BEVERAGE AND OTHER- Food, beverage and other revenues increased $10.7 million to $29.2 million for the year ended December 31, 1996 primarily due to increased food, beverage and other sales at the expanded Riverside and Baton Rouge facilities. Riverside revenues increased from $5.2 million to $11.1 million while Baton Rouge revenues increased from $4.9 million to $7.6 million. Food, beverage and other revenues remained stable with the year ended December 31, 1995 in Alton and Sioux City. Food, beverage and other net profit margin improved $4.1 million to $5.4 million for the year ended December 31, 1996 due primarily to improved operating efficiencies in the Company's food and beverage operations. OTHER OPERATING EXPENSES- Other operating expenses increased $3.5 million to $19.1 million for the year ended December 31, 1996. This increase is primarily due to the opening of the permanent land-based entertainment pavilion at Riverside, the opening of the Catfish Town development atrium in Baton Rouge, the addition of expanded entertainment facilities in Sioux City, and the additional services required to operate during the severe weather conditions experienced in January and February 1996 at the Alton, Riverside and Sioux City casinos. SELLING, GENERAL AND ADMINISTRATIVE- Selling, general and administrative expenses increased from $47.5 million in 1995 to $52.0 million for the year ended December 31, 1996. Selling and marketing expenses increased $3.6 million due primarily to increases in advertising and promotional expenses necessitated by increased competition in Alton and Riverside, and for the opening of the Riverside permanent facility. Additionally, general and administrative expenses increased as the Company recorded a charge in 1996 of approximately $1.5 million, for professional and other fees related to its response to a Marion County, Indiana grand jury document subpoena and the related termination of a private placement of first mortgage notes. These increases were offset somewhat by the extinguishment of lease fees in connection with the temporary site in Riverside. 30 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DEPRECIATION AND AMORTIZATION- Depreciation and amortization increased $2.0 million from $20.4 million for the year ended December 31, 1995 to $22.4 million for the year ended December 31, 1996. This increase is primarily due to increased depreciation in Riverside in connection with the Company's land-based entertainment pavilion which opened on January 15, 1996 at an approximate cost of $45 million, and increased depreciation at the Catfish Town development in Baton Rouge. DEVELOPMENT AND PREOPENING COSTS- Development and preopening costs increased from $3.4 million for the year ended December 31, 1995 to $12.4 million for the year ended December 31, 1996. The increase is due primarily to expenses related to developing the casino in Lawrenceburg, Indiana, which opened at its temporary site on December 10, 1996. INTEREST EXPENSE- Net interest expense increased from $14.3 million in 1995 to $30.6 million for the year ended December 31, 1996. The increase is attributable to interest expense on the increased borrowings under the $100 million line of credit, which was used to fund the Company's expansion and development program through June 5, 1996, and interest expense related to the $235 million First Mortgage Notes issued June 5, 1996. NET INCOME (LOSS)- Net income decreased from $7.0 million for the year ended December 31, 1995 to a net loss of $24.8 million for the year ended 1996 primarily for the reasons discussed above. In addition the Company recorded a pretax charge of $3.5 million related to lease termination costs in connection with assets formerly used at its temporary facility in Riverside. Further, the Company recorded an extraordinary loss of $0.9 million (net of tax) related to the writeoff of deferred finance costs associated with the early extinguishment of its line of credit in 1996 and a $1.3 million charge related to referendum costs in Baton Rogue. In 1995, the Company recorded a pretax charge of approximately $3.5 million primarily related to loans made pursuant to a lease option related to the development of a downtown St. Louis casino site. LIQUIDITY AND CAPITAL RESOURCES During 1997, the Company generated cash flows from operating activities of $31.6 million compared to using $7.5 million for 1996. The increase in cash flow is primarily attributed to the opening of the Lawrenceburg Casino and the receipt of a $10.0 million income tax refund. During 1997, the Company used cash flows for investing activities of $72.6 million versus $179.8 million for 1996. The primary use of funds in 1997 was the investment in the construction of the Lawrenceburg facility. In 1996, the Company placed $94.3 million in a restricted fund to be used for the construction of the Lawrenceburg facility and used $97.4 million for capital expenditures, primarily at the Lawrenceburg facility. During 1997, the Company generated $62.0 million in cash flows from financing activities compared to generating $209.4 million of cash flows from financing activities for the same period in 1996. The primary sources of cash flows in 1997 were $46.6 million in loans from the Company's partner in Lawrenceburg and $25.0 million in proceeds from an equipment loan at the Lawrenceburg Partnership offset by payments on installment contracts and payments to partners. In 1996, the Company received proceeds from its issuance of $235 million of First Mortgage Notes and capital contributions and loans from its partner of $42.2 million, offset by the repayment of $90.0 million on its previous line of credit. As of December 31, 1997, the Company had approximately $59.4 million of cash and cash equivalents, including approximately $41.3 million held at the Indiana Partnership. Approximately $22.6 million of the cash held at the Indiana Partnership is expected to be used towards the completion of the Lawrenceburg project. In addition, the Company had $25.5 million of restricted cash, $12.4 million of which is in a disbursement account to be used to fund 31 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) the Company's portion of the remaining Lawrenceburg construction costs, which cannot be used for any other purpose. In addition to the disbursement account, the Indiana Partnership has placed approximately $13.1 million in an escrow account representing unbilled construction costs of the permanent Lawrenceburg facility. On June 5, 1996 the Company issued $235 million of First Mortgage Notes which are due June 2004. Additionally, the Company has $115 million of Convertible Subordinated Notes outstanding which were issued in June 1994 and are due June 2001. The Company has made a significant investment in property and equipment and plans to make significant additional investments at certain of its existing properties, particularly in Lawrenceburg, Indiana. The Company currently estimates that the total construction costs of the Lawrenceburg casino and entertainment project will approximate $225 million (excluding capitalized interest). This is a forward looking statement that involves certain risks and uncertainties and this amount is subject to numerous factors including weather and other construction risks. As of December 31, 1997, approximately $210 million has been contributed to the partnership for the project by all partners, including approximately $14 million in preopening costs. Of the remaining Lawrenceburg construction costs, approximately $22.5 million is expected to be funded through the remaining proceeds from equipment financing which was completed in 1997 and the balance will be funded by the Company, from the disbursement account, under provisions of the Partnership agreement as Conseco has fulfilled its funding obligation as of December 31, 1997. The Company expects that the restricted cash on hand at December 31, 1997, together with the $22.5 million in remaining proceeds from the equipment financing, will be sufficient to complete the Lawrenceburg project. As a result of its June 1995 acquisition of Jazz, the Company is now the developer of the Catfish Town real estate project in Baton Rouge, Louisiana. The Company estimates that the completion of the Catfish Town project will cost an additional $2 to $5 million (primarily tenant allowance) as of December 31, 1997. Further, if a Predecessor entity of the Company's status as an S-Corporation, which has been asserted as an issue by the IRS during an ongoing audit, is successfully challenged, the Company currently estimates that it would require up to approximately $13.9 million (excluding penalties) to fund the potential income tax liability. The Company believes that cash on hand will be sufficient to fund its current capital expenditure obligations, including the completion of the permanent Lawrenceburg casino development. While the Company believes that its sources of liquidity are sufficient to meet its cash obligations during the next 12 months, the Company's ability to meet its operating and debt service requirements, however, is substantially dependent upon the success of the permanent Lawrenceburg casino. If the permanent Lawrenceburg casino fails to meet the Company's operating and cash flow expectations or there are any other events that negatively impact its sources or uses of cash, such as an overrun in the project costs at the permanent Lawrenceburg casino, a significant deterioration in the operating results of the Company's other properties, or an adverse IRS ruling, the Company may be unable to meet future debt service payments without obtaining additional debt or equity financing or without the disposition of assets. No assurance can be given that the Company would be able to obtain such additional financing on suitable terms or sell assets on favorable terms, if required. In light of the foregoing, the Company has retained and has been working with financial advisory firms to consider various options with respect to the Company's capital structure, including possible debt and equity financing and asset dispositions. The disposal of assets could result in a significant charge to earnings. 32 ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR 2000 The Company has determined that it will need to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the Year 2000 and beyond. As the Company is dependent on third party software for all of its major applications the Company has initiated discussions with its significant software vendors and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues. Through these discussions, the Company has determined that all of the systems that are critical to the Company's operations are either 2000 compliant or that 2000 compliant versions exist that can be implemented by the Company. The next phase in the Company's efforts will be to plan for and implement the Year 2000 versions of the software into the Company's systems. The Company has a June 1999 target date to complete its implementation efforts. As of December 31, 1997, the Company has incurred less than $25,000 of costs related to Year 2000 issues. The Company estimates it will incur less than $250,000 in future expenses to ensure all systems will function properly with respect to dates in the Year 2000. These expenses are not expected to have a material impact on the financial position, cash flow or operations of the Company. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE", "BELIEVE", "ESTIMATE" AND "EXPECT" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT LIMITED TO, (I) GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY OPERATES, (II) INCREASED COMPETITIVE PRESSURES IN THE MARKETS IN WHICH THE COMPANY OPERATES, (III) THE EFFECT OF FUTURE LEGISLATION OR REGULATORY CHANGES ON THE COMPANY'S OPERATIONS, AND (IV) OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. 33 PART III ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this item is set forth under the caption "Certain Transactions" in the Proxy Statement and is incorporated herein by reference. The Company believes that the disclosed transactions were made on terms as favorable to the Company as those available in arms length transactions in the marketplace. 34 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to the Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 1st day of October, 1998. ARGOSY GAMING COMPANY By: /s/ DALE R. BLACK --------------------------------------- Dale R. Black Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----