-----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, DBCJXs34boJ/onfAzsoDrWjp3vFjlwlU0EQIfTLSo32MaPKch5UEmnrd2Ukzs3lQ T5xX9Ar3oEkNS5EMgVV5HA== 0001047469-99-010563.txt : 19990322 0001047469-99-010563.hdr.sgml : 19990322 ACCESSION NUMBER: 0001047469-99-010563 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARGOSY GAMING CO CENTRAL INDEX KEY: 0000895385 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AMUSEMENT & RECREATION SERVICES [7900] IRS NUMBER: 371304247 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11853 FILM NUMBER: 99569281 BUSINESS ADDRESS: STREET 1: 219 PIASA ST CITY: ALTON STATE: IL ZIP: 62002 BUSINESS PHONE: 6184747500 MAIL ADDRESS: STREET 1: 219 PIASA STREET CITY: ALTON STATE: IL ZIP: 62002 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998 COMMISSION FILE NUMBER: 0-21122 ------------------------ ARGOSY GAMING COMPANY (Exact name of Registrant as specified in its charter) DELAWARE 37-1304247 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 219 PIASA STREET, ALTON, ILLINOIS 62002 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (618) 474-7500 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED - -------------------------------------------------------------------------------- ------------------ 13 1/4% First Mortgage Notes due 2004 New York 12% Convertible Subordinated Notes due 2001 New York Common Stock, par value $.01 per share New York Securities registered pursuant to Section 12(g) of the Act: None
------------------------ Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 17, 1999, the aggregate market value of the registrant's Common Stock held by non-affiliates was $122,201,478. The closing price of the Common Stock on March 17, 1999 as reported on the New York Stock Exchange, was $6.00. As of March 17, 1999, the number of shares outstanding of the registrant's Common Stock, par value $.01 per share, was 28,140,324. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1998, and of the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 22, 1999 as described in the Cross Reference Sheet and a Table of Contents included herewith, is incorporated herein by reference into Parts II and III of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS
PAGE REFERENCE OR REFERENCE(1) ----------------- PART I ITEM 1. BUSINESS............................................................................ 1 ITEM 2. PROPERTIES.......................................................................... 20 ITEM 3. LEGAL PROCEEDINGS................................................................... 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)............ 28 ITEM 6. SELECTED FINANCIAL DATA............................................................. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(3)..................................................................... 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(4)...................................... 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................................................ 98 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(5)............................... 99 ITEM 11. EXECUTIVE COMPENSATION(6)........................................................... 99 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(7)................... 99 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(6)................................... 99 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................... 100
- ------------------------ (1) Certain information is incorporated by reference, as indicated below, from the Annual Report to Stockholders for the fiscal year ended December 31, 1998 (the "Annual Report") and the registrant's Notice of Annual Meeting of Stockholders and Proxy Statement for its Annual Meeting of Stockholders to be held on April 22, 1999, (the "Proxy Statement"). (2) Proxy Statement section entitled "Market for Registrant's Common Equity and Related Stockholder Matters." (3) Annual report, pages 30-37, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (4) Annual report, pages 38-58, sections entitled "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows, "Consolidated Statements of Stockholders' Equity," "Notes to Consolidated Financial Statements," and "Report of Independent Auditors." (5) Proxy Statement sections entitled "Election of Directors" and "Management." (6) Proxy Statement sections entitled "Executive Compensation" and "Certain Transactions." (7) Proxy Statement section entitled "Record Date, Required Vote, Outstanding Shares and Holdings of Certain Stockholder--Security Ownership of Certain Beneficial Owners and Management." PART I ITEM 1. BUSINESS GENERAL Argosy Gaming Company (the "Company") is a multi-jurisdictional owner and operator of riverboat casinos and related entertainment facilities in the midwestern and southern United States. The Company, through its subsidiaries, owns and operates riverboat casinos in Alton, Illinois, Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux City, Iowa. Unless the context otherwise requires, "Company" and "Argosy" shall mean Argosy Gaming Company and its subsidiaries. The Company's principal executive offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone number is (618) 474-7500. CURRENT OPERATIONS ALTON BELLE CASINO--Alton, Illinois, is located on a leased site on the Mississippi River approximately 20 miles northeast of downtown St. Louis, and consists of 22,800 gaming square feet, 700 slot machines and 32 table games for a total of approximately 920 gaming positions. The facility also includes a 37,000 square foot, three-level floating entertainment pavilion which features a sports/entertainment lounge, buffet and restaurant facilities, conference facilities and the market's only off-track betting parlor. ARGOSY CASINO OF GREATER KANSAS CITY--Riverside, Missouri, is located on a 55-acre owned site approximately five miles from downtown Kansas City on the Missouri River and consists of approximately 36,000 gaming square feet, 1,083 slot machines and 45 table games for a total of approximately 1,370 gaming positions. The riverboat casino is complemented by an 85,000 square foot land-based entertainment facility featuring specialty and buffet restaurants, a sports/entertainment lounge, and 14,000 square feet of banquet/conference facilities. BELLE OF BATON ROUGE--Baton Rouge, Louisiana, is located on a site on the Mississippi River in downtown Baton Rouge and consists of approximately 28,000 gaming square feet, 752 slot machines and 42 table games for total of approximately 1,060 gaming positions. The riverboat casino is complemented by Argosy's adjacent land-based entertainment development known as Catfish Town. The Catfish Town development includes a 50,000 square foot festival atrium, entertainment/sports lounge, buffet/coffee shop, conference facilities and approximately 150,000 square feet of leasable retail space. BELLE OF SIOUX CITY--Sioux City, Iowa, is located on a leased site in downtown Sioux City on the Missouri River and consists of 12,500 gaming square feet, 449 slot machines and 23 table games for a total of approximately 610 gaming positions, a bar and gift shop. The casino is complemented by adjacent barge facilities featuring buffet dining, meeting space and administrative support offices. ARGOSY LAWRENCEBURG CASINO--Lawrenceburg, Indiana is located approximately 15 miles west of Cincinnati, Ohio on the Ohio River. Indiana Gaming Company, L.P., a joint-venture subsidiary of the Company ("Indiana Partnership"), operates the Lawrenceburg casino. The vessel features approximately 74,300 square feet of gaming space on three levels and has approximately 2,560 gaming positions consisting of approximately 2,000 slots and 104 table games. The vessel can accommodate approximately 4,400 passengers and crew members. The facility also includes a 300 room hotel, which opened in May 1998, and a 120,000 square foot land-based entertainment pavilion and support facility featuring a 350 seat buffet restaurant, two specialty restaurants, an entertainment lounge, and a 1,750 space parking garage. The Lawrenceburg casino opened December 10, 1996 and, through September 30, 1997, was operated from a temporary site utilizing a leased vessel with approximately 20,500 square feet of gaming space. The vessel, which had a capacity of 1,600 passengers, featured approximately 870 slot machines and 52 table games for a total of approximately 1,275 gaming positions. In addition, the Indiana Partnership leased, 1 from the Company, an approximately 24,000 square foot floating entertainment and support facility which featured ticketing and holding areas, a food court, two bars and a gift kiosk. Parking for the temporary facility was provided at a 1,400 space satellite lot. The Indiana Partnership provided free shuttle service for the parking lot to the temporary site. From October 1, 1997 through December 9, 1997, the Company utilized the permanent vessel at the temporary site. The Company is the sole general partner of, and holds a 57.5% general partnership interest in the Indiana Partnership. Conseco Entertainment L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited partnership interest and certain other investors hold the remaining 13.5% limited partnership interests in the Indiana Partnership. The Company manages the operations of the Lawrenceburg Casino and receives a management fee of 7.5% of EBITDA, while Conseco receives a financial advisory fee of 5% of EBITDA. CORPORATE STRATEGY The Company's operating strategy has been developed with the goal to position the Company as the premier riverboat casino operator. This strategy includes capitalizing on management's significant experience and expertise in gaming industry operations and marketing, developing the Company's marketing strategies with an emphasis on direct marketing, and prudently investing in gaming and gaming-related assets for its properties. Argosy's corporate strategy involves the following elements: EXPERIENCED MANAGEMENT TEAM. Argosy's corporate management team has been assembled to lead the company's transformation into one of the premier riverboat casino operators in the United States. This team, lead by James B. Perry, has in excess of 70 years of casino industry experience mostly in the competitive locals/regional market of Atlantic City. In addition, since the third and fourth quarters of 1997 Argosy has hired several key personnel with significant casino operations experience at each of its' locations. These hirings are highlighted by three general managers who each have over 20 years experience in the gaming industry. EXPANDED SALES AND MARKETING EFFORTS. The Company's marketing strategy is designed to attract and reward serious gaming customers through direct marketing, promotional activities and targeted entertainment events. During 1998, the Company replaced or upgraded the player tracking systems at four of its properties. These enhancements have enabled the Company to better provide targeted rewards based upon each customer's playing habits. The Company also has refocused its entertainment events, including concerts, private parties and sporting events, to attract and reward the targeted Argosy consumer. OPERATIONS. The Company's operating strategy is to provide a superior customer experience to sophisticated gaming customers by offering a competitive gaming product and by emphasizing prompt, friendly customer service. CAPITAL IMPROVEMENTS. Argosy's management team has developed a capital strategy that emphasizes prudent capital investment to enhance the Company's operations. This strategy includes a program to systematically replace older, less competitive slot machines with newer products. In 1998, over 10% of the Company's slot machines were replaced with approximately 20% scheduled for 1999. In addition, Argosy spent approximately $2.0 million in 1998 to replace or upgrade the player tracking systems at its properties. Finally, the Company anticipates improving its physical plant, including parking, public areas, restaurants, etc., as necessary, to accommodate customers' needs and improve current operating inefficiencies. COMPETITION The Company's Alton Casino faces competition from four other riverboat casino facilities currently operating in the St. Louis area and expects the level of competition to remain intense in the future. The 2 most recent casino complex to open includes two independently owned facilities, each of which operate two dockside vessels. This casino complex, which increased gaming capacity in St. Louis by approximately 55%, opened in March of 1997. The Company's Riverside Casino currently faces competition from three casino companies in the Kansas City area that offer dockside gaming, two of which offer two gaming vessels each. Until July 1998, there was an additional competitor in the Kansas City area. The Company's Baton Rouge Casino faces competition from one casino located in downtown Baton Rouge, a nearby native American casino and multiple casinos throughout Louisiana. Currently, the Company faces competition in Sioux City, Iowa, from two land-based Native American casinos, slot machines at a pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market. The Indiana Partnership faces competition from one other riverboat casino in the Cincinnati market, which opened in October 1996. In addition, a riverboat casino opened in November 1998 in the Louisville, Kentucky area approximately 100 miles from the Company's Lawrenceburg facility and a competing riverboat is expected to open approximately 45 miles from the Company's Lawrenceburg facility in 2000. There could be further unanticipated competition in any market which the Company operates as a result of legislative changes or other events. The Company expects each market in which it participates, both current and prospective, to be highly competitive. EMPLOYEES As of December 31, 1998, the Company had approximately 4,146 full-time and 585 part-time employees. Approximately 2,354 employees are represented by the Seafarers International Union of North America. The Company has collective bargaining agreements with that union which expire at various times between June 1999 and June 2003. Ten employees are represented by the International Brotherhood of Electrical Workers. In addition, approximately 73 employees are represented by the United Plant Guard Workers of America and 18 employees are represented by American Maritime Officers Union. The Company is currently negotiating collective bargaining agreements with the Seafarers International Union of North America. The Company has not experienced any work stoppages and believes its relations with its employees are generally satisfactory. LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT GENERAL The Indiana Partnership operates pursuant to a partnership agreement entered into among the partners as of April 11, 1994, as amended and restated as of February 21, 1996. The Indiana Gaming Company is the sole manager of the partnership pursuant to a management agreement, subject only to certain actions or major decisions which are described in the partnership agreement and require the consent of a majority in interest of the limited partners. Under the provisions of the partnership agreement and the management agreement, the Company manages the operation of the Lawrenceburg Casino project and receives a management fee of 7.5% of EBITDA (as defined in the partnership agreement) and Conseco receives a financial advisory fee of 5% of EBITDA. PARTNER DISTRIBUTIONS The Lawrenceburg casino partnership agreement sets forth the manner in which cash flow of the Indiana Partnership is distributed. Pursuant to the agreement, principal on capital loans is repaid on an eight-year amortizing schedule and cash flow (after repayment of principal of, and interest on, capital loans) is distributed by the general partner not less frequently than quarterly: (i) first, to the partners pro rata for tax payments in an amount equal to their taxable net income for such period; (ii) second, to the partners as a prepayment of principal on capital loans to be applied in the inverse order of maturity, up to 75% of the remaining cash flow; (iii) third, in payment of a preferred return of 14% on any preferred 3 equity contributed by the partners; (iv) fourth, as a return of the preferred equity contributed by the partners; (v) fifth, as a return of common equity contributed by the partners; and (vi) sixth, to the partners in accordance with their respective percentage interests. Historically, these distributions have been made monthly. The partnership agreement provides that the net cash proceeds from a sale or refinancing are distributed by the general partner in the same order as cash flow except that the proceeds will be used to repay 100% of outstanding capital loans by the partners. GENERAL PARTNER REMOVAL The Lawrenceburg casino partnership agreement provides that the Company's wholly-owned subsidiary, The Indiana Gaming Company, can be removed as general partner of the partnership by the limited partners under certain limited circumstances, including: (i) a material breach (after notice and expiration of applicable cure periods) of certain material provisions of the partnership agreement dealing with such things as distributions to partners or the failure to obtain the required consent of the limited partners for certain major decisions; (ii) conviction of embezzlement or fraud involving the Indiana Partnership; (iii) certain bankruptcy events; (iv) reduction in the Indiana Gaming Company's partnership interest to less than 40% due to sales or dilution for failure to pay required capital; (v) a final unappealable judgment against The Indiana Gaming Company in excess of $25 million which is uninsured and remains unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts constituting "gross mismanagement"; (vii) failure of The Indiana Gaming Company to fund project costs in excess of $215 million (after expiration of applicable notice and cure periods); and (viii) foreclosure by the Trustee under the Company's loan agreement on The Indiana Gaming Company's pledge of its partnership interest the Indiana Partnership. Upon removal as general partner, the general partnership interest of The Indiana Gaming Company becomes a "special limited partner" interest with rights to partner distributions but only limited voting rights on partnership matters. Also, if the reason for the removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii) above the limited partners may acquire all, but not less than all, of The Indiana Gaming Company's interest for the fair market value thereof determined by an appraisal process. LIMITED PARTNERS' SALE RIGHTS The Lawrenceburg Casino partnership agreement provides that: (i) after the third anniversary date of commencement of operations at the Lawrenceburg Casino (December 10, 1996), each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests) or (ii) after a deadlock by the parties with respect to significant items in any annual operating budget of the partnership for budget year 1999 and thereafter, any partner has a right to sell its interest to the other partners (the limited partner pursuant to clause (i) and the partner desiring to sell pursuant to clause (ii) is hereinafter referred to as a "Selling Partner" and the non-selling partners are hereinafter referred to as the "Non-Selling Partners"). The partnership agreement provides that after the Selling Partner gives notice of its intent to sell, the Selling Partner and Non-Selling Partners shall have 60 days to attempt in good faith to agree to a purchase price. If within such period of time no such agreement is reached, then the Selling Partner's interest shall be appraised pursuant to an appraisal process to determine the fair market value thereof. After the fair market value of the Selling Partner's interest is determined by the appraisal process, the Non-Selling Partners have 60 days to accept or reject such sale at that price, and if the Non-Selling Partners decline to purchase the interest of the Selling Partner at the appraisal price then the general partner is to solicit bids and sell the Partnership or all of the assets of the partnership within twelve months to the highest bidder and the partnership will be dissolved. No assurances can be given that The Indiana Gaming Company, if it is a Non-Selling Partner, will have or will be able to obtain sufficient funds to acquire any Selling Partner's interest in the circumstances provided for above and therefore the assets of the partnership would have to be sold to the highest bidder as provided above. In addition, the partnership agreement provides all partners with a right of first refusal on transfers of partnership interests. A foreclosure by the Trustee on the Company's pledge of its partnership interest shall be deemed a transfer giving rise to the right of first refusal. 4 REGULATORY MATTERS ILLINOIS In February 1990, the State of Illinois pursuant to the Riverboat Gambling Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act authorizes riverboat gaming upon any navigable stream within or forming a boundary of the State of Illinois other than Lake Michigan. The Riverboat Act does not, however, authorize riverboat gaming or the docking of a riverboat conducting gaming within a county having a population in excess of 3,000,000. The Riverboat Act grants the Illinois Gaming Board specific powers and duties, and all other powers which are necessary and proper to effectuate the Riverboat Act. The Illinois Gaming Board's jurisdiction extends to every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. The Riverboat Act authorized a five member Illinois Gaming Board to issue up to ten owner's licenses statewide. Each owner's license permits the operation of up to two boats as a part of a single riverboat gaming operation with a combined maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board). No person, firm or corporation may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner may hold up to 10% of a second riverboat gaming operation in Illinois. In addition to the ten owner's licenses which may be authorized under the Riverboat Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming and to conduct such gaming on a specified date or series of dates. Riverboat gaming under such a license may take place on a riverboat not normally used for riverboat gaming. An owner's license is issued for an initial period of three years (with a fee of $25,000 for the first year and $5,000 for each of the following two years) and must be renewed annually thereafter (with a fee of $5,000 for each year). The Company's Illinois gaming license is subject to renewal in October, 1999. An owner's license is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Gaming Board that the licensee continues to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board also requires that officers, directors and employees of a gaming operation be licensed. Licenses issued by the Illinois Gaming Board may not be transferred to another person or entity. All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Pursuant to its rule making authority under the Illinois Riverboat Act, the Illinois Gaming Board has adopted certain regulations that provide that any beneficial owner of the legal or beneficial interests of a gaming company may be required, and in the case of a beneficial owner of 5% or more of the legal or beneficial interests (a "5% Holder") is required, to furnish a detailed personal disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the personal disclosure form as the basis for its investigation to determine such holder's suitability as a stockholder of the company. In the case of a 5% Holder, the Illinois Gaming Board conducts such an investigation. The Illinois Gaming Board's decisions as to suitability are based on the same criteria used for a finding of preliminary suitability for licensure including character, reputation, experience and financial integrity of such holder. If the Illinois Gaming Board determines that a holder is not suitable, the holder is entitled to request a hearing; however, if no hearing is requested after such determination or such finding is upheld after a hearing, the holder is required to divest his shares of common stock of the company. After a holder is required to divest and until divestiture, the licensee is unable to distribute profits to such stockholder. Applicants for and holders of an owner's license are required to obtain formal approval from the Illinois Gaming Board for changes in: (i) key personnel, including officers, directors, managing agents, or holders of a 5% or greater ownership interest in the business entity; (ii) its organizational form; (iii) the equity and debt capitalization of the entity; (iv) investors and/or debt holders; (v) sources of funds; (vi) the applicant's economic development plan; (vii) riverboat capacity or significant design changes; (viii) the number of gaming positions; (ix) anticipated economic impact; or (x) oral or written agreements relating to 5 the acquisition or disposition of property of a value greater than $1 million. A holder of an owner's license is allowed to make distributions to its partners, stockholders or itself only to the extent that such distribution would not impair the financial viability of the gaming operation. Factors to be considered by the licensee include, but are not limited to, the following: (i) working capital requirements, (ii) debt service requirements, (iii) requirements for repairs and maintenance and (iv) capital expenditure requirements. Minimum and maximum wagers on games are set by the licensee. Wagering may not be conducted with money or negotiable currency. No person under the age of 21 is permitted to wager in Illinois, and wagers may only be taken from a person present on a licensed riverboat. With respect to electronic gaming devices, the payout percentage may not be less than 80% nor more than 100%. Under the Riverboat Act, vessels must have the capacity to hold a minimum of 500 persons if operating on the Mississippi River or the Illinois River south of Marshall County, and a minimum of 400 persons on any other waterway. In addition, all riverboats must be accessible to disabled persons, must be either a replica of a 19th century Illinois riverboat or be a casino cruise ship design and must comply with applicable federal and state laws, including but not limited to U.S. Coast Guard regulations. Gaming may only be conducted on a gaming excursion, which is limited to a maximum period of four hours. A gaming excursion is deemed to have started upon the commencement of gaming. For the purpose of orderly ingress of passengers to a riverboat, gaming is deemed to commence when the first passenger boards a riverboat for an excursion and may continue while other passengers are boarding for a period not to exceed thirty minutes, at which time the gangplank or its equivalent must be pulled up and further boarding is not permitted. For the purpose of orderly egress of passengers from a riverboat at the end of an excursion, gaming may continue for a period not to exceed thirty minutes after the gangplank or its equivalent is lowered. During this thirty minute period of egress, new passengers may not board a riverboat. These periods of time do not extend the four-hour maximum. Special event extended cruises may be authorized by the Illinois Gaming Board. Although the Riverboat Act provides that no gambling may be conducted while a riverboat is docked, an Illinois Gaming Board rule currently permits dockside gaming during the 30-minute time periods prior to and following a cruise. Furthermore, if the captain of the riverboat reasonably determines that for reasons of safety, although seaworthy, the riverboat should not leave the dock or should return immediately thereto due to inclement weather, mechanical or structural problems, or river icing, then a gaming excursion may commence or continue while the gang plank or its equipment is raised and remains raised, and ingress is prohibited until completion of the excursion, in which case the riverboat is not considered docked. If such a situation occurs, the holder of the owner's license must promptly file a report with the administrator of the Illinois Gaming Board detailing the basis for its decision not to cruise. Recent pronouncements by the Illinois Gaming Board indicate that the explanations for failure to cruise pursuant to the rule will be scrutinized and that any abuse of the rule will result in disciplinary actions, which may include, among other things, any of the following: cancellation of future cruises, penalties, fines, suspension and/or revocation of a license. The Riverboat Act imposes a graduated wagering tax based on annual adjusted gross receipts ("AGR") from gambling games at a rate of 15% on AGR up to $25 million; 20% on AGR between $25 million and $50 million; 25% on AGR between $50 million and $75 million; 30% on AGR between $75 million and $100 million; and 35% on AGR in excess of $100 million. The tax imposed is to be paid by the licensed owner by wire transfer to the Illinois Gaming Board on the day after the day when the wagers were made. The Riverboat Act also requires that licensees pay a $2.00 admission tax for each person admitted to a gaming cruise. In addition, all use, occupancy and excise taxes that apply to food and beverages and all taxes imposed on the sale or use of tangible property apply to sales aboard riverboats. The Company also pays $0.25 admission tax to the City of Alton for each person admitted to the Alton Belle Casino. 6 The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming as it may deem necessary and proper and into alleged violations of the Riverboat Act. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to riverboat gaming operations at all times. A holder of any license is subject to the imposition of fines, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Illinois Gaming Board may revoke or suspend licenses, as the Illinois Board may see fit and in compliance with applicable laws of Illinois regarding administrative procedures and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Gaming Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interests of the public and the gaming industry. INDIANA In June 1993, the Indiana legislature adopted legislation permitting riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and Patoka Lake. The legislation granted authority to supervise gaming activities to the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission"). The Indiana Gaming Commission is empowered to administer, regulate and enforce the system of riverboat gaming established under Indiana's Riverboat Gambling Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all riverboat gaming operations in Indiana, as well as all persons on riverboats where gaming operations are conducted. The Indiana Gaming Commission has broad powers to regulate riverboat gaming operations and to approve the form of ownership and financial structure of not only riverboat owner licensees, but also their entity qualifiers, and intermediary and holding companies. Further, the Indiana General Assembly has the power to promulgate new laws and implement amendments to the Riverboat Gambling Act, which can materially affect the operation or economic viability of the gaming industry in Indiana. The Indiana Riverboat Act requires the owner of a riverboat gaming operation to hold an owner's license issued by the Indiana Gaming Commission. The Indiana Gaming Commission is authorized to issue 11 owner's licenses statewide. Each license granted entitles the licensee to own and operate one riverboat and gaming equipment as part of the gaming operation. A licensee may own no more than a 10% interest in any other owner's license under the Indiana Riverboat Act. The Indiana Riverboat Act restricts the granting of the 11 owner's licenses by location. The 11 licenses must be awarded as follow: (i) two licenses for riverboats operating from Gary; (ii) one license for a riverboat operating in Hammond; (iii) one license for a riverboat operating in East Chicago; (iv) one license for a riverboat operating in any city located in LaPorte, Porter or Lake counties, not including the above-named cities; (v) five licenses for riverboats that operate upon the Ohio River from counties contiguous thereto and with no more than one operating in any county; and (vi) one license for a riverboat operating in Patoka Lake from either DuBois, Crawford or Orange Counties. Each owner's license runs for a period of five years. Thereafter, the license is subject to renewal on an annual basis upon a determination by the Indiana Gaming Commission that the licensee continues to be 7 eligible for an owner's license pursuant to the Indiana Riverboat Act and the rules and regulations adopted thereunder. The Indiana Partnership's license is up for renewal in 2001. The Company's Indiana gaming license is subject to renewal in 2001. A licensed owner undergoes a complete investigation every three years. A licensed owner may apply for and may hold other licenses that are necessary for the operation of a riverboat, including licenses to sell alcoholic beverages, a license to prepare and serve food and any other necessary license. Furthermore, the Indiana Riverboat Act requires that officers, directors and employees of a gaming operation and suppliers of gaming equipment, devices and supplies and certain other suppliers be licensed. All Indiana state excise taxes, use taxes and gross retail taxes apply to sales on a riverboat. Applicants for licensure must submit comprehensive application and personal disclosure forms and undergo an exhaustive background investigation prior to the issuance of a license. The applicant must also disclose the identity of every shareholder or participant of the applicant and provide specific information with respect to certain shareholders holding significant interests (5% or greater) in the applicant. The Indiana Gaming Commission has the authority to request specific information on any shareholder. A riverboat owner licensee or any other person may not lease, hypothecate, borrow money against or loan money against an owner's riverboat gaming license. An ownership interest in an owner's riverboat gaming license may only be transferred in accordance with the regulations promulgated under the Indiana Riverboat Act. Pursuant to rules promulgated by the Indiana Gaming Commission, any person (other than an institutional investor) who individually, or in association with others, acquires directly or indirectly the beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee, directly or indirectly, through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for finding of suitability within 45 days after acquiring the securities. Each institutional investor who, individually or in association with others, acquires, directly or indirectly, beneficial ownership of 5% or more of any class of voting securities of a publicly-traded corporation that is a riverboat licensee or 5% or more of the beneficial interest in a riverboat licensee through any class of the voting securities of any holding or intermediary company of a riverboat licensee shall notify the Indiana Gaming Commission within 10 days after the institutional investor acquires the securities and shall provide additional information and may be subject to a finding of suitability as required by the Indiana Gaming Commission. An institutional investor who would otherwise be subject to a suitability finding shall, within 45 days, after acquiring the interests submit information to the Indiana Gaming Commission including the following: a description of the institutional investor's business and a statement as to why the institutional investor satisfies the definitional requirements of an institutional investor under Indiana gaming rule requirements; a certification made under oath that the voting securities were acquired and are held for investment purposes only and were acquired and are held in the ordinary course of business as an institutional investor; the name, address, telephone number, social security number or federal tax identification number of each person who has the power to direct or control the institutional investor's exercise of its voting rights as a holder of voting securities of the riverboat licensee; the name of each person who beneficially owns 5% or more of the institutional investor's voting securities or equivalent; a list of the institutional investor's affiliates; a list of all securities of the riverboat licensee that are or were beneficially owned by the institutional investor or its affiliates within the preceding one year; a disclosure of all criminal and regulatory sanctions imposed during the preceding ten years; a copy of any filing made under 15 U.S.C. 18(a); and any other additional information the Indiana Gaming Commission may request to insure compliance with Indiana gaming laws. 8 Each institutional investor who, individually or in association with others, acquires, directly or indirectly, the beneficial ownership of 15% or more of any class of voting securities of a publicly-traded corporation that owns a riverboat owner's license or 15% or more of the beneficial interest in a riverboat licensee directly or indirectly through any class of voting securities of any holding company or intermediary company of a riverboat licensee shall apply to the Indiana Gaming Commission for a finding of suitability within 45 days after acquiring the securities. An institutional investor means any of the following: a retirement fund administered by a public agency for the exclusive benefit of federal, state or local public employees; an investment company registered under the Investment Company Act of 1940; a collective investment trust organized by banks under Part 9 of the Rules of the Comptroller of the Currency; a closed end investment trust; a chartered or licensed life insurance company or property and casualty insurance company; a banking, chartered or licensed lending institution; an investment adviser registered under the Investment Advisers Act of 1940; and any other entity the Indiana Gaming Commission determines constitutes an institutional investor. The Riverboat Gambling Act imposes a tax on admissions to gaming excursions at a rate of $3.00 for each person admitted to the gaming excursion. This admission tax is imposed upon the license owner conducting the gaming excursion on a per-person basis without regard to the actual fee paid by the person using the ticket, with the exception that no tax shall be paid by admittees who are actual and necessary officials, employees of the licensee or other persons actually working on the riverboat. A tax is imposed on the adjusted gross receipts received from gaming games under the Riverboat Gambling Act at a rate of twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted gross receipts is defined as the total of all cash and property (including checks received by a licensee), whether collected or not, received by a licensee from gaming operations less the total of all cash paid out as winnings to patrons including a provision for uncollectible gaming receivables as is further set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from time to time, impose other fees and assessments on riverboat owner licensees. In addition, all use, excise and retail taxes apply to sales aboard riverboats. Riverboats operating in Indiana must (i) have a valid certificate of inspection from the U.S. Coast Guard to carry at least 500 passengers; and (ii) be at least 150 feet long. Any riverboat that operates on the Ohio River must replicate, as nearly as possible, historic Indiana steamboat passenger vessels of the nineteenth century. Riverboats operating in Lake Michigan or Patoka Lake need not meet this requirement. Gaming sessions are generally required to be at least two hours and are limited to a maximum duration of four hours. No gaming may be conducted while the boat is docked, except (i) for 30-minute time periods at the beginning and end of each cruise while the passengers are embarking and disembarking (total gaming time is limited to four hours, however, including the pre- and post-docking periods); and (ii) when weather or water conditions prevent the boat from cruising. The Indiana Gaming Commission may grant extended cruise hours at its discretion. If the master of the riverboat reasonably determines and certifies in writing that specific weather conditions or water conditions present a danger to the riverboat and the riverboat's passengers and crew, the riverboat may remain docked and gaming may take place until (i) the master determines that the conditions have sufficiently diminished for the riverboat to safely proceed; or (ii) the duration of the authorized excursion has expired. No riverboat licensee or riverboat license applicant may enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods or services rendered or received as determined at the time the contract is executed. Any contract entered into by a riverboat licensee or riverboat license applicant that exceeds the total dollar amount of $50,000 shall be a written contract. A riverboat license applicant means an applicant for a riverboat owner's license that has been issued a certificate of suitability. 9 Pursuant to Indiana Gaming Commission rules, riverboat licensees and riverboat license applicants must submit an internal control procedure regarding purchasing transactions which must contain provisions regarding ethical standards, compliance with state and federal laws, and prohibitions on the acceptance of gifts and gratuities by purchasing and contracting personnel from suppliers of goods or services. The rules also require any riverboat licensee or applicant to submit any contract, transaction or series of transactions greater than $500,000 in any 12-month period to the Indiana Gaming Commission within 10 days of execution, and to submit a summary of all contracts or transactions greater than $50,000 in any 12-month period on a quarterly basis. The rules provide that contracts submitted to the Indiana Gaming Commission are not submitted for approval, but grant the Indiana Gaming Commission authority to cancel or terminate any contract not in compliance with Indiana law and Indiana Gaming Commission rules. A riverboat owner licensee may not enter into or perform any contract or transaction in which it transfers or receives consideration which is not commercially reasonable or which does not reflect the fair market value of the goods and services rendered or received. All contracts are subject to disapproval by the Indiana Gaming Commission. A riverboat owner licensee or an affiliate may not enter into a debt transaction of $1.0 million or more without prior approval of the Indiana Gaming Commission. The Indiana Gaming Commission has a rule requiring the reporting of certain currency transactions, which is similar to that required by Federal authorities. See "--Other Applicable Non-Gaming Regulations." Indiana gaming laws provide that the opportunity for full minority and women's business enterprise participation in the riverboat industry in Indiana is essential to social and economic parity for minority and women business persons. The Indiana Gaming Commission has the power to review compliance with the goals of participation by minority and women business persons and impose appropriate conditions on licensees to insure that goals for such business enterprises are met. Under the Riverboat Gambling Act, a riverboat licensee or a riverboat license applicant shall designate certain minimum percentages of the value of its contracts for goods and services to be expended with minority business enterprises and womens' business enterprises such that 10% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with minority enterprises and 5% of the dollar value of the riverboat licensee's or the riverboat license applicant's contracts be expended with women's business enterprises. Expenditures with minority and women business enterprises are not mutually exclusive. Licensees are required to report the dollar value and percentage of contracts awarded to minority business enterprises and women's business enterprises annually. If the Indiana Gaming Commission determines that a licensee has not met these requirements, it may suspend, limit or revoke the owner's license or fine or impose appropriate conditions on the licensee. All licensees subject to the jurisdiction of the Indiana Gaming Commission have a continuing duty to maintain suitability for licensure. The Indiana Gaming Commission may initiate an investigation or disciplinary action or both against a licensee about whom the commission has reason to believe is not maintaining suitability for licensure, is not complying with licensure conditions, and/or is not complying with Indiana gaming laws or regulations. The Indiana Gaming Commission may suspend, revoke, restrict or place conditions on the license of a licensee; require the removal of a licensee or an employee of a licensee; impose a civil penalty or take any other action deemed necessary by the Indiana Gaming Commission to insure compliance with Indiana gaming laws. The Indiana Riverboat Act prohibits contributions to a candidate for a state, legislative, or local office, or to a candidate's committee or to a regular party committee by the holder of a riverboat owner's license or a supplier's license, by an officer of a licensee or by an officer of a person that holds at least a 1% interest in the licensee. The Indiana Gaming Commission has promulgated a rule requiring quarterly reporting by the holder of a riverboat owner's license or a supplier's license or officers of the licensee, officers of persons that hold at least a 1% interest in the licensee, and of persons who directly or indirectly own a 1% interest in the licensee. 10 The Indiana Gaming Commission adopted a rule which prohibits a distribution by a riverboat licensee to its partners, shareholders, itself, or any affiliated entity, if the distribution would impair the financial viability of the riverboat gaming operation. The Indiana Gaming Commission has adopted a rule which requires riverboat licensees to maintain, on a quarterly basis, a cash reserve in the amount of the actual payout for three days, and the cash reserve would include cash in the casino cage, cash in a bank account in Indiana or cash equivalents not committed or obligated. The Governor of Indiana has appointed a Gaming Impact Study Commission chaired by the Attorney General to review the impact of all forms of gaming in Indiana and to issue its final report by December 31, 1999. IOWA In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and Missouri Rivers and certain other waterways located in Iowa. The Excursion Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa Commission") jurisdiction over all gambling operations. The legislation authorized the granting of licenses to conduct riverboat gaming to not-for-profit corporations which, in turn, are permitted to enter into operating agreements with persons who are licensed by the Iowa Commission to operate riverboat casinos. The number of licenses which may be granted is not limited by statute or regulation. Gaming is permitted only on riverboats which recreate, as nearly as practicable, Iowa's riverboat history and have a capacity for at least 250 persons with tickets. In addition the licensee must utilize Iowa resources, goods and services in the operation of the riverboat. An excursion gambling boat must operate at least one excursion each day for 100 days during the excursion season, (from April 1 through October 31). Excursions consist of a minimum two hours during the excursion season. While an excursion gambling boat is docked, passengers may embark or disembark at any time during its business hours. If during the excursion season it is determined that it would be unsafe to complete any portion of an excursion, or if mechanical problems prevent the completion of any portion of an excursion, the boat may be allowed to remain dockside. A gaming license will be issued for not more than three years and is subject to annual renewals thereafter. The Company's Iowa gaming license is subject to renewal in March 1999 and yearly thereafter. The Iowa Commission has broad discretion with regard to such renewals. The annual license fee to operate an excursion gambling boat shall be based on the passenger carrying capacity, including crew, for which the excursion gambling boat is registered. The annual fee shall be five dollars per person capacity. Licenses issued by the Iowa Commission may not be transferred to another person or entity. The Company must submit detailed financial and operating reports to the Iowa Commission. Iowa statute stipulates that a referendum must be held in 2002 to reaffirm gaming in each county that has gaming and further stipulates that similar referenda be held every eight years thereafter. Minimum and maximum wagers on games are set by the licensee. Wagering may only be conducted with chips, wagering debit cards or coins. Wagers may only be made by persons 21 years of age and older. A licensee shall not accept a credit card to purchase coins, tokens or other forms of credit to be wagered on gambling games. The legislation imposes a graduated tax based on annual adjusted gross receipts at a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any amount over $3 million. The tax is to be paid by the licensee within 10 days after the close of business of the day when the wagers were made. The legislation also permits the Iowa Commission to impose an admission fee for each person embarking on an excursion vessel, and the city or county in which gaming is conducted is permitted to impose an admission fee of not greater than 50 cents. Pursuant to its rule making authority, the Iowa Commission requires officers, directors and certain key employees of the Company to be licensed by the Iowa Commission. In addition, anyone having a 11 material relationship or involvement with the Company may be required to be found suitable or to be licensed, in which case those persons would be required to pay the costs and fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove a change in position by such officers or key employees and the power to require the Company to suspend or dismiss officers, directors or other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the Iowa Commission finds unsuitable to act in such capacities. Any contract in excess of $50,000 must be submitted to and approved by the Iowa Commission. The Iowa Commission may also require any individual who has a material relationship with the Company to be investigated and licensed or found suitable. Any person who acquires 5% or more of the Company's equity securities must be approved by the Iowa Commission prior to such acquisition. The applicant stockholder is required to pay all costs of such investigation. LOUISIANA In July 1991, the Louisiana legislature adopted legislation permitting certain types of gaming activity on certain rivers and waterways in Louisiana. The legislation granted authority to supervise riverboat gaming activities to the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement Division of the Louisiana State Police (the "Louisiana Enforcement Division"). The Louisiana Riverboat Gaming Commission was authorized to hear and determine all appeals relative to the granting, suspension, revocation, condition or renewal of all licenses, permits and applications. In addition, the Louisiana Riverboat Gaming Commission was to establish rules providing for and determining, among other things, authorized routes, duration of excursions and the stops a riverboat may make, minimum levels of insurance, construction of riverboats, periodic inspections and procedures for negotiable instrument transactions involving patrons. The Louisiana Enforcement Division was authorized, among other things, to investigate applicants and issue licenses, investigate violations of the statute, conduct continuing reviews of gaming activities and exercise other broad oversight powers. In an April 1996 special session of the Louisiana legislature, Louisiana lawmakers passed a measure which established the Louisiana Gaming Control Board and provides that such board shall be the successor to all prior authorities, and the sole and exclusive authority, with regard to the regulation and supervision of gaming operations and activities in Louisiana except for the regulation of horse racing and offtrack betting and the conducting of charitable gaming operations. Effective May 1, 1996, the powers, duties, functions, and responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana Enforcement Division, including those with respect to riverboat gaming, are transferred to the Louisiana Gaming Control Board. The Department of Public Safety and Corrections, Office of State Police, retains certain enforcement powers and responsibilities relative to investigations, audits, and cruising procedures. The laws and regulations of Louisiana seek to (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity, (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing procedures for reliable record keeping and making periodic reports to the Board; (iv) prevent cheating and fraudulent practices; (v) provide a source of state and local revenues through fees; and (vi) ensure that gaming licensees, to the extent practicable, employ and contract with Louisiana residents, women and minorities. Initial licenses to conduct riverboat gaming expire five years from the date the license was granted. The Company's Louisiana gaming license is subject to renewal in July 1999. The Louisiana Act specifies certain restrictions and conditions relating to the operation of riverboat gaming, including but not limited to the following: (i) in parishes bordering the Red River, gaming may be conducted dockside; however, in all other authorized locations, gaming is not permitted while a riverboat is docked, other than for forty-five minutes between excursions, unless dangerous weather or water conditions exist; (ii) each round trip riverboat cruise may not be less than three nor more than eight hours in 12 duration, subject to specified exceptions; (iii) agents of the Board are permitted on board at any time during gaming operations; (iv) gaming devices, equipment and supplies may be purchased or leased from permitted suppliers; (v) gaming may only take place in the designated river or waterway; (vi) gaming equipment may not be possessed, maintained, or exhibited by any person on a riverboat except in the specifically designated gaming area, or a secure area used for inspection, repair, or storage of such equipment; (vii) wagers may be received only from a person present on a licensed riverboat; (viii) persons under 21 are not permitted in designated gaming areas; (ix) except for slot machine play, wagers may be made only with tokens, chips or electronic cards purchased from the licensee aboard a riverboat; (x) licensees may only use docking facilities and routes for which they are licensed and may only board and discharge passengers at the riverboat's licensed berth; (xi) licensees must have adequate protection and indemnity insurance; (xii) licensees must have all necessary federal and state licenses, certificates and other regulatory approvals prior to operating a riverboat; and (xiii) gaming may only be conducted in accordance with the terms of the license and the rules and regulations adopted by the Board. No person may receive any percentage of the profits from the Company's operations in Louisiana without first being found suitable. A gaming license is deemed to be a privilege under Louisiana law and as such may be denied, revoked, suspended, conditioned or limited at any time by the Louisiana Gaming Control Board. In issuing a license, the Board must find that the applicant is a person of good character, honesty and integrity and the applicant is a person whose prior activities, criminal record, if any, reputation, habits and associations do not pose a threat to the public interest of the State of Louisiana or to the effective regulation and control of gaming, or create or enhance the dangers of unsuitable, unfair or illegal practices, methods, and activities in the conduct of gaming or the carrying on of business and financial arrangements in connection therewith. The Louisiana Gaming Control Board will not grant any licenses unless it finds that: (i) the applicant is capable of conducting gaming operations, which means that the applicant can demonstrate the capability, either through training, education, business experience, or a combination of the above, to operate a gaming casino; (ii) the proposed financing of the riverboat and the gaming operations is adequate for the nature of the proposed operation and from a source suitable and acceptable to the Board; (iii) the applicant demonstrates a proven ability to operate a vessel of comparable size, capacity and complexity to a riverboat in its application for a license; (iv) the applicant designates the docking facilities to be used by the riverboat; (v) the applicant shows adequate financial ability to construct and maintain a riverboat; (vi) the applicant has a good faith plan to recruit, train and upgrade minorities in all employment classifications; and (vii) the applicant is of good moral character. The Louisiana Gaming Control Board may not award a license to any applicant who fails to provide information and documentation to reveal any fact material to qualifications or who supplies information which is untrue or misleading as to a material fact pertaining to the qualification criteria; who has been convicted of or pled nolo contendere to an offense punishable by imprisonment of more than one year; who is currently being prosecuted for or regarding whom charges are pending in any jurisdiction of an offense punishable by more than one year imprisonment; if any holder of 5% or more in the profits and losses of the applicant has been convicted or pled guilty or nolo contendere to an offense which at the time of conviction is punishable as a felony. The transfer of a license or permit or an interest in a license or permit is prohibited. The sale, purchase, assignment, transfer, pledge or other hypothecation, lease, disposition or acquisition (a "Transfer") by any person of securities which represents 5% or more of the total outstanding shares issued by a corporation that holds a license is subject to Louisiana Gaming Control Board disapproval. A security issued by a corporation that holds a license must disclose these restrictions. Section 2501 of the regulations enacted by the Louisiana State Police Riverboat Gaming Division pursuant to the Louisiana Act (the "Regulations") requires prior written approval of the Board of all persons involved in the sale, purchase, assignment, lease, grant or foreclosure of a security interest, hypothecation, transfer, conveyance or acquisition of an ownership interest (other than in a corporation) or economic interest of five percent (5%) or more in any licensee. 13 Section 2523 of the Regulations requires notification to and prior approval from the Board of the (i) application for, receipt, acceptance or modification of a loan, or the (ii) use of any cash, property, credit, loan or line of credit, or the (iii) guarantee or granting of other forms of security for a loan by a licensee or person acting on a licensee's behalf. Exceptions to prior written approval apply to any transaction for less than $2.5 million in which all of the lending institutions are federally regulated, or if the transaction involves publicly registered debt and securities sold pursuant to a firm underwriting agreement. The failure of a licensee to comply with the requirements set forth above may result in the suspension or revocation of that licensee's gaming license. Additionally, if the Board finds that the individual owner or holder of a security of a corporate license or intermediary company or any person with an economic interest in a licensee is not qualified under the Louisiana Act, the Board may require, under penalty of suspension or revocation of the license, that the person not (i) receive dividends or interest on securities of the corporation, (ii) exercise directly or indirectly a right conferred by securities of the corporation, (iii) receive remuneration or economic benefit from the licensee, or (iv) continue in an ownership or economic interest in the licensee. A licensee must notify the Louisiana Gaming Control Board in writing within five (5) days of the completion of the following transactions: 1. Withdrawal of capital in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 2. The granting of a loan or any other extension of credit in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; 3. Any advance or other distribution of any type of asset in excess of five percent (5%) of the licensee's net gaming proceeds for the preceding twelve month period; No prior approval of any such withdrawal, loan, advance or distribution is required, but such transaction is ineffective if subsequently disapproved by the Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board may issue an emergency order for not more than 10 days prohibiting payment of profits, income or accruals by, or investments in, a licensee. Riverboat gaming licensees and their Affiliated Gaming Persons are required to notify the Louisiana Gaming Control Board within 30 days after any such person applies for, receives or accepts a loan, or makes use of any cash, property, credit, loan or line of credit, or guarantees, or grants other form of security for a loan (a "Loan") unless such transaction involves publicly registered debt and securities (in which event such person shall file the registration statement and other materials with the Louisiana Gaming Control Board), unless more stringent conditions are imposed by the Louisiana Gaming Control Board, or the amount of the Loan is below certain specified thresholds. The Louisiana Gaming Control Board is required to investigate the reported Loan, and to either approve or disapprove the transaction. If disapproved, the Loan must be rescinded by the Licensee or Affiliated Gaming Person. Fees for conducting gaming activities on a riverboat include (i) $50,000 per riverboat for the first year of operation and $100,000 per year per riverboat thereafter; (ii) a state franchise fee of 15% of net gaming proceeds; (iii) a state license fee of 3.5% of net gaming proceeds; and (iv) a local fee of up to $2.50 per passenger. A licensee must periodically report the following information to the Board, which is not confidential and is to be available for public inspection: the licensee's net gaming proceeds from all authorized games; the amount of tax paid on net gaming proceeds; and all quarterly and annual financial statements presenting historical data that are submitted to the Board, including annual financial statements that have been audited by an independent certified public accountant. 14 The Board has adopted rules governing the method for approval of the area of operations and the rules and odds of authorized games and devices permitted, and prescribing grounds and procedures for the revocation, limitation or suspension of licenses and permits. In April 1996, the Louisiana legislature approved legislation mandating local option elections to determine whether to prohibit or continue to permit three individual types of gaming in Louisiana on a parish-by-parish basis. The referendum was brought before the Louisiana voters at the time of the November 1996 presidential election. Voters elected to permit riverboat gaming in all parishes where it is presently conducted and to allow land-based casino gaming in Orleans Parish. Voters in 31 parishes elected to permit video draw poker devices, but in 33 parishes, including East Baton Rouge Parish, voters elected to prohibit the devices. Current operators of video poker devices in East Baton Rouge Parish (and the other parishes where voters elected to prohibit video poker) will be allowed to operate only until the end of their current license plus two extensions. Typically video poker licenses have a maximum one year duration. MISSOURI Gaming was originally authorized in the State of Missouri on November 3, 1992, although no governmental action was taken to enforce or implement the original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law which replaced the original law and established the Missouri Gaming Commission, which is responsible for the licensing and regulation of riverboat gaming in Missouri. The number of licenses which may be granted is not limited by statute or regulation. The Missouri Gaming Law grants specific powers and duties to the Missouri Gaming Commission to supervise riverboat gaming and implement the Missouri Gaming Law and take any other action as may be reasonable or appropriate to enforce the Missouri Gaming Law. The Missouri Gaming Commission has discretion to approve permanently moored ("dockside") riverboat casinos if it finds that the best interest of Missouri and the safety of the public indicate the need for continuous docking of an excursion gambling boat. Under the Missouri Gaming Law, the ownership and operation of riverboat gaming facilities in Missouri are subject to extensive state and local regulation. If a company is granted a gaming license in Missouri, such company, any subsidiaries it may form and its officers, directors, significant shareholders and employees will be subject to regulations. The initial license and first subsequent license renewal of an excursion gambling boat operator shall be for a period of one year. Thereafter, license renewal periods shall be two years. The company's gaming license will be subject to renewal in June 2000. However, the Missouri Gaming Commission may reopen license hearings at any time. As part of the application and licensing process for a gaming license, the applicant must submit detailed financial, operating and other reports to the Missouri Gaming Commission. Each applicant has an ongoing duty to update the information provided to the Missouri Gaming Commission in the application. In addition to the information required of the applicant, directors, officers and other key persons must submit Personal Disclosure Forms which include detailed personal financial information and are subject to thorough investigations. All gaming employees must obtain an occupational license issued by the Missouri Gaming Commission. Operators' licenses are issued through application to the Missouri Gaming Commission, which requires, among other things, (a) investigations into an applicant's character, financial responsibility and experience qualifications and (b) that applicants furnish (i) an affirmative action plan for the hiring and training of minorities and women and (ii) an economic development or impact report. License fees are a minimum of $50,000 for the initial application and $25,000 annually thereafter. The Missouri Gaming Commission may revoke or suspend gaming licenses and impose other penalties for violation of the Missouri Gaming Law and the rules and regulations which may be promulgated thereunder. Penalties include, but are not limited to, forfeiture of all gaming equipment used in the conduct of unauthorized gambling games and fines of up to three times a licensee's highest daily gross receipts derived from wagering on the gambling games, whether authorized or unauthorized, conducted during the preceding twelve months. In addition, the Missouri Gaming Commission requires 15 60 days notice of, and may disapprove or require delay pending further investigation of, transactions in excess of the greater of $500,000 or 30% of licensee's net worth, up to $1,000,000, which transactions involve or relate to the gaming licensee. Pursuant to its rule making authority, the Missouri Gaming Commission has adopted certain regulations which provide, among other things, that: (i) riverboat excursions are limited to a duration of four hours, and gaming may be conducted at any time during the excursion; (ii) no gaming licensee or occupational licensee may pledge, hypothecate or transfer in any way any license, or any interest in a license, issued by the Missouri Gaming Commission; (iii) without first notifying the Missouri Gaming Commission at least 60 days prior to such consummation of any of the following transactions (and during such period the Missouri Gaming Commission may disapprove the transaction or require the transaction to be delayed pending further investigation) (a) a gaming licensee or a holding company affiliated with a gaming licensee may not make a public issuance of debt, (b) a publicly held gaming licensee or a publicly held holding company may not make any issuance of an ownership interest equaling 5% or greater of the gaming licensee or holding company or (c) a person or entity may not pledge or hypothecate an ownership interest in a gaming licensee that is not a publicly held company or a holding company that is not a publicly held company provided that no such ownership interest may be transferred voluntarily or involuntarily pursuant to any pledge without separate notice to the Missouri Gaming Commission as required by the regulations; (iv) not later than 7 days after the consummation of any transfer of ownership interest in a publicly held gaming licensee, if such transfer would result in an entity or group of entities acting in concert owning, directly or indirectly, a total amount of ownership interest equaling 5% or greater of the ownership interest in the gaming licensee, the transferee must report such consummation to the Missouri Gaming Commission; (v) no withdrawals of capital, loans, advances or distribution of any type of assets in excess of 5% of accumulated earnings of a licensee to anyone with an ownership interest in the licensee may occur without prior Missouri Gaming Commission approval; and (vi) the Missouri Gaming Commission may take action against a licensee or other person who has been disciplined in another jurisdiction for gaming related activity. The Missouri Gaming Law imposes operational requirements on riverboat operators, including a charge of two dollars per gaming customer per excursion that licensees must pay to the Missouri Gaming Commission, a minimum payout requirement of 80% for slot machines, a 20% tax on adjusted gross receipts, prohibitions against providing credit to gaming customers (except for the use of credit cards and cashing checks) and a requirement that each licensee reimburse the Missouri Gaming Commission for all costs of any Missouri Gaming Commission staff necessary to protect the public on the licensee's riverboat. Licensees must also submit to the Commission on a quarterly basis an audit of compliance and of the financial transactions and condition of the licensee's total operations for the calendar quarter and pay the associated auditing fees. The Missouri Gaming Law provides for a loss limit of $500 per person per excursion. Although the Missouri Gaming Law provides no limit on the amount of riverboat space that may be used for gaming, the Missouri Gaming Commission is empowered to impose such space limitations through the adoption of rules and regulations. Additionally, United States Coast Guard safety regulations could affect the amount of riverboat space that may be devoted to gaming. The Missouri Gaming Law also includes requirements as to the form of riverboats, which must resemble Missouri's riverboat history to the extent practicable and include certain non-gaming amenities. With respect to the availability of dockside gaming, which may be more profitable than cruise gaming, the Missouri Gaming Commission is empowered to determine on a site by site basis where such gaming is in the best interest of Missouri and the safety of the public and shall be permitted. All licensees currently operating riverboat gaming operations in Missouri are authorized to conduct all or a portion of their operations on a dockside basis. The Company began dockside operations in August 1995. Dockside gaming in Missouri may differ from dockside gaming in other states, such as Mississippi, because the Missouri Gaming Commission has the ability to require "simulated cruising." This requirement permits customers to board dockside riverboats only at specific times and prohibits boarding during a certain portion of each simulated cruise, which are required to be a 16 minimum of two hours and a maximum of four hours. Dockside gaming in Missouri may not be as profitable as dockside gaming in other states, that allow for continuous customer ingress and egress. The licensee may receive wagers only from a person present on a licensed excursion gambling boat. Wagering shall not be conducted with money or other negotiable currency. A person under 21 years of age shall not make a wager on an excursion gambling boat and shall not be allowed in the area of the excursion boat where gambling is being conducted. The Missouri Gaming Commission is authorized to enter the premises of excursion gambling boats, facilities, or other places of business of a licensee in Missouri to determine compliance with the Missouri Gaming Law and to investigate alleged violations of the Missouri Gaming Law or Missouri Gaming Commission rules, orders or final decisions. A holder of any license shall be subject to imposition of penalties, suspension or revocation of such license, or other action for any act or failure to act by himself or his agents or employees that is injurious to the public health, safety, morals, good order and general welfare of the people of the state of Missouri, or that would discredit the Missouri gaming industry or the state of Missouri. The Missouri Gaming Commission may waive any licensing requirement or procedure for any type of license if it determines that the waiver is in the best interests of the public. In addition, a supplier's license is required of persons who sell or lease gambling equipment, gambling supplies or both to any licensee. A licensee licensed to conduct gambling games shall acquire all gambling games or implements of gambling from a licensed supplier. On August 29, 1996, certain residents of St. Louis County (the "St. Louis Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and injunctive relief generally against the Missouri Gaming Commission and specifically against the granting of licenses by the Missouri Gaming Commission to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP ("Players") with respect to their casino development in Maryland Heights, Missouri. The suit alleged that (i) the Missouri legislature lacks the constitutional authority to authorize the Missouri Gaming Commission to license casinos except on excursion gambling boats and floating facilities "upon" the Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly construed a statute to permit it to grant gaming licenses to excursion gambling boats or floating facilities placed within artificial spaces and (iii) the Missouri Gaming Commission is not authorized to regulate gaming operations conducted upon floating facilities. In December 1996, the Missouri court dismissed the St. Louis Plaintiffs' claim and the St. Louis Plaintiffs appealed the decision to the Missouri Supreme Court. In December 1997, the Missouri Supreme Court ruled that the definition of the words "upon the Mississippi and Missouri Rivers" in the Missouri Constitution required that to be permitted an artificial basin must be contiguous to the river and that the artificial basin must be filled with river water and touch the surface stream of the river for considerable distances. On November 3, 1998, the citizens of the State of Missouri approved a Constitutional amendment which was proposed by initiative petition, that retroactively legalized lotteries, gift enterprises and games of chance aboard excursion gambling boats and floating facilities located within artificial spaces containing water that are within 1,000 feet of the closest edge of the main channel of the Mississippi or Missouri Rivers. This amendment to the Constitution was certified on November 23, 1998. LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally prohibited form of lottery. A bill currently in the legislature, which would permit slot machines under lottery regulations at racetracks, requires a simple majority in the Kansas House and Senate, as well as a majority vote in the racetrack's county. Kansas legislature is in session through March, and veto would extend through mid-April. The State of Kansas has approved Class III Indian compacts with four separate tribes authorizing the tribes to conduct table and keno games, but not slot machines, on their respective reservation lands. One such casino is open and is located approximately 60 miles from Kansas City. 17 KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally prohibited form of lottery. In order to amend the Kentucky constitution, three-fifths of the members of each house of the Kentucky legislature and a majority of Kentucky voters would have to approve a proposed amendment. Several Kentucky racetracks have publicly lobbied for the right to conduct casino games. OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited form of lottery. In order to amend the Ohio constitution, three-fifths of the members of each house of the Ohio legislature and a majority of Ohio voters would have to approve any proposed amendment. NEBRASKA. A number of efforts to expand gaming in Nebraska failed during 1996. After an effort to present a statewide referendum on legalizing casino gaming failed in the Nebraska legislature, three separate voter petition drives also failed. FEDERAL AND NON-GAMING REGULATIONS The Company and its subsidiaries are subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in additional costs to the Company. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. All vessels operated by the Company must comply with U.S. Coast Guard requirements as to safety and must hold a Certificate of Seaworthiness or must be approved by the American Bureau of Shipping ("ABS") for stabilization and flotation, and may also be subject to local zoning and building codes. These requirements set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessel. Loss of the Certificate of Seaworthiness of a vessel would preclude its use as a riverboat. Every five years, vessels must be dry docked for an inspection of the outside of the hull resulting in a loss of service for a period of time. The U. S. Coast Guard has developed a pilot program which would utilize underwater equipment to complete a hull inspection while the vessel remains in service. This procedure was utilized to inspect the Alton Gaming Company riverboat casino in February 1998. If the procedure is ever disapproved by the U. S. Coast Guard, the Company would be required to remove a riverboat from service and seek to lease another riverboat casino or discontinue operations for the inspection period. All shipboard employees of the Company employed on U.S. Coast Guard regulated vessels, including those who have nothing to do with the actual operation of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act which, among other things, exempts these employees from state limits on workers' compensation awards. The Company is subject to the provisions of the Americans With Disabilities Act but does not anticipate incurring significant expenses to bring its facilities or procedures into compliance with such Act. The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires banks, other financial institutions and casinos to monitor receipts and disbursements of currency in excess of $10,000 and report them to the United States Department of the Treasury (the "Treasury"). In management's opinion, the BSA may have resulted in a reduction in the volume of play by high level wagerers. The Treasury has proposed tentative amendments to the BSA which would apply solely to casinos and their reporting of 18 currency transactions. The most significant proposed change in the BSA is a reduction in the threshold at which customer identification data must be obtained and documented by the casino, from $10,000 to $3,000 (which may include the aggregation of smaller denomination transactions). Additionally, the amendments would substantially increase the record-keeping requirements imposed upon casinos relating to customer data, currency and non-currency transactions. Management believes the proposed amendments, if enacted in their current form, could result in a further reduction in the volume of play by upper-and middle-level wagerers while adding operating costs associated with the more extensive record-keeping requirements. However, the effect on the Company's operations is not expected to be material. UNCERTAIN EFFECT OF NATIONAL GAMBLING IMPACT STUDY COMMISSION A National Gambling Impact Study Commission has been established by the United States Congress to conduct a comprehensive study of the social and economic impact of gaming in the United States. The National Commission is required to issue a report containing its findings and conclusions, together with recommendations for legislation and administrative actions, within two years after its first meeting, which occurred on June 20, 1997. Any recommendations which may be made by the National Commission could result in the enactment of new laws and/or the adoption of new regulations which could adversely impact the gaming industry in general. We are unable at this time to determine what recommendations, if any, the National Commission will make, or the ultimate disposition of any recommendations the National Commission may make. INSURANCE The Company carries property and casualty insurance on its land-based assets and its vessels generally in the amount of their replacement costs with a nominal deductible with respect to its land-based assets and a deductible equal to 2% of the replacement value of the vessels. The Company's land-based assets are not currently covered by flood insurance. The Company's general liability insurance with respect to land-based operations has a limit of $1 million per occurrence and $2 million as an annual aggregate with a $50,000 deductible. Its general liability insurance with respect to its marine operations has a $100,000 per occurrence deductible with per occurrence coverage up to a $75 million limit. With respect to worker's compensation the Company has a $250,000 per occurrence deductible with a $1 million per occurrence limit. The Company does not have business interruption insurance. 19 ITEM 2. PROPERTIES The following is a list of the Company's principal properties as of December 31, 1998. Substantially all of the properties of the Company are subject to the lien of the Company's senior lenders under its $235 million First Mortgage Note Indenture dated June 5, 1996.
INTEREST FUNCTION(1) LEASE EXPIRATION --------- ---------------------------------------------- -------------------- ALTON, ILLINOIS Office Building.................. Leased Executive Offices August 1999 Real Property.................... Leased Landing Rights April 2001(4) Alton Belle II................... Owned Riverboat Casino Office Building.................. Owned Offices Support Barges................... Owned Landing, Ticketing and Office facilities RIVERSIDE, MISSOURI Real Property.................... Leased Landing Rights December 1999(4) Real Property.................... Owned Permanent Landing Site Argosy IV........................ Owned Riverboat Casino BATON ROUGE, LOUISIANA Real Property.................... Owned Vessel Access Argosy III....................... Owned Riverboat Casino Support Barge.................... Owned Staging Barge LAWRENCEBURG, INDIANA(2) Real Property.................... Owned Permanent Landing Site Argosy VI........................ Owned Riverboat Casino Docking Site..................... Leased Vessel Dock December 2002(4) SIOUX CITY, IOWA Argosy V......................... Owned Riverboat Casino Support Barge.................... Owned Staging Barge Real Property.................... Leased Landing Rights June 2002 OTHER(3) Spirit of America................ Owned Staging Vessel Argosy I......................... Owned Riverboat Casino
- ------------------------ (1) A significant portion of the Company's land-based assets are not covered by flood insurance for any loss or damage that may result from flooding, and the Company does not currently have any business interruption insurance. (2) Owned by a partnership pursuant to which the Company, through a wholly-owned subsidiary, has a 57.5% partnership interest and serves as general partner. (3) Currently not in service. (4) Renewal options available. 20 ITEM 3. LEGAL PROCEEDINGS The Company is from time to time a party to legal proceedings arising in the ordinary course of business. Other than as disclosed below, the Company is unaware of any legal proceedings which, even if the outcome were unfavorable to the Company, would have a material adverse impact on either its financial condition or results of operations. CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL. In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House") filed a cause of action in the U. S. District Court of the Middle District of Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and Argosy obtained the gaming license for Baton Rouge based upon false and fraudulent pretenses and declarations and financial misrepresentations. The complaint alleges tortious conduct as well as violations of RICO and seeks damages of $158 million plus court costs and attorneys' fees. The plaintiff was an applicant for a gaming license in Baton Rouge whose application was denied by the Louisiana Enforcement Division. The Company believes the allegations of the plaintiff are without merit and intends to vigorously defend such cause of action. On June 7, 1995, the Company consummated its purchase of all of the outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company intends to seek indemnification from the Former Jazz Shareholders for any liability the Company, Argosy Louisiana or Jazz suffers as a result of such cause of action. As part of the consideration payable by the Company to the Former Jazz Shareholder for the acquisition of Jazz, the Company agreed at the time of such acquisition to annual deferred purchase price payments of $1,350,000 for each of the first ten years after closing and $500,000 for each of the next ten years. Payments are to be made quarterly by the Company. The definitive acquisition documents provide the Company with off-set rights against such deferred purchase price payments for indemnification claims of the Company against the Former Jazz Shareholders and for the liabilities that the Former Jazz Shareholder contractually agreed to retain. There can be no assurance that the Former Jazz Shareholders will have assets sufficient to satisfy any claim in excess of the Company's off-set rights. The defendants filed a Motion to Dismiss, or alternatively to abstain and stay the action, pending resolution of certain Louisiana state court claims filed by Capitol House. The trial court decided in favor of the defendants and dismissed the suit without prejudice to the rights of plaintiff to revive the suit after the conclusion of the pending state court matters. The plaintiff appealed this dismissal to the U. S. Fifth Circuit Court of Appeals. While the appeal was pending, several of the Louisiana state court claims were resolved. On March 11, 1997, the U. S. Fifth Circuit Court of Appeals vacated the trial court's dismissal and remanded the case to the district court for further proceedings. The defendants have re-urged the previously filed motion to dismiss. On November 17, 1997, the district court granted the motion and dismissed, with prejudice, all of the federal claims under RICO. The claims of Capitol House that arose under Louisiana state law were dismissed, without prejudice. Capitol House filed an appeal of the district court dismissal on January 9, 1998, with the U.S. Fifth Circuit Court of Appeals. On November 4, 1998, the Fifth Circuit affirmed the district court's dismissal of Capital House's RICO claims. This matter is now concluded in federal court. Additionally, Capitol House filed an amended petition in the Nineteenth Judicial District Court for East Baton Rouge Parish, State of Louisiana, Suit Number 418,525 on November 26, 1997, amending its previously filed but unserved suit against Richard Perryman, the person selected by the Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming license for East Baton Rouge Parish, and now adding its state law claims against Jazz, the former shareholders of Jazz, Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. This suit alleges that these parties violated the Louisiana Unfair Trade Practices Act in connection with obtaining the gaming license which was issued to the Company. This suit alleges the same, or 21 substantially similar, facts that formed the basis of the federal claim which was dismissed on November 17, 1997. The defendants have filed a Peremptory Exception of No Cause of Action, Peremption and Prescription and Exception of Lis Pendens in response to Capitol House's state court suit. A hearing on these exceptions was held June 1, 1998, before Judge McDonald. The Court granted the exception and dismissed the suit as to Argosy Gaming Company, Argosy of Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of Baton Rouge Casino. The Court denied the exception as to Jazz and the former shareholders of Jazz. On behalf of Jazz and its former shareholders, a supervisory writ has been filed with the First Circuit Court of Appeal, State of Louisiana, seeking a dismissal of the claims. Capitol House has appealed the dismissal of the claims as to the other parties. On December 10, 1998, the Court of Appeal granted a hearing and then denied the supervisory writs of Jazz and the Former Jazz Shareholders and affirmed the ruling of the trial court. Jazz and the Former Jazz Shareholders have filed a Motion for Rehearing before the Court of Appeal. Capitol House's appeal of the trial court's dismissal of Argosy Gaming Company, Argosy of Louisiana, Inc., and Catfish Queen Partnership in Commendam is still pending in the First Circuit. If the Court of Appeal should deny Jazz and the Former Jazz Shareholders' Motion for Rehearing, this suit will then proceed in the trial court and Jazz will assert its additional defenses before the trial court. An adverse ruling in this matter could have a material adverse effect on the Company. MARION COUNTY, INDIANA GRAND JURY On or after March 15, 1996, the Company, its partners in the Lawrenceburg casino project and certain other individuals and entities were served with document request subpoenas issued by the Office of the Prosecuting Attorney of Marion County, Indiana in connection with a grand jury investigation entitled: STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law requires that at the time a target of an investigation is determined, that entity or person must be so advised by the Office of the Prosecuting Attorney. On March 23, 1996 the Company was advised by the Marion County prosecutor that no target subpoenas had been issued by the grand jury in its investigation as of that date. As described below, the grand jury has since handed up indictments on April 28, 1997 against four persons, but the Company and the partners of the Indiana Partnership continue not to have been advised by the Marion County Prosecutor that any of them is a target of the investigation. However, there can be no assurance that further targets will not be identified as further information and documents are obtained and considered by the grand jury. Due to the confidential nature of grand jury proceedings, the Company is not aware of the specific subject matter or matters of the investigation, other than to the extent revealed by the April 28, 1997 indictments. The Company believes it has fully complied with its subpoena, and has been informed by its partners that they have done the same. The subpoenas requested information regarding the current or prior ownership interest in the Company and the partners of the Indiana Partnership by the individuals or entities described below. The subpoenas also requested that the Company and its partners produce a broad category of documents including documents regarding employment and other agreements, gifts, payments and correspondence between the Company and any of its partners on the one hand and several business entities and individuals, including a then-Indiana state legislator (Samuel Turpin), certain Indiana lobbyists, and certain Lawrenceburg, Indiana city officials and businessmen on the other hand. The Company has learned that this legislator (Turpin) has served as an employee of a subsidiary of Conseco, Inc., the parent company of the 29% limited partner in the Indiana Partnership since September 1995. Additionally, the Company has learned that Turpin has served since September 1993 as a consultant to American Consulting Engineers, Inc. ("ACE"), a major Indiana engineering firm that is engaged in many state and local government funded construction projects. ACE also serves as lead engineer for the Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative Ethics Committee voted to reprimand, but take no further action against, Turpin for failing to properly report the foregoing employment and consulting arrangements on his 1993, 1994 and 1995 statements of economic interests. On June 27, 1996, Turpin announced 22 his resignation as chairman of the Indiana House Ways and Means Committee. Turpin did not seek re-election in 1996 and is no longer a member of the Indiana House of Representatives. On April 28, 1997, the grand jury made a "First and Partial Report" that handed up felony indictments against (1) Willis Conner, co-owner of ACE; (2) Kenneth Cragen, president of and lobbyist for the Indiana Motor Truck Association ("IMTA"); (3) Turpin; and (4) James Wurster, co-owner of ACE. Conner, Wurster and Turpin are each charged with one count of bribery in connection with payments made by ACE to Turpin while he served in the Indiana General Assembly, which payments were stated to be for consulting fees for duties outside the legislative process, but which the indictment charges were in return for official acts by Turpin that promoted the economic interests of ACE. The press release by the Marion County prosecutor at the time of the indictments described those economic interests as including "the promoting of certain riverboat gaming interests in which ACE had a financial interest, the diverting of state funds into highway construction and, while Turpin was a member of the State Budget Committee, the release of state funds that benefited particular ACE public works projects." Turpin was also charged with five counts of filing fraudulent campaign finance reports, and one count of perjury in connection with a sworn statement to the Indiana Bureau of Motor Vehicles. Wurster was also charged with one count, and Cragen with two counts, of unlawful lobbying in connection with lobbying activities involving IMTA and ACE. The Company (including entities controlled by its employees) believes that it has not engaged in, or been informed by its partners that they have engaged in, any illegal conduct in the pursuit of or the granting of the gaming license to the Indiana partnership of Lawrenceburg. Because the grand jury proceedings were unlikely to be concluded quickly, on March 25, 1996, a former U.S. Attorney (James Richmond) and his law firm were retained to conduct, as special independent counsel (the "special independent counsel"), an internal investigation into the activities and actions of the Company and the entities controlled by any person employed by the Company with respect to (i) the hiring by Conseco, Inc. and the Indiana engineering firm of the then-state legislator, (Turpin) (ii) the endorsement of the Indiana Partnership by the City of Lawrenceburg and the financial affairs of certain Lawrenceburg officials with respect to such endorsement and the awarding of the certificate of suitability by the Indiana Gaming Commission, and (iii) their lobbying efforts in furtherance of the Indiana legislature's enactment of legislation authorizing gaming and limiting gaming licenses to one per county. A special committee of independent directors of the Company was appointed to supervise and coordinate the special independent counsel's investigation. The special independent counsel did not investigate Conseco, Inc. The Company was advised that Conseco, Inc. also retained independent counsel and such counsel conducted its own internal investigation of matters that may be the subject of the grand jury proceedings and such investigation found no wrongdoing by Conseco, Inc. or any person or entity it controls, or is controlled by. From March 25 to April 15, 1996, the special independent counsel conducted its investigation and issued an interim report in which it concluded that it found no evidence that the Company or any entity controlled by or person employed by the Company had any involvement in, or knowledge of, the relationship between the then-state legislator (Turpin) and Conseco, Inc. or the Indiana engineering firm (ACE), or attempted to improperly influence any City of Lawrenceburg official, state legislator or Indiana Gaming Commission member or staff member in connection with the endorsement of the partnership by the City of Lawrenceburg and the awarding of the certificate of suitability to the Indiana Partnership with regard to lobbying, including the lobbying with respect to one gaming license per county legislation. The special independent counsel found no evidence that the Company or any entity controlled by or person employed by the Company attempted to unduly influence any legislator in any way. However, no investigation was made of any lobbyist's records, activities or expenditures, nor were any outside lobbyists interviewed. The special independent counsel also audited the Company's compliance with the lobbying disclosure statute in Indiana and found only technical errors in the Company's lobbying disclosure statements. No evidence was found that these technical errors were intentional or designed to hide any lobbying activity. In conducting its investigation, the special independent counsel, among other things, 23 reviewed numerous boxes of documents produced by the executive and Lawrenceburg offices of the Company and extensively interviewed the nine Company officers and employees most closely related to the Lawrenceburg Casino project, as well as the principal of R.J. Investments, Inc., a 4% limited partner of the Indiana Partnership. Several months after the completion of his investigation, the special independent counsel (Richmond) was retained as Acting General Counsel of the Company for the period January 14, 1997 through April 30, 1997. No assurance can be given, however, that the nature and scope of the investigation conducted by the special independent counsel for the Company and Conseco, was sufficient to uncover conduct that might be considered unlawful. In the event that the Company, any entity controlled by the Company, any person employed by the Company, the Indiana Partnership or any of its partners is found by the Marion County prosecutor to have engaged in unlawful conduct, there is no assurance what effect such action would have on the Indiana Partnership's gaming license. In the event that a partner is determined by the Indiana Gaming Commission to be unsuitable for ownership of a gaming license, the terms of the Indiana Partnership's partnership agreement provide that the Indiana Partnership shall redeem 100% of such unsuitable partner's interest for an amount equal to 90% of the "appraised value" of that partner's interest, determined in accordance with the terms of the partnership agreement. The purchase price is payable in five annual installments, only from available cash flow or sale or financing proceeds of the partnership, and bears interest at "prime". Also, there can be no assurance that the Indiana Gaming Commission would not take other actions such as suspending, revoking or failing to renew the Indiana Partnership's gaming license. Since April 1, 1998, the Company has been served with two additional document subpoenas from the Marion County, Indiana Grand Jury relating to (i) John Frick & Associates and its principal James A. Perucker and (ii) the Indiana Gaming Association and its Executive Director John Barnett. The Company has from time to time retained Mr. Perucker and his firm to act as its lobbyist in the State of Indiana. The Company is, and has been for years, a member of the Indiana Gaming Association, an industry trade association which also conducts lobbying activities in the State of Indiana. Since May 1, 1998, the Partnership also received a similar document subpoena relating to the Indiana Gaming Association and its Executive Director John Barnett. The Company is working with its special independent counsel to comply with the most recent document subpoenas. There can be no assurance that the grand jury investigation will not lead to events having a material adverse effect on the Company. MATTERS CONCERNING H. STEVEN NORTON In September, 1993, H. Steven Norton, who was then the President of the Company, and is now no longer employed by the Company, filed a cause of action against John T. Connors, formerly a significant shareholder of the Company and a former officer, director and shareholder of J. Connors Group Inc., a predecessor entity of the Company ("JCG"), seeking $50 million in damages. Mr. Norton alleged that Mr. Connors failed to fulfill his promise made in the summer of 1991 to establish a partnership with Mr. Norton in which each would have an equal 50% interest in JCG, which had a 25% partnership interest in the Company's predecessor entity that owned the Alton Belle casino. As a result of the reorganization effected immediately prior to its initial public offering, the Company succeeded to all the rights, properties and assets, and assumed all the liabilities, of all of its predecessor entities, including JCG. Subsequent to the filing of the lawsuit, Mr. Connors advised the Company that his dealings with Mr. Norton, which are the subject of the litigation, were in his capacity as an officer of JCG, and that the Company should assume the defense and reimburse Mr. Connors for his legal fees, and that any liability resulting from the litigation was assumed by the Company as a result of the Company's reorganization. The Company responded to Mr. Connors that it believed that his actions and dealings with Mr. Norton were solely in his individual capacity as a shareholder of JCG, and the Company declined to assume the defense or reimburse him for 24 previously incurred legal fees, and the Company denied that it has any liability with respect to such matter. If, however, JCG were to have been found liable to Mr. Norton as a result of the actions of Mr. Connors, then the Company could under certain circumstances be liable to Mr. Norton for any damages awarded against JCG. In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit against Mr. Connors and is again seeking $50 million in damages. On May 21, 1998, Mr. Connors filed a third party complaint directed against the Company. In the complaint, Connors alleges the Company purchased JCG's assets and liabilities and that to the extent Mr. Connors is held liable, the Company must indemnify Mr. Connors for the amount of any judgment obtained by Mr. Norton together with other unnamed damages. The Company has filed a motion to dismiss the third party complaint of Mr. Connors. That motion is still pending. Mr. Norton's employment with the Company terminated on February 27, 1998. Mr. Norton has asserted a claim that the Company owes Mr. Norton compensation as a result of the fact that his interest in the Lawrenceburg partnership has been diluted from a direct 10% interest in the partnership to a 25% interest in Centaur, Inc. which effectively means Mr. Norton has a 2.4% interest in the partnership. The Company denies that it has any obligation to Mr. Norton in respect of his interest in the Lawrenceburg partnership. Mr. Norton has threatened to file a cause of action against the Company if no settlement can be reached. The Company is evaluating whether it desires to enter into settlement discussions with Mr. Norton. There can be no assurance that these lawsuits will not lead to events having a material adverse effect on the Company. GAMEDEV OF SIOUX CITY, INC., F/K/A SIOUX CITY RIVERBOAT CORP., INC. V. ARGOSY GAMING COMPANY AND IOWA GAMING COMPANY This suit was filed on June 11, 1998, in the Iowa District Court in Woodbury County, Iowa. Gamedev of Sioux City, Inc. ("Gamedev"), the limited partner of the limited partnership, Belle of Sioux City, L.P., seeks monetary damages and an equitable accounting based on claims of breach of fiduciary duty and negligent misrepresentation against the defendants. Iowa Gaming Company, a wholly-owned subsidiary of the Company, is the general partner of the Belle of Sioux City, L.P. On July 21, 1998, the defendants responded to the Petition by filing a motion to dismiss on the grounds that Gamedev's claims are derivative in nature, and that Gamedev has failed to comply with the demand requirements under Iowa limited partnership law. Also, Gamedev is not entitled to an equitable accounting because it has an adequate remedy at law. In response, on August 4, 1998, plaintiff filed a First Amended and Substituted Petition and added claims for fraudulent misrepresentation, breach of the partnership agreement, and breach of the management agreement. Defendants filed a motion to dismiss based on substantially similar grounds and requested a more specific statement on the claims for breach of contract. On September 25, 1998, the court denied the motion to dismiss and granted the request for a more specific statement. Plaintiff subsequently filed a Second Amended Petition on October 14, 1998. The court scheduled November 2, 1999 for the trial date. The discovery cutoff deadline for the parties is October 1, 1999. Plaintiff must designate its experts by June 25, 1999, and defendants must designate their experts by August 27, 1999. Dispositive motions shall be filed per statute, and a settlement conference, if required, is set for October 27, 1999. The parties have exchanged written discovery and are presently responding to them. Depositions will be scheduled in the future. There can be no assurance that the lawsuit will not lead to events having a material adverse effect on the Company. 25 CONSERVANCY DISTRICT LEASE LITIGATION IN DEARBORN COUNTY, INDIANA On March 21, 1997, Deborah S. Whitacre filed an action in the Circuit Court of Dearborn County, Indiana as Cause No. 15CO1-9703-CP-073, challenging the validity of a lease to the City by the Conservancy District of Lawrenceburg, Indiana (the "District") of certain land owned by the District, which land has in turn been subleased by the City to the Company's affiliate Indiana Gaming and is being used for development and operation of the riverboat gaming facility in the City for which Indiana Gaming has been awarded a riverboat owner's license by the Commission. Defendants are the District and its individual directors. In 1998, Indiana Gaming was permitted to intervene and is now contesting the action. The District and its directors have advised that they are contesting the action and intend to continue to do so. An adverse ruling in this matter could have a material adverse effect on the Company. PENDING INTERNAL REVENUE SERVICE AUDIT On November 1, 1994, the Company received a Notice of the beginning of an Administrative Proceeding from the Internal Revenue Service ("IRS") for the 1992 and 1993 tax years of Metro Entertainment & Tourism, Inc. ("Metro"). Metro was merged with and into the Company immediately prior to its initial public offering in February 1993. Metro along with J. Connors Group, Inc. ("Connors") were the partners of Alton Riverboat Gambling Partnership ("ARGP") which until the Company's initial public offering owned and operated the Alton, Illinois riverboat casino. The IRS has proposed certain adjustments with respect to the Company in a 30-day letter and has also proposed adjustments with respect to certain positions and deductions taken by Metro and ARGP in 60-day letters. The principal issues raised by the IRS in the Metro 60-day letter involve the status of Metro as an S Corporation and the deductibility of the $8.5 million accommodation fee paid to William McEnery in 1992 and 1993. The Company has filed a protest to both the 30-day letter and 60-day letters and intends to vigorously contest these proposed adjustments. The total Federal tax liability asserted by the IRS against the Company resulting from these proposed adjustments is approximately $11.3 million including interest through December 31, 1998 but excluding penalties, if any. The required payment by the Company resulting from an adverse ruling of this matter could have a material effect on the Company's results of operations, financial condition and cash flows. GAMING INDUSTRY CLASS ACTIONS The Company has been named, along with two gaming equipment suppliers, 41 of the country's largest gaming operators and four gaming distributors (the "Gaming Industry Defendants") in three class action lawsuits pending in Las Vegas, Nevada. The suits allege that the Gaming Industry Defendants violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a course of fraudulent and misleading conduct intended to induce people to play their gaming machines based upon a false belief concerning how those gaming machines actually operate, as well as to the extent to which there is actually an opportunity to win on any given play. The suites seek unspecified compensatory and punitive damages. On January 14, 1997, the Court consolidated all three actions under the case name WILLIAM H. POULOS, ETC. V. CAESARS WORLD, INC., ET AL. On February 13, 1997 the plaintiffs filed a consolidated amended complaint. The Court subsequently dismissed this complaint, in part, and on January 8, 1998, the plaintiffs filed a second consolidated amended complaint. The parties have fully briefed the Plaintiff's motion for class certification and are awaiting a decision from the court. The Company is unable to determine what effect, if any, the suit would have on its business or operations. STEVEN B. SMALL CASE A class action lawsuit was filed by plaintiff Stephen B. Small, et al., as class representative, on November 28, 1997, in the United States District Court for the Western District of Missouri, naming four gaming operators in Kansas City, Missouri, including The Missouri Gaming Company. The lawsuit alleged that the defendants are conducting gaming operations that are not located on the Missouri River in 26 violation of certain state and federal statutes. The Missouri Gaming Company was granted a motion to dismiss the lawsuit. On October 30, 1998, the plaintiff filed a similar lawsuit in the Circuit Court of Cole County, Missouri. The plaintiff is seeking a declaratory judgment that the operators are conducting illegal games of chance, as well as compensatory, special, consequential, and incidental damages in unspecified amounts. Management believes that the claims are without merit and does not expect that the lawsuit will have a material adverse effect on the Company's financial position or results of operations. 27 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A Special Meeting of Stockholders was held on December 4, 1998. At the meeting, stockholders voted on a proposal to approve the issuance of common stock in order to comply with provisions of a Securities Purchase Agreement and Rule 312 of the New York Stock Exchange.
VOTES VOTES WITHHELD/ FOR AGAINST ABSTAIN - ------------ ---------- ----------- 10,960,656.. 4,226,278 38,859
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated by reference from Proxy Statement, page 18, section entitled Market for Registrants Common Equity and Related Stockholder Matters. ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net revenues....................... $ 506,668 $ 344,083 $ 244,817 $ 252,691 $ 153,045 Income (loss) from operations...... 87,811 6,530 (10,751) 27,662 22,994 Net income (loss).................. 5,741 (40,213) (24,839) 6,953 9,635 Diluted net income (loss).......... 0.23 (1.65) (1.02) 0.29 0.40 Weighted average diluted common shares outstanding............. 24,604,485 24,333,333 24,333,333 24,333,333 2,433,333 ------------- ------------- ------------- ------------- ------------- PRO FORMA NET INCOME DATA (UNAUDITED):(1) Pro forma net income (loss)........ 5,712 5,393 Diluted pro forma net income per share............................ 0.23 0.22 Pro forma, diluted shares outstanding...................... 24,333,333 24,333,333 ------------- ------------- ------------- ------------- ------------- BALANCE SHEET DATA (AT END OF PERIOD): Total assets....................... 562,752 559,856 530,528 309,882 232,831 Long-term debt, including current maturities....................... 424,000 449,790 380,208 169,702 115,431 Total stockholders' equity......... 40,863 32,663 72,701 97,540 90,587 ------------- ------------- ------------- ------------- -------------
- ------------------------ (1) Pro forma net income per share for the years ended December 31, 1995 and 1994, reflects the Company's June 7, 1995, acquisition of Jazz Enterprises, Inc. as if the acquisition had occurred on January 1, 1994. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Annual Report, pages 30-37 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of Argosy Gaming Company are included in this report: AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY GAMING COMPANY Incorporated by reference from the Annual Report, pages 38-58, sections entitled "Consolidated Balance Sheets", "Consolidated Statements of Operations", "Consolidated Statements of Cash Flows", "Consolidated Statements of Stockholders' Equity", "Notes to Consolidated Financial Statements" and "Report of Independent Auditors". FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X. FINANCIAL STATEMENTS OF ALTON GAMING COMPANY Report of Independent Auditors....................................................... 31 Balance Sheets....................................................................... 32 Statements of Income................................................................. 33 Statements of Stockholder's Equity................................................... 34 Statements of Cash Flows............................................................. 35 Notes to Financial Statements........................................................ 36 FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY Report of Independent Auditors....................................................... 40 Balance Sheets....................................................................... 41 Statements of Operations............................................................. 42 Statements of Stockholder's Equity................................................... 43 Statements of Cash Flows............................................................. 44 Notes to Financial Statements........................................................ 45 CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC. Report of Independent Auditors....................................................... 49 Consolidated Balance Sheets.......................................................... 50 Consolidated Statements of Operations................................................ 51 Consolidated Statements of Stockholder's Deficit..................................... 52 Consolidated Statements of Cash Flows................................................ 53 Notes to Consolidated Financial Statements........................................... 54 FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM Report of Independent Auditors....................................................... 59 Balance Sheets....................................................................... 60 Statements of Operations............................................................. 61 Statements of Partners' Equity....................................................... 62 Statements of Cash Flows............................................................. 63 Notes to Financial Statements........................................................ 64
29 FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC. Report of Independent Auditors....................................................... 68 Balance Sheets....................................................................... 69 Statements of Operations............................................................. 70 Statements of Stockholder's Deficit.................................................. 71 Statements of Cash Flows............................................................. 72 Notes to Financial Statements........................................................ 73 CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY Report of Independent Auditors....................................................... 77 Consolidated Balance Sheets.......................................................... 78 Consolidated Statements of Operations................................................ 79 Consolidated Statements of Stockholder's Equity...................................... 80 Consolidated Statements of Cash Flows................................................ 81 Notes to Consolidated Financial Statements........................................... 82 FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P. Report of Independent Auditors....................................................... 88 Balance Sheets....................................................................... 89 Statements of Operations............................................................. 90 Statements of Partners' Equity....................................................... 91 Statements of Cash Flows............................................................. 92 Notes to Financial Statements........................................................ 93
30 REPORT OF INDEPENDENT AUDITORS Board of Directors Alton Gaming Company We have audited the accompanying balance sheets of Alton Gaming Company as of December 31, 1998 and 1997, and the related statements of income, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Alton Gaming Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois January 29, 1999 31 ALTON GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash...................................................................................... $ 4,383 $ 3,807 Accounts receivable, net of allowance for doubtful accounts of $255 and $259, respectively............................................................................ 125 211 Deferred income taxes..................................................................... 616 690 Other current assets...................................................................... 986 549 --------- --------- Total current assets.................................................................... 6,110 5,257 --------- --------- Due from affiliates....................................................................... 10,046 10,405 Net property and equipment................................................................ 26,808 27,447 Other assets.............................................................................. 2 6 --------- --------- TOTAL ASSETS............................................................................ $ 42,966 $ 43,115 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 1,597 $ 799 Accrued payroll and related expenses...................................................... 1,515 1,221 Slot club liability....................................................................... 727 766 Other accrued liabilities................................................................. 1,309 1,515 Accrued insurance......................................................................... 1,073 1,107 --------- --------- Total current liabilities............................................................... 6,221 5,408 --------- --------- OTHER LONG-TERM OBLIGATIONS-RELATED PARTY................................................... 201 186 DEFERRED INCOME TAXES....................................................................... 3,201 3,745 STOCKHOLDER'S EQUITY: Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1 Capital in excess of par.................................................................. 256 256 Retained earnings......................................................................... 33,086 33,519 --------- --------- Total stockholder's equity.............................................................. 33,343 33,776 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 42,966 $ 43,115 --------- --------- --------- ---------
See accompanying notes to financial statements. 32 ALTON GAMING COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Casino......................................................................... $ 67,798 $ 61,877 $ 72,369 Food, beverage and other....................................................... 6,564 7,433 7,817 --------- --------- --------- 74,362 69,310 80,186 Less promotional allowances.................................................... (2,298) (2,102) (2,253) --------- --------- --------- Net revenues..................................................................... 72,064 67,208 77,933 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 31,466 31,672 36,082 Food, beverage and other....................................................... 5,728 7,113 7,473 Other operating expenses....................................................... 5,398 5,623 5,706 Selling, general and administrative............................................ 11,637 10,856 12,226 Allocation of corporate costs-related party.................................... 1,869 2,247 4,193 Depreciation and amortization.................................................. 3,985 4,455 4,206 --------- --------- --------- 60,083 61,966 69,886 --------- --------- --------- Income from operations........................................................... 11,981 5,242 8,047 --------- --------- --------- OTHER INCOME (EXPENSE): Interest income................................................................ 64 70 50 Interest expense............................................................... (78) (14) (51) --------- --------- --------- (14) 56 (1) --------- --------- --------- Income before income taxes....................................................... 11,967 5,298 8,046 Income tax expense............................................................... 4,748 2,002 3,198 --------- --------- --------- Net income....................................................................... $ 7,219 $ 3,296 $ 4,848 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 33 ALTON GAMING COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED STOCKHOLDER'S SHARES STOCK PAR EARNINGS EQUITY ------- ------- ---------- -------- -------------- Balance, December 31, 1995.............. 1,000 $ 1 $ 256 $ 34,025 $ 34,282 Net income............................ 4,848 4,848 Dividends............................. (2,885) (2,885) -- ------- ----- -------- ------- Balance, December 31, 1996.............. 1,000 1 256 35,988 36,245 Net income............................ 3,296 3,296 Dividends............................. (5,765) (5,765) -- ------- ----- -------- ------- Balance, December 31, 1997.............. 1,000 1 256 33,519 33,776 Net income............................ 7,219 7,219 Dividends............................. (7,652) (7,652) -- ------- ----- -------- ------- Balance, December 31, 1998.............. 1,000 $ 1 $ 256 $ 33,086 $ 33,343 -- -- ------- ----- -------- ------- ------- ----- -------- -------
See accompanying notes to financial statements. 34 ALTON GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................ $ 7,219 $ 3,296 $ 4,848 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................. 3,985 4,455 4,206 Loss on disposal of equipment................................................. 26 90 Deferred income taxes......................................................... (470) 192 597 Changes in operating assets and liabilities: Accounts receivable......................................................... 86 119 138 Other current assets........................................................ (647) (28) 395 Other assets................................................................ 166 Accounts payable............................................................ 798 (748) 273 Other accrued liabilities................................................... 240 96 (1,503) Income taxes payable to affiliate........................................... (225) 214 (5,570) --------- --------- --------- Net cash provided by operating activities................................. 11,012 7,686 3,550 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................. (3,158) (1,686) (1,680) --------- --------- --------- Net cash used in investing activities..................................... (3,158) (1,686) (1,680) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid................................................................ (7,652) (5,765) (2,885) Due from affiliate............................................................ 359 (6) 692 Increase in other long term obligations-related party......................... 15 15 13 --------- --------- --------- Net cash used in financing activities..................................... (7,278) (5,756) (2,180) --------- --------- --------- Net increase (decrease) in cash............................................... 576 244 (310) Cash, beginning of year....................................................... 3,807 3,563 3,873 --------- --------- --------- Cash, end of year............................................................. $ 4,383 $ 3,807 $ 3,563 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 35 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Alton Gaming Company ("Company"), an Illinois Corporation and wholly-owned subsidiary of Argosy Gaming Company ("Argosy"), is engaged in the business of providing casino-style gaming and related entertainment to the public through the operation of the Alton Belle casino in Alton, Illinois. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the following estimated useful lives: 5 to 30 Shore improvements............................................ years 5 to 20 Riverboat, dock and improvements.............................. years 5 to 10 Furniture, fixtures and equipment............................. years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1998 1997 1996 --------- --------- --------- Food, beverage and other........................................... $ 916 $ 1,112 $ 1,238
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $1,499, $2,807,and $3,225 for the years ended December 31, 1998, 1997 and 1996, respectively. INCOME TAXES--Earnings or losses from the Company are included in the consolidated income tax returns of Argosy. The Company computes federal and state income taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 36 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Leasehold and shore improvements...................................... $ 1,936 $ 1,933 Riverboat, dock and improvements...................................... 30,469 30,497 Furniture, fixtures and equipment..................................... 15,089 12,209 ---------- ---------- 47,494 44,639 Less accumulated depreciation and amortization........................ (20,686) (17,192) ---------- ---------- Net property and equipment............................................ $ 26,808 $ 27,447 ---------- ---------- ---------- ----------
3. INCOME TAXES Income tax expense for the years ended December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996 --------- --------- --------- Current: Federal........................................................ $ 4,570 $ 1,586 $ 2,273 State.......................................................... 648 224 328 --------- --------- --------- 5,218 1,810 2,601 --------- --------- --------- Deferred: Federal........................................................ (411) 155 526 State.......................................................... (59) 37 71 --------- --------- --------- (470) 192 597 --------- --------- --------- Income tax expense........................................... $ 4,748 $ 2,002 $ 3,198 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1998, 1997 and 1996, differs from that computed at the Federal Statutory tax rate as follows:
1998 1997 1996 --------- --------- --------- Federal statutory rate........................................... 34.0% 34.0% 35.0% State income taxes, net of federal benefit....................... 4.8 4.8 4.7 Other............................................................ 0.9 (1.0) --- --- --- 39.7% 37.8% 39.7% --- --- --- --- --- ---
37 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. INCOME TAXES (CONTINUED) The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1998 and 1997, are as follows:
1998 1997 --------- --------- Depreciation............................................................. $ (3,247) $ (3,791) Start-up costs........................................................... 46 46 Other.................................................................... 616 690 --------- --------- Net deferred tax liability............................................... $ (2,585) $ (3,055) --------- --------- --------- ---------
4. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid $52, $14 and $148 for interest for the years ended December 31, 1998, 1997 and 1996, respectively, and $5,390, $1,597 and $8,170 for income taxes in 1998, 1997 and 1996 to Argosy. During 1997, the Company transferred equipment to affiliates with a carrying value of $278. Amounts due from affiliates increased by this amount as a result of the transfer. During 1997, Argosy transferred a barge to the Company with a carrying value of $432. Amounts due from affiliates decreased by this amount as a result of the transfer. 5. OTHER RELATED PARTY TRANSACTIONS The Company has entered into a management agreement with Argosy based on a cost allocation model which was approved by the Illinois Gaming Board. The Company is restricted from making dividends unless approved by the Illinois Gaming Board. The Company participates in Argosy's property, general liability, worker's compensation and other insurance programs. The Company's estimated share of these costs, which is allocated directly to the Company by Argosy, was $1,104, $2,023 and $3,309 for the years ended December 31, 1998, 1997 and 1996, respectively. Interest expense to related parties amounted to $77, $14 and $32 for the years ended December 31, 1998, 1997 and 1996, respectively. In January 1996, the Company entered into a 5 year operating lease agreement with Argosy for certain office space. The lease carries annual rentals of approximately $126 throughout the lease term. During 1994, the Company transferred the original Alton Belle along with other barge facilities having a total cost of approximately $11,300 and accumulated depreciation of approximately $3,300 to an affiliate. This amount is included in due from affiliates in the accompanying balance sheets. No interest is charged on this advance. 6. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan, which covers substantially all of its full time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the 38 ALTON GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. EMPLOYEES BENEFIT PLAN (CONTINUED) Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expenses recognized by the Company under the Plan were $223, $530 and $461 for the years ended December 31, 1998, 1997 and 1996, respectively. 7. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1999.................................................................................. $ 202 2000.................................................................................. 170 2001.................................................................................. 5 2002.................................................................................. 5 2003.................................................................................. 5 Thereafter............................................................................ 5
Rent expense for the years ended December 31, 1998, 1997 and 1996, was $466, $532 and $565, respectively. A predecessor entity to the Company ("Predecessor"), as a result of a certain shareholder loan transaction, could be subject to federal and certain state income taxes (plus interest and penalties, if any) if it is determined that it failed to satisfy all of the requirements of the S-Corporation provisions of the Internal Revenue Code relating to the prohibition concerning a second class of stock. An audit is currently being conducted by the Internal Revenue Service ("IRS") of the Company's federal income tax returns for the 1992 and 1993 tax years, and the IRS has asserted the S-Corporation status as one of the issues although the IRS has yet to make a formal claim of deficiency. If the IRS successfully challenges the Predecessor's S-Corporation status, the Company would be required to pay federal and certain state income taxes on the Predecessor's taxable income from the commencement of its operations until February 25, 1993 (plus interest and penalties, if any, thereon until the date of payment). If the Predecessor was required to pay federal and certain state income taxes on its taxable earnings through February 25, 1993, such payments could amount to approximately $13,500, including interest through December 31, 1998, but excluding penalties, if any. While the Company believes the Predecessor has legal authority for its position that it is not subject to federal and certain state income taxes because it met the S-Corporation requirements, no assurances can be given that the Predecessor's position will be upheld. This contingent liability could have a material adverse effect on the Company's results of operations, financial condition and cash flows. No provision has been made for this contingency in the accompanying financial statements. Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The assets of the Company are pledged as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. 39 REPORT OF INDEPENDENT AUDITORS Board of Directors The Missouri Gaming Company We have audited the accompanying balance sheets of The Missouri Gaming Company as of December 31, 1998 and 1997, and the related statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Missouri Gaming Company at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Kansas City, Missouri January 29, 1999 40 THE MISSOURI GAMING COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash.................................................................... $ 3,905 $ 3,629 Accounts receivable, net of allowance for doubtful accounts of $55 and $25, respectively..................................................... 34 269 Prepaid rent............................................................ 960 1,041 Other current assets.................................................... 365 311 Deferred income taxes................................................... 312 370 --------- --------- Total current assets.................................................. 5,576 5,620 --------- --------- NET PROPERTY AND EQUIPMENT................................................ 66,819 70,878 OTHER ASSETS: Deposits................................................................ 221 221 Prepaid rent............................................................ 917 Other................................................................... 913 1,060 --------- --------- Total other assets.................................................... 1,134 2,198 --------- --------- TOTAL ASSETS.............................................................. $ 73,529 $ 78,696 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable........................................................ $ 1,405 $ 1,352 Accrued payroll and related expenses.................................... 1,383 1,181 Slot club liability..................................................... 924 674 Accrued insurance....................................................... 752 917 Installment contracts payable........................................... 500 Other current liabilities............................................... 855 920 --------- --------- Total current liabilities............................................. 5,819 5,044 --------- --------- DUE TO AFFILIATES......................................................... 49,056 56,007 DEFERRED INCOME TAXES..................................................... 2,260 1,851 STOCKHOLDER'S EQUITY: Common stock-$.01 par value, 1,000 shares authorized, issued and outstanding Capital in excess of par................................................ 5,000 5,000 Retained earnings....................................................... 11,394 10,794 --------- --------- Total stockholder's equity............................................ 16,394 15,794 --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................ $ 73,529 $ 78,696 --------- --------- --------- ---------
See accompanying notes to financial statements. 41 THE MISSOURI GAMING COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Casino......................................................... $ 71,955 $ 61,750 $ 82,247 Food, beverage and other....................................... 11,163 10,050 13,048 --------- --------- --------- 83,118 71,800 95,295 Less promotional allowances.................................... (6,157) (5,252) (6,822) --------- --------- --------- Net revenues................................................... 76,961 66,548 88,473 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................... 38,144 33,568 43,733 Food, beverage and other....................................... 8,602 8,583 9,552 Selling, general and administrative............................ 14,201 11,871 13,399 Other operating expenses....................................... 4,722 4,098 5,263 Depreciation and amortization.................................. 5,924 5,947 6,724 Preopening..................................................... 392 Lease termination.............................................. 3,508 --------- --------- --------- 71,593 64,067 82,571 --------- --------- --------- Income from operations........................................... 5,368 2,481 5,902 --------- --------- --------- OTHER INCOME (EXPENSE): Interest income................................................ 56 231 40 Interest expense............................................... (4,381) (5,162) (6,048) --------- --------- --------- (4,325) (4,931) (6,008) --------- --------- --------- Income (loss) before income taxes................................ 1,043 (2,450) (106) Income tax (expense) benefit..................................... (443) 929 42 --------- --------- --------- Net income (loss)................................................ $ 600 $ (1,521) $ (64) --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 42 THE MISSOURI GAMING COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL COMMON EXCESS OF RETAINED STOCKHOLDER'S SHARES STOCK PAR EARNINGS EQUITY ----------- ----------- ----------- --------- ------------- Balance, December 31, 1995............................... 1,000 $ $ 5,000 $ 12,379 $ 17,379 Net loss............................................... (64) (64) ----- ----------- ----------- --------- ------------- Balance, December 31, 1996............................... 1,000 5,000 12,315 17,315 Net loss............................................... (1,521) (1,521) ----- ----------- ----------- --------- ------------- Balance, December 31, 1997............................... 1,000 5,000 10,794 15,794 Net income............................................. 600 600 ----- ----------- ----------- --------- ------------- Balance, December 31, 1998............................... 1,000 $ $ 5,000 $ 11,394 $ 16,394 ----- ----------- ----------- --------- ------------- ----- ----------- ----------- --------- -------------
See accompanying notes to financial statements. 43 THE MISSOURI GAMING COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................ $ 600 $ (1,521) $ (64) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of fixed assets................ 5,777 5,740 6,484 Amortization of other assets................................. 147 207 240 Deferred income taxes........................................ 467 455 1,320 Lease termination costs...................................... 1,941 Changes in operating assets and liabilities: Accounts receivable........................................ 235 (49) (91) Other current assets....................................... (148) 85 505 Accounts payable........................................... 96 (2,153) 947 Accrued liabilities........................................ 316 (4,868) (775) Other assets............................................... 998 1,000 1,000 --------- --------- --------- Net cash provided by (used in) operating activities...... 8,488 (1,104) 11,507 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................ (1,339) (998) (19,192) --------- --------- --------- Net cash used in investing activities.................... (1,339) (998) (19,192) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on installment contracts.............................. (207) (94) (797) Due (from) to affiliate........................................ (6,666) (185) 10,294 (Increase) decrease in deposits................................ (133) 200 --------- --------- --------- Net cash (used in) provided by financing activities...... (6,873) (412) 9,697 --------- --------- --------- Net increase (decrease) in cash................................ 276 (2,514) 2,012 Cash, beginning of year........................................ 3,629 6,143 4,131 --------- --------- --------- Cash, end of year.............................................. $ 3,905 $ 3,629 $ 6,143 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 44 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--The Missouri Gaming Company ("Company") (a Missouri company and a wholly owned subsidiary of Argosy Gaming Company, ("Argosy")) owns and operates a riverboat casino and related facilities in Riverside, Missouri. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts in 1997 and 1996 have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed using the straight-line method over the following estimated useful lives: Buildings and shore improvements.............................. 5 to 30 years Riverboat, dock and improvements.............................. 5 to 20 years Furniture, fixtures and equipment............................. 5 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, food and beverage and other items which were provided to customers without charge, has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in operating costs and expenses as follows:
1998 1997 1996 --------- --------- --------- Food, beverage and other......................................... $ 2,954 $ 2,419 $ 2,217
ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 1998, 1997 and 1996 was $1,148, $2,548 and $3,214, respectively. INCOME TAXES--Earnings or losses from the Company are included in the consolidated income tax returns of Argosy. The Company computes federal and state income taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 45 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Land and improvements........................................................... $ 14,657 $ 14,658 Buildings and improvements...................................................... 29,152 29,107 Riverboat, dock and improvements................................................ 23,372 23,810 Furniture, fixtures and equipment............................................... 19,740 18,501 ---------- ---------- 86,921 86,076 Accumulated depreciation and amortization....................................... (20,102) (15,198) ---------- ---------- Net property and equipment...................................................... $ 66,819 $ 70,878 ---------- ---------- ---------- ----------
3. RIVERSIDE AGREEMENT The Company entered into a Lease and Development Agreement ("Agreement") with the City of Riverside, Missouri. The Agreement, as amended, required the Company to pay $1,600 for the construction of a city park and for the development of a golf course. These payments were capitalized, are included as an intangible asset in the accompanying balance sheet, and are being amortized over ten years using the straight-line method. The unamortized portion of these payments is included in other assets in the accompanying balance sheets. Under the terms of the Agreement, the Company leases a portion of its site from the City of Riverside. The $5,000 minimum rent due for the initial five-year term of the lease was paid in advance as required by the Agreement. In addition to minimum rent, during the initial five-year lease term, percentage rent is payable at 3% of revenues, as defined, over $100 million annually. The Company has the option to extend the Agreement for three successive five-year terms. The initial term expires in November, 1999 and the Company intends to extend the agreement. In all extension periods, there will be no minimum rent and percentage rent will be payable as follows: (i) 3% on the first $50 million of revenues; (ii) 4% on revenues between $50 million and $100 million; and (iii) 5% on revenues in excess of $100 million. The Agreement requires the Company to maintain a net worth of $5,000 at all times, unless approved by the City of Riverside. 46 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax benefit (expense) for years ended December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996 --------- --------- --------- Current: Federal................................................................. $ 21 $ 1,240 $ 1,200 State................................................................... 3 144 162 --------- --------- --------- 24 1,384 1,362 --------- --------- --------- Deferred: Federal................................................................. (417) (417) (1,162) State................................................................... (50) (38) (158) --------- --------- --------- (467) (455) (1,320) --------- --------- --------- Income tax (expense) benefit.............................................. $ (443) $ 929 $ 42 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 differs from that computed at the Federal Statutory corporate tax rate as follows:
1998 1997 1996 --------- --------- --------- Federal statutory rate................................................. 34.0% (34.0)% (35.0)% State income taxes, net of federal benefit............................. 4.1 (4.1) (4.8) Other.................................................................. 4.3 0.2 --------- --------- --------- 42.4% (37.9)% (39.8)% --------- --------- --------- --------- --------- ---------
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 --------- --------- Start-up costs..................................................................... $ 105 $ 323 Depreciation....................................................................... (2,365) (2,174) Other, net......................................................................... 312 370 --------- --------- Net deferred tax liability......................................................... $ (1,948) $ (1,481) --------- --------- --------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment of $707 in 1998 and $135 in 1996, which was financed through installment contracts. The Company paid $6,752, $5,393 and $8,043 for interest and $114, $3,518 and $225 for income taxes in 1998, 1997 and 1996, respectively. 47 THE MISSOURI GAMING COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. RELATED PARTY TRANSACTIONS The Company participates in Argosy's property, general liability, worker's compensation and other insurance programs. The Company's estimated share of these costs, which is allocated directly to the Company by Argosy, was $994, $2,603 and $2,853 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company has outstanding long-term debt with Argosy in the amounts of $49,056 and $56,007 at December 31, 1998 and 1997, respectively. These amounts represent funds received in connection with the construction of the permanent facility. The Company accrues interest on the long-term debt at a rate of 12% annually. There are no stated repayment terms on the long-term debt and payments are made from available cash flow. 7. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan, which covers substantially all of its full time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was $203, $422 and $441 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1999.................................................................................. $ 177 2000.................................................................................. 35 2001.................................................................................. 26
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $1,483, $1,539, and $1,874, respectively. The Company is restricted from making certain distributions to Argosy and other affiliates unless approved by state gaming authorities. Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The assets of the Company are pledged as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. 9. LEASE TERMINATION In the second quarter of 1996 the Company determined that it no longer had a use for the temporary restaurant and entertainment barge. Accordingly, the Company expensed the remaining lease costs and any termination costs associated with the lease. 48 REPORT OF INDEPENDENT AUDITORS Board of Directors Argosy of Louisiana, Inc. We have audited the accompanying consolidated balance sheets of Argosy of Louisiana, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholder's deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Argosy of Louisiana, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP New Orleans, Louisiana January 29, 1999 49 ARGOSY OF LOUISIANA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents............................................... $ 3,025 $ 3,429 Accounts receivable, net of allowance for doubtful accounts of $708 and $838, respectively.................................................... 301 484 Income taxes receivable from related party.............................. 717 742 Other current assets.................................................... 577 429 --------- --------- Total current assets.................................................. 4,620 5,084 --------- --------- NET PROPERTY AND EQUIPMENT................................................ 39,670 43,896 OTHER ASSETS: Deferred lease acquisition cost, net.................................... 1,700 1,808 Other................................................................... 13 13 --------- --------- Total other assets.................................................... 1,713 1,821 --------- --------- TOTAL ASSETS.............................................................. $ 46,003 $ 50,801 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable........................................................ $ 595 $ 771 Accrued payroll and related expenses.................................... 966 919 Accrued gaming taxes.................................................... 558 501 Other accrued liabilities............................................... 1,963 1,445 Due to affiliates....................................................... 3,149 1,795 Accrued interest-related party.......................................... 2,304 902 Accrued insurance....................................................... 1,166 1,246 Notes payable and current maturities of long-term debt-related party.... 13,349 10,268 --------- --------- Total current liabilities............................................. 24,050 17,847 --------- --------- LONG-TERM DEBT-RELATED PARTY.............................................. 34,709 37,842 DEFERRED INCOME TAXES..................................................... 432 432 MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................. 1,484 2,240 STOCKHOLDER'S DEFICIT: Common stock-$1 par value, 1,000 shares authorized, issued and outstanding........................................................... 1 1 Accumulated deficit..................................................... (14,673) (7,561) --------- --------- (14,672) (7,560) --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................... $ 46,003 $ 50,801 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 50 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Casino......................................................... $ 46,828 $ 47,628 $ 51,007 Food, beverage and other....................................... 6,108 7,046 7,641 --------- --------- --------- 52,936 54,674 58,648 Less promotional allowances...................................... (3,882) (4,238) (5,228) --------- --------- --------- Net revenues..................................................... 49,054 50,436 53,420 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................... 28,869 27,887 26,923 Food, beverage and other....................................... 5,612 6,799 4,894 Other operating expenses....................................... 4,798 5,147 4,757 Selling, general and administrative............................ 11,036 12,346 10,939 Depreciation and amortization.................................. 5,272 5,468 6,379 Referendum expenses............................................ 1,347 --------- --------- --------- 55,587 57,647 55,239 --------- --------- --------- Loss from operations............................................. (6,533) (7,211) (1,819) INTEREST EXPENSE (INCOME): Interest to related party...................................... 1,395 1,402 1,603 Interest, net.................................................. (60) (89) (119) --------- --------- --------- Loss before income taxes and minority interest................... (7,868) (8,524) (3,303) Income tax benefit............................................... 420 965 Minority interest................................................ 756 838 241 --------- --------- --------- Net loss......................................................... $ (7,112) $ (7,266) $ (2,097) --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 51 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RETAINED COMMON EARNINGS SHARES STOCK (DEFICIT) TOTAL ----------- ----------- ---------- ---------- Balance, December 31, 1995............................................. 1,000 $ 1 $ 1,802 $ 1,803 Net loss............................................................. (2,097) (2,097) ----- ----------- ---------- ---------- Balance, December 31, 1996............................................. 1,000 1 (295) (294) Net loss............................................................. (7,266) (7,266) ----- ----------- ---------- ---------- Balance, December 31, 1997............................................. 1,000 1 (7,561) (7,560) Net loss............................................................. (7,112) (7,112) ----- ----------- ---------- ---------- Balance, December 31, 1998............................................. 1,000 $ 1 $ (14,673) $ (14,672) ----- ----------- ---------- ---------- ----- ----------- ---------- ----------
See accompanying notes to consolidated financial statements. 52 ARGOSY OF LOUISIANA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.......................................................................... $ (7,112) $ (7,266) $ (2,097) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation.................................................................. 5,164 5,083 5,780 Amortization.................................................................. 108 385 599 Loss on writedown of asset.................................................... 317 Minority interest............................................................. (756) (838) (241) Deferred income taxes......................................................... (420) (965) Changes in operating assets and liabilities: Accounts receivable......................................................... 183 127 185 Income tax receivable from related party.................................... 25 137 Accrued interest to related party........................................... 1,402 902 Other current assets........................................................ (148) 430 (166) Accounts payable............................................................ (176) (356) (191) Accrued payroll and related expenses........................................ 47 170 138 Other accrued liabilities................................................... 342 467 1,047 --------- --------- --------- Net cash (used in) provided by operating activities....................... (604) (1,179) 4,089 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................... (919) (444) (713) Proceeds from sale of equipment to affiliates..................................... 486 --------- --------- --------- Net cash (used in) provided by investing activities....................... (919) 42 (713) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in amounts due to affiliates............................................. 1,354 1,795 Payments on notes payable and long-term debt...................................... (52) (280) (5,595) Payments on installment contracts................................................. (183) Decrease in other assets.......................................................... 69 --------- --------- --------- Net cash provided by (used in) financing activities....................... 1,119 1,515 (5,526) --------- --------- --------- Net (decrease) increase in cash and cash equivalents.............................. (404) 378 (2,150) Cash and cash equivalents, beginning of year...................................... 3,429 3,051 5,201 --------- --------- --------- Cash and cash equivalents, end of year............................................ $ 3,025 $ 3,429 $ 3,051 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 53 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Argosy of Louisiana, Inc. (collectively with its controlled partnership Catfish Queen Partnership in Commendam ("Partnership") "the Company") was formed on July 29, 1993. The Company entered a partnership agreement with Jazz Enterprises, Inc. ("Jazz") to form the Partnership to provide riverboat gaming and related entertainment in Baton Rouge, Louisiana. The Company is the 90% general partner of the Partnership, along with the 10% partner in commendam Jazz. Both the Company and Jazz are wholly owned subsidiaries of Argosy Gaming Company ("Argosy"). On November 5, 1996 the voters of East Baton Rouge Parish voted to continue to allow riverboat gaming in the parish. Costs associated with the Partnership's efforts to pass this referendum have been reflected in the accompanying statement of operations. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany accounts and transactions have been eliminated. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the estimated useful lives or lease period as follows: Riverboat, dock and improvements........................ 15 to 20 years Furniture, fixtures and equipment....................... 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS--Deferred lease acquisition costs resulted from the contribution of certain leases by Jazz to the Partnership. This cost is amortized on the straight-line method over 20 years. Accumulated amortization was $458 and $350 at December 31, 1998 and 1997, respectively. IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverage and other items which were provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. 54 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The estimated direct cost of providing promotional allowances for food and beverages and other items was $2,333, $2,493 and $2,534 in 1998, 1997 and 1996, respectively, and has been included in food and beverage and other items costs and expenses. ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $1,552, $1,656 and $1,527 in 1998, 1997 and 1996, respectively. INCOME TAXES--Earnings or losses from the Company are included in the consolidated tax returns of Argosy. The Company computes federal and state taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Leasehold and shore improvements.......................................................... $ 6,970 $ 6,967 Riverboat, docks and improvements......................................................... 36,077 36,072 Furniture, fixtures and equipment......................................................... 18,065 16,825 Construction in progress.................................................................. 317 ---------- ---------- 61,112 60,181 Less accumulated depreciation and amortization............................................ (21,442) (16,285) ---------- ---------- Net property and equipment................................................................ $ 39,670 $ 43,896 ---------- ---------- ---------- ----------
3. LONG-TERM DEBT-RELATED PARTY Notes payable and long term debt consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- 8% unsecured note payable to Argosy in quarterly installments of $931 including interest, through July 2001........................................................................ $ 17,527 $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 1999............................. 1,844 1,844 Noninterest-bearing advances from Argosy, no stated maturity.............................. 28,687 28,739 ---------- ---------- 48,058 48,110 Less current maturities................................................................... (13,349) (10,268) ---------- ---------- $ 34,709 $ 37,842 ---------- ---------- ---------- ----------
During 1996, the right to a note payable from the Partnership to the Company was assigned to Argosy. The carrying value of long term debt approximates fair value at December 31, 1998 and 1997. During 1998 and 1997, the Company did not make scheduled debt payments to Argosy. Argosy has agreed to provide operating support to the Company and to the extent necessary will not demand payment on the 55 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT-RELATED PARTY (CONTINUED) current portion of the long-term debt during 1999 and has agreed to not demand payment on the noninterest bearing advances prior to January 1, 2000. Maturities of long term debt, excluding the noninterest bearing advances, but including scheduled payments under the notes payable to Argosy which were due prior to December 31, 1998 and which have not yet been paid are as follows: 1999............................................................ $ 13,349 2000............................................................ 3,337 2001............................................................ 2,685
4. INCOME TAXES Income tax benefit consists of the following:
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- --------- ---------- Deferred: Federal........................................................................... $ $ 384 $ 849 State............................................................................. 36 116 --------- --------- ---------- Total deferred...................................................................... 420 965 --------- --------- ---------- Income tax benefit.................................................................. $ $ 420 $ 965 --------- --------- ---------- --------- --------- ----------
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
1998 1997 --------- --------- Tax over book depreciation................................................................... $ (4,374) $ (4,551) Net operating loss carryforward.............................................................. 8,654 5,981 Pre-opening.................................................................................. 116 270 Other, net................................................................................... 407 409 Minority Interest............................................................................ (432) (432) --------- --------- 4,371 1,677 Valuation allowance.......................................................................... (4,803) (2,109) --------- --------- Net deferred tax assets (liabilities)........................................................ $ (432) $ (432) --------- --------- --------- ---------
56 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES (CONTINUED) The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows:
YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Tax at U. S. statutory rates.................................................... (34.0)% (35.0)% (35.0)% State income tax, net of federal tax benefit.................................... (5.3) (5.3) (3.9) Nondeductible referendum expenses............................................... 16.4 Prior year taxes................................................................ (4.6) Valuation allowance............................................................. 37.7 28.6 Minority interest............................................................... 4.0 2.9 Other, net...................................................................... 1.6 2.8 (5.0) ----- ----- ----- (4.9)% (29.2)% ----- ----- ----- ----- ----- -----
The Company has not recorded any income tax benefit on its operating losses in 1998 and has recorded a valuation allowance against its net deferred tax assets in 1998 and 1997 due to the uncertainty of realization. The Company has tax net operating loss carryforwards of approximately $22,000 which expire from 2010 to 2018. 5. RELATED PARTY TRANSACTIONS The Company leases, for a minimum of five years with six five-year renewal options, a docking site, office and warehouse space from Jazz. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts. Rent expense was approximately $3,354, $3,398 and $3,539 in 1998, 1997 and 1996, respectively. Approximately $2,834, $2,920 and $3,091 in 1998, 1997 and 1996, respectively resulted from the above mentioned lease with Jazz. The Company participates in Argosy's property, general liability, workers compensation and other insurance programs. The Company's share of these costs was approximately $1,474, $2,511 and $1,989 in 1998, 1997 and 1996, respectively. 6. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan which covers substantially all of its full-time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was approximately $169, $392 and $320 in 1998, 1997 and 1996, respectively. 7. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $336 in 1998 which was financed through installment contracts. 57 ARGOSY OF LOUISIANA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED) The Company paid interest of $3, $500 and $2,811 in 1998, 1997 and 1996, respectively. During 1996, Argosy transferred property and equipment to the Company with a fair value of $1,844, subject to an unsecured note payable. During 1996, the Company transferred property and equipment to Jazz with a fair value of $12,471 and recorded a receivable from Jazz in the same amount. The rights to this receivable was assigned to Argosy and reduced the amounts due to Argosy from non-interest bearing advances. 8. COMMITMENTS AND CONTINGENCIES On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional passenger fee, which is now $2.50 per passenger, until actual construction of a hotel commences by Jazz or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1998, the Company has paid all admission payments due under the above agreements. Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31, - ---------------------------------------------------------------------------- 1999........................................................................ $ 631 2000........................................................................ 651 2001........................................................................ 597 2002........................................................................ 243 2003........................................................................ 121
Argosy has issued $235 million of 13.25% First Mortgage Notes, due 2004 ("Mortgage Notes"). The assets of the Company are pledged as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. 58 REPORT OF INDEPENDENT AUDITORS The Partners Catfish Queen Partnership in Commendam We have audited the accompanying balance sheets of Catfish Queen Partnership in Commendam as of December 31, 1998 and 1997, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Catfish Queen Partnership in Commendam at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP New Orleans, Louisiana January 29, 1999 59 CATFISH QUEEN PARTNERSHIP IN COMMENDAM BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................................. $ 3,025 $ 3,429 Accounts receivable, net of allowance for doubtful accounts of $708 and $838.............. 301 484 Inventories............................................................................... 209 145 Other current assets...................................................................... 254 173 --------- --------- Total current assets.................................................................... 3,789 4,231 --------- --------- NET PROPERTY AND EQUIPMENT.................................................................. 39,670 43,579 OTHER ASSETS: Deferred lease acquisition costs, net..................................................... 1,700 1,808 Other..................................................................................... 13 13 --------- --------- Total other assets...................................................................... 1,713 1,821 --------- --------- TOTAL ASSETS................................................................................ $ 45,172 $ 49,631 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable.......................................................................... $ 595 $ 771 Accrued payroll and related expenses...................................................... 966 919 Accrued insurance......................................................................... 1,166 1,246 Accrued gaming taxes...................................................................... 558 501 Other accrued liabilities................................................................. 1,901 1,405 Accrued interest-related party............................................................ 2,304 902 Due to affiliates......................................................................... 3,149 1,795 Notes payable and current maturities of long-term debt-related party...................... 13,349 10,268 --------- --------- Total current liabilities............................................................... 23,988 17,807 --------- --------- LONG-TERM DEBT--RELATED PARTY............................................................... 6,022 9,103 PARTNERS' EQUITY............................................................................ 15,162 22,721 --------- --------- TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 45,172 $ 49,631 --------- --------- --------- ---------
See accompanying notes to financial statements. 60 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Casino......................................................................... $ 46,828 $ 47,628 $ 51,007 Food, beverage and other....................................................... 6,108 7,046 7,641 --------- --------- --------- 52,936 54,674 58,648 Less promotional allowances.................................................... (3,882) (4,238) (5,228) --------- --------- --------- Net revenues..................................................................... 49,054 50,436 53,420 --------- --------- --------- COSTS AND EXPENSES: Casino......................................................................... 28,869 27,887 26,923 Food, beverage and other....................................................... 5,612 6,799 4,894 Other operating expenses....................................................... 4,798 5,147 4,757 Selling, general and administrative............................................ 10,716 12,201 10,786 Depreciation and amortization.................................................. 5,272 5,468 5,644 Referendum expenses............................................................ 1,347 --------- --------- --------- 55,267 57,502 54,351 --------- --------- --------- Loss from operations............................................................. (6,213) (7,066) (931) INTEREST EXPENSE (INCOME): Related parties................................................................ 1,405 1,402 1,603 Other, net..................................................................... (59) (89) (119) --------- --------- --------- (1,346) (1,313) (1,484) --------- --------- --------- NET LOSS......................................................................... $ (7,559) $ (8,379) $ (2,415) --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 61 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
ARGOSY OF JAZZ TOTAL LOUISIANA, ENTERPRISES, PARTNERS' INC. INC. EQUITY ----------- ----------- --------- Partners' equity at December 31, 1995.......................................... $ 30,163 $ 3,352 $ 33,515 Net loss..................................................................... (2,173) (242) (2,415) ----------- ----------- --------- Partners' equity at December 31, 1996.......................................... 27,990 3,110 31,100 Net loss..................................................................... (7,541) (838) (8,379) ----------- ----------- --------- Partners' equity at December 31, 1997.......................................... 20,449 2,272 22,721 Net loss..................................................................... (6,803) (756) (7,559) ----------- ----------- --------- Partners' equity at December 31, 1998.......................................... $ 13,646 $ 1,516 $ 15,162 ----------- ----------- --------- ----------- ----------- ---------
See accompanying notes to financial statements. 62 CATFISH QUEEN PARTNERSHIP IN COMMENDAM STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.......................................................................... $ (7,559) $ (8,379) $ (2,415) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation.................................................................. 5,164 5,083 5,045 Amortization.................................................................. 108 385 599 Changes in operating assets and liabilities: Accounts receivable......................................................... 183 127 185 Other current assets........................................................ (145) 205 353 Accounts payable............................................................ (176) (356) (167) Accrued payroll and related expenses........................................ 47 170 138 Accrued interest to related parties......................................... 1,402 902 (1,195) Other accrued liabilities................................................... 320 404 889 --------- --------- --------- Net cash (used in) provided by operating activities........................... (656) (1,459) 3,432 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................... (919) (444) (713) Proceeds from sale of equipment to affiliates..................................... 486 --------- --------- --------- Net cash (used in) provided by financing activities........................... (919) 42 (713) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in advances from affiliates.............................................. 1,354 1,795 Payment on notes payable and long-term debt-related parties....................... (4,938) Payments on installment contracts................................................. (183) Decrease in other assets.......................................................... 69 --------- --------- --------- Net cash provided by (used in) financing activities........................... 1,171 1,795 (4,869) --------- --------- --------- Net (decrease) increase in cash and cash equivalents.............................. (404) 378 (2,150) Cash and cash equivalents, beginning of period.................................... 3,429 3,051 5,201 --------- --------- --------- Cash and cash equivalents, end of period.......................................... $ 3,025 $ 3,429 $ 3,051 --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 63 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Catfish Queen Partnership in Commendam ("Partnership") provides riverboat gaming and related entertainment in Baton Rouge, Louisiana. The Partnership is comprised of a 90% general partner, Argosy of Louisiana, Inc. ("General Partner") and a 10% partner in commendam, Jazz Enterprises, Inc. ("Jazz"), both wholly owned subsidiaries of Argosy Gaming Company ("Argosy"). On November 5, 1996 the voters of East Baton Rouge Parish voted to continue to allow riverboat gaming in the parish. Costs associated with the Partnership's efforts to pass this referendum have been reflected in the accompanying statement of operations. Net loss is allocated to the partners based on their respective ownership interests. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value at December 31, 1998 and 1997. PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation and amortization is computed on the straight-line method over the estimated useful lives or lease period as follows: 15 to 20 Riverboat, dock and improvements..................... years Furniture, fixtures and equipment.................... 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS--Deferred lease acquisition costs resulted from the contribution of certain leases by Jazz to the Partnership. These costs are amortized on the straight-line method over 20 years. Accumulated amortization was $458 and $350 at December 31, 1998 and 1997, respectively. IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. CASINO REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of food, beverage and other items which were provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances for food and beverages and other items was $2,333, $2,493 and $2,534 in 1998, 1997 and 1996, respectively, and has been included in food and beverage costs and expenses. 64 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $1,552, $1,656 and $1,527 in 1998, 1997 and 1996, respectively. INCOME TAXES--No provision (credit) for federal or state income taxes is recorded in the financial statements, as income taxes are the responsibility of the individual partners. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Leasehold and shore improvements................................................ $ 6,970 $ 6,967 Riverboat, docks and improvements............................................... 36,077 36,072 Furniture, fixtures and equipment............................................... 18,065 16,825 ---------- ---------- 61,112 59,864 Less accumulated depreciation and amortization.................................. (21,442) (16,285) ---------- ---------- Net property and equipment...................................................... $ 39,670 $ 43,579 ---------- ---------- ---------- ----------
3. LONG-TERM DEBT Notes payable and long term debt consists of the following:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- 8% unsecured note payable to Argosy in quarterly installments of $931, including interest, through July 2001................................................... $ 17,527 $ 17,527 Noninterest-bearing unsecured note payable to Argosy due 1999................... 1,844 1,844 ---------- ---------- 19,371 19,371 Less current maturities......................................................... (13,349) (10,268) ---------- ---------- $ 6,022 $ 9,103 ---------- ---------- ---------- ----------
During 1994, the General Partner transferred property and equipment to the Partnership with a fair value of $20,039, subject to an unsecured note payable of $20,039 to the General Partner. In 1996, the General Partner assigned its rights to this note to Argosy. The carrying value of long term debt approximates fair value at December 31, 1998 and 1997. During 1998 and 1997, the Partnership did not make scheduled debt payments to Argosy. Argosy has agreed to provide operating support to the Partnership and, to the extent necessary, will not demand payment on the current portion of the long-term debt during 1999. 65 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT (CONTINUED) Maturities of long term debt, including scheduled payments under the notes payable to Argosy, which were due prior to December 31, 1998 and which have not yet been paid are as follows: 1999............................................................ $ 13,349 2000............................................................ 3,337 2001............................................................ 2,685
4. RELATED PARTY TRANSACTIONS The Partnership leases, for a minimum of five years with six five-year renewal options, a docking site, office and warehouse space from Jazz. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts. Rent expense was $3,354, $3,398 and $3,539 in 1998, 1997 and 1996, respectively. Approximately $2,834, $2,920 and $3,091 in 1998, 1997 and 1996, respectively, resulted from the above mentioned lease with Jazz. The Partnership participates in Argosy's property, general liability, workers compensation and other insurance programs. The Partnership's estimated share of these costs, which is allocated directly to the Partnership by Argosy, was approximately $1,474, $2,511 and $1,989 for the years ended December 31, 1998, 1997 and 1996, respectively. Indirect costs incurred by Argosy, on behalf of the Partnership are not allocated as they are immaterial. 5. EMPLOYEES BENEFIT PLAN The Partnership participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan which covers substantially all of its full-time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Partnership will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized by the Partnership under the Plan was approximately $169, $392 and $320 in 1998, 1997 and 1996, respectively. 6. SUPPLEMENTAL CASH FLOW INFORMATION The Partnership acquired equipment in the amount of $336 in 1998 which was financed through installment contracts. The Partnership paid interest of $3, $500 and $2,811 in 1998, 1997 and 1996, respectively. During 1996, Argosy transferred property and equipment with a fair value of $1,844, subject to an unsecured note payable to Argosy. 7. COMMITMENTS AND CONTINGENCIES On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and Jazz entered into an agreement which requires Jazz and the Company to 66 CATFISH QUEEN PARTNERSHIP IN COMMENDAM NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. COMMITMENTS AND CONTINGENCIES (CONTINUED) pay to the City-Parish $2.50 per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional passenger fee, which is now $2.50 per passenger, until actual construction of a hotel commences by Jazz or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1998, the Partnership has paid all admission payments due under the above agreements. Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31, - ---------------------------------------------------------------------------- 1999........................................................................ $ 631 2000........................................................................ 651 2001........................................................................ 597 2002........................................................................ 243 2003........................................................................ 121
Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The assets of the Partnership are pledged as collateral, and the Partnership is a guarantor, under the terms of the Mortgage Notes. 67 REPORT OF INDEPENDENT AUDITORS Board of Directors Jazz Enterprises, Inc. We have audited the accompanying balance sheets of Jazz Enterprises, Inc. as of December 31, 1998 and 1997, and the related statements of operations, stockholder's deficit and cash flows for the each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Jazz Enterprises, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Ernst & Young LLP Chicago, Illinois January 29, 1999 68 JAZZ ENTERPRISES, INC. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents............................................................. $ 20 Prepaid insurance..................................................................... 110 109 Other current assets.................................................................. 28 --------- --------- Total current assets................................................................ 110 157 --------- --------- NET PROPERTY AND EQUIPMENT.............................................................. 52,733 54,593 GOODWILL, NET........................................................................... 19,325 19,922 NOTE RECEIVABLE......................................................................... 1,892 1,892 OTHER ASSETS............................................................................ 1,636 3,390 --------- --------- TOTAL ASSETS............................................................................ $ 75,696 $ 79,954 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable and accrued liabilities.............................................. $ 2,843 $ 3,000 Current maturities of long-term debt.................................................. 545 491 --------- --------- Total current liabilities........................................................... 3,388 3,491 --------- --------- LONG-TERM DEBT.......................................................................... 6,552 7,165 LONG-TERM DEBT--RELATED PARTY........................................................... 75,625 74,072 STOCKHOLDER'S DEFICIT: Common stock, no par value, 100,000 shares authorized, 200 shares issued and outstanding Accumulated deficit................................................................... (9,869) (4,774) --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................................. $ 75,696 $ 79,954 --------- --------- --------- ---------
See accompanying notes to financial statements. 69 JAZZ ENTERPRISES, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Lease revenue--related party.................................................... $ 2,833 $ 2,920 $ 3,091 Rent revenue.................................................................... 349 378 354 --------- --------- --------- 3,182 3,298 3,445 --------- --------- --------- COSTS AND EXPENSES: Operating expenses.............................................................. 1,100 1,071 593 Selling, general and administrative............................................. 2,882 1,608 1,714 Depreciation and amortization................................................... 2,679 2,354 1,382 Preopening costs................................................................ 100 --------- --------- --------- 6,661 5,033 3,789 --------- --------- --------- Loss from operations.............................................................. (3,479) (1,735) (344) OTHER EXPENSE (INCOME): Interest expense................................................................ 860 909 951 Equity in loss of unconsolidated partnership.................................... 756 838 242 Interest income................................................................. (200) --------- --------- --------- Loss before income taxes.......................................................... (5,095) (3,282) (1,537) Income tax expense................................................................ --------- --------- --------- Net loss.......................................................................... $ (5,095) $ (3,282) $ (1,537) --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 70 JAZZ ENTERPRISES, INC. STATEMENTS OF STOCKHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ACCUMULATED SHARES STOCK DEFICIT TOTAL ----------- ------------- ------------ --------- Balance, December 31, 1995........................ 200 $ 45 $ 45 Net loss........................................ (1,537) (1,537) --- --- ------------ --------- Balance, December 31, 1996........................ 200 (1,492) (1,492) Net loss........................................ (3,282) (3,282) --- --- ------------ --------- Balance, December 31, 1997........................ 200 (4,774) (4,774) Net loss........................................ (5,095) (5,095) --- --- ------------ --------- Balance, December 31, 1998........................ 200 $ (9,869) $ (9,869) --- --- ------------ --------- --- --- ------------ ---------
See accompanying notes to financial statements. 71 JAZZ ENTERPRISES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................................ $ (5,095) $ (3,282) $ (1,537) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization............................................... 2,679 2,354 1,382 Write off of deferred lease costs........................................... 1,200 Equity in losses of unconsolidated partnership.............................. 756 838 242 Other current assets........................................................ 28 (27) 90 Prepaid expenses............................................................ (1) (32) Accounts payable and accrued liabilities.................................... (238) (478) 24 --------- --------- ---------- Net cash (used in) provided by operating activities....................... (671) (627) 201 --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................................ (231) (897) (22,988) --------- --------- ---------- Net cash used in investing activities..................................... (231) (897) (22,988) --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in long-term debt...................................................... 760 Principal payments on long-term debt............................................ (491) (115) (2,191) Advances from affiliate......................................................... 1,553 1,442 25,414 Increase in other assets........................................................ (180) (543) (468) --------- --------- ---------- Net cash provided by financing activities................................. 882 1,544 22,755 --------- --------- ---------- Net (decrease) increase in cash and cash equivalents............................ (20) 20 (32) Cash and cash equivalents at beginning of year.................................. 20 32 --------- --------- ---------- Cash and cash equivalents at end of year........................................ $ $ 20 $ --------- --------- ---------- --------- --------- ----------
See accompanying notes to financial statements. 72 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Jazz Enterprises, Inc., ("Jazz" or "the Company") a Louisiana corporation and a wholly owned subsidiary of Argosy Gaming Company ("Argosy") was incorporated on June 10, 1992 for the purpose of developing a riverboat gaming operation and an entertainment complex, known as "Catfish Town" in Baton Rouge, Louisiana. The Company entered into a partnership ("Partnership") with Argosy of Louisiana, Inc., also a wholly owned subsidiary of Argosy ("ALI") in which the Company owns 10% and ALI owns 90%, to operate a riverboat casino in Baton Rouge, Louisiana. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS--The Company considers cash and all liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash and cash equivalents approximates fair value at December 31, 1997. GOODWILL--Goodwill represents the cost in excess of fair value of net assets acquired, at the date of acquisition, and is amortized over 40 years. Accumulated amortization is $2,138 and $1,541 at December 31, 1998 and 1997, respectively. DEFERRED LEASE COSTS--The Company records tenant buildout allowances as an intangible asset. The deferred lease costs are amortized over the respected life of the lease. During 1998, the Company wrote off $1.2 million of deferred lease costs related to tenants whose businesses failed. This write off is included in selling, general and administrative expenses in the 1998 statement of operations. INVESTMENT IN PARTNERSHIP--The Company records its investment in the Partnership under the equity method as it believes that it has significant influence over the Partnership since the Partnership's parent and Jazz are wholly-owned subsidiaries of Argosy. PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the shorter of the estimated useful lives or lease period as follows: Buildings and improvements............................. 31 years 5 to 7 Furniture, fixtures and equipment...................... years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. The evaluation of the impairment of Jazz's long-lived assets is performed on a combined basis with the long-lived assets of the Partnership, since the assets of Jazz and the Partnership are used together to generate joint cash flows. 73 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RENTAL INCOME--Rental income is recognized over the life of the associated lease. Minimum future rents to be received under operating leases are: 1999......................................................... $ 364 2000......................................................... 341 2001......................................................... 341 2002......................................................... 341 2003......................................................... 85
PREOPENING COSTS--Preopening costs, which consist primarily of labor, training and marketing costs are expensed as incurred. ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $0, $0 and $53 for 1998, 1997 and 1996, respectively. INCOME TAXES--Earnings or losses from the Company are included in the consolidated tax returns of Argosy. The Company computes federal and state taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Land........................................................................................ $ 8,300 $ 8,187 Buildings and improvements.................................................................. 47,023 47,012 Furniture, fixtures and equipment........................................................... 2,453 2,444 --------- --------- 57,776 57,643 Less accumulated depreciation and amortization.............................................. (5,043) (3,050) --------- --------- Net property and equipment.................................................................. $ 52,733 $ 54,593 --------- --------- --------- ---------
3. LONG-TERM DEBT Notes payable and long-term debt consists of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Notes payable to former owner, principal and interest due quarterly through September 2015, discounted at 10.5%........................................................................ $ 7,097 $ 7,656 Noninterest bearing advances from Argosy, no stated maturity................................ 75,625 74,072 --------- --------- 82,722 81,728 Less current maturities..................................................................... (545) (491) --------- --------- $ 82,177 $ 81,237 --------- --------- --------- ---------
74 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT (CONTINUED) The carrying value of long-term debt approximates fair value at December 31, 1998. Maturities of long term debt, excluding the noninterest bearing advances from Argosy, are as follows: 1999....................................................... $ 545 2000....................................................... 604 2001....................................................... 670 2002....................................................... 743 2003....................................................... 825 Thereafter................................................. 3,710
Argosy has indicated that it will not demand payment on the noninterest bearing advances prior to January 1, 2000 and has agreed to provide operating support to the Company during 1999. 4. INCOME TAXES The tax effects of significant temporary differences of the Company representing deferred tax assets and liabilities at December 31, 1998 and 1997 are as follows:
1997 1996 --------- --------- Tax over book depreciation................................................. $ (887) $ (828) Preopening................................................................. 824 824 Net operating loss carryforwards........................................... 4,289 2,287 Other, net................................................................. (325) 20 --------- --------- 3,901 2,303 Valuation allowance........................................................ (3,901) (2,303) --------- --------- Net deferred tax assets.................................................... $ $ --------- --------- --------- ---------
The Company has not recorded any income tax benefit on its operating losses and has recorded a valuation allowance against its net deferred tax assets due to the uncertainty of realization. The Company has tax net operating loss carryforwards of approximately $10,918 which expire from 2008 through 2018. 5. RELATED PARTY TRANSACTIONS The Company leases, for a minimum of five years with six five-year renewal options, a docking site, office and warehouse space to the Partnership. Rent under terms of the lease ranges from 6% to 10% of adjusted gross receipts, as defined. Revenue of $2,833, $2,920 and $3,091 in 1998, 1997 and 1996, respectively, resulted from this lease with the Partnership. 6. SUPPLEMENTAL CASH FLOW INFORMATION During 1996, the Company received property and equipment with a carrying value of $12,471 from Argosy and this amount increased the noninterest bearing advances from related parties. The Company paid interest of $860, $909 and $951 in 1998, 1997 and 1996, respectively. 75 JAZZ ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 7. COMMITMENTS AND CONTINGENCIES On September 21, 1994, the City of Baton Rouge and the Parish of East Baton Rouge (collectively referred to as "City-Parish") and the Company entered into an agreement which required the Company and the Partnership to pay to the City-Parish $2.50 per passenger. Additionally, the Company agreed to pay to the City-Parish an additional passenger fee, which is now $2.50 per passenger, until actual construction of a hotel commences by the Company or another Argosy affiliate. Argosy has guaranteed the additional $2.50 per passenger if required, for the initial five-year certification term approved by the Louisiana Riverboat Gaming Commission. Through December 31, 1998, the Partnership has paid all admission payments due under the above agreements. Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998 are as follows:
YEARS ENDING DECEMBER 31, - ------------------------------------------------------------------------- 1999..................................................................... $ 214 2000..................................................................... 202 2001..................................................................... 202 2002..................................................................... 202 2003..................................................................... 202 Thereafter............................................................... 14,942
Rent expense for the years ended December 31, 1998, 1997, and 1996 was $240, $244 and $283, respectively. Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The assets of the Company are pledged as collateral, and the Company is a guarantor, under the terms of the Mortgage Notes. 76 REPORT OF INDEPENDENT AUDITORS The Board of Directors The Indiana Gaming Company We have audited the accompanying consolidated balance sheets of The Indiana Gaming Company as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Indiana Gaming Company at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Indianapolis, Indiana January 29, 1999 77 THE INDIANA GAMING COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents............................................................... $ 25,491 $ 41,257 Accounts receivable, net of allowance for doubtful accounts of $701 and $347, respectively.......................................................................... 707 382 Deferred income taxes................................................................... 254 74 Other current assets.................................................................... 642 1,179 ---------- ---------- Total current assets.............................................................. 27,094 42,892 ---------- ---------- NET PROPERTY AND EQUIPMENT................................................................ 194,731 176,407 OTHER ASSETS: Deposits................................................................................ 530 Restricted cash and cash equivalents.................................................... 13,114 Intangible assets, net of accumulated amortization of $2,675 and $1,292, respectively... 29,566 30,844 Deferred income taxes................................................................... 722 2,785 ---------- ---------- Total other assets................................................................ 30,288 47,273 ---------- ---------- TOTAL ASSETS.............................................................................. $ 252,113 $ 266,572 ---------- ---------- ---------- ---------- CURRENT LIABILITIES: Accounts payable........................................................................ $ 1,974 $ 5,936 Accrued payroll and related expenses.................................................... 4,195 2,924 Accrued interest and dividends payable-related parties.................................. 2,183 5,260 Installment contracts payable........................................................... 1,961 3,288 Accrued admission and gaming taxes...................................................... 10,835 900 Other accrued liabilities............................................................... 9,402 4,924 Income taxes payable.................................................................... 24,534 5,915 Current maturities of long-term debt.................................................... 11,095 12,856 Current maturities of other long-term obligations....................................... 4,583 ---------- ---------- Total current liabilities......................................................... 66,179 46,586 ---------- ---------- LONG-TERM DEBT............................................................................ 118,933 195,405 OTHER LONG-TERM OBLIGATIONS............................................................... 2,000 MINORITY INTERESTS........................................................................ 30,516 17,656 STOCKHOLDER'S EQUITY Common stock--$.01 par value, 1,000 shares authorized, issued and outstanding........... Retained earnings....................................................................... 36,485 4,925 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................ $ 252,113 $ 266,572 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 78 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- REVENUES: Casino....................................................................... $ 264,352 $ 127,908 $ 3,930 Admissions................................................................... 16,025 7,895 776 Food, beverage, hotel and other.............................................. 24,922 7,005 167 ---------- ---------- --------- 305,299 142,808 4,873 Less promotional allowances.................................................. (20,578) (5,784) (462) ---------- ---------- --------- Net revenues................................................................... 284,721 137,024 4,411 ---------- ---------- --------- COSTS AND EXPENSES: Casino....................................................................... 110,330 58,081 2,116 Food, beverage, hotel and other.............................................. 18,879 5,746 149 Other operating expenses..................................................... 8,222 13,119 711 Selling, general and administrative.......................................... 41,615 21,606 783 Management fees-related parties.............................................. 5,201 1,924 38 Depreciation and amortization................................................ 12,622 10,922 378 Preopening................................................................... 11,036 ---------- ---------- --------- 196,869 111,398 15,211 ---------- ---------- --------- Income (loss) from operations.................................................. 87,852 25,626 (10,800) ---------- ---------- --------- OTHER INCOME (EXPENSE): Interest income.............................................................. 1,205 1,400 127 Interest expense............................................................. (10,254) (3,588) (192) ---------- ---------- --------- (9,049) (2,188) (65) ---------- ---------- --------- Income (loss) before minority interests and income taxes....................... 78,803 23,438 (10,865) Minority interests............................................................. (26,023) (6,989) 4,721 Income tax expense............................................................. (21,220) (3,259) ---------- ---------- --------- Net income (loss).............................................................. $ 31,560 $ 13,190 $ (6,144) ---------- ---------- --------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements. 79 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL RETAINED STOCKHOLDER'S COMMON (DEFICIT) (DEFICIT) SHARES STOCK EARNINGS EQUITY --------- --------- ---------------- --------------- Balance, December 31, 1995................................ 1,000 $ (2,121) $ (2,121) Net loss................................................ (6,144) (6,144) --------- --------- ------- ------- Balance, December 31, 1996................................ 1,000 (8,265) (8,265) Net income.............................................. 13,190 13,190 --------- --------- ------- ------- Balance, December 31, 1997................................ 1,000 4,925 4,925 Net income.............................................. 31,560 31,560 --------- --------- ------- ------- Balance, December 31, 1998................................ 1,000 $ 36,485 $ 36,485 --------- --------- ------- ------- --------- --------- ------- -------
See accompanying notes to consolidated financial statements. 80 THE INDIANA GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss)............................................ $ 31,560 $ 13,190 $ (6,144) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................ 12,622 10,922 453 Deferred taxes........................................... 1,883 (2,859) Loss on disposal of equipment............................ 391 Minority interests....................................... 26,023 6,989 (4,721) Changes in operating assets and liabilities: Accounts receivable...................................... (325) (244) (138) Other current assets..................................... 537 527 (941) Accounts payable......................................... (3,962) 2,821 1,630 Accrued interest payable................................. (1,744) 1,917 656 Income taxes payable..................................... 18,619 5,915 Accrued liabilities...................................... 15,684 6,381 2,289 --------- --------- --------- Net cash provided by (used in) operating activities........ 101,288 45,559 (6,916) --------- --------- --------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow............................. 13,114 1,805 (14,919) Purchases of property and equipment........................ (27,676) (113,141) (52,879) Payments under development agreement....................... (6,583) (13,586) (6,946) --------- --------- --------- Net cash used in investing activities...................... (21,145) (124,922) (74,744) --------- --------- --------- CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: (Decrease) increase in advances from affiliates............ (52,953) 49,812 50,438 Payments on installment contracts.......................... (3,125) (4,116) (1,805) Repayment of long-term debt................................ (21,939) (2,710) Payment of preferred equity return to partner.............. (3,688) (1,163) Partnership equity distributions........................... (10,808) (1,514) Proceeds from contributed capital.......................... 19,044 (Payments on) proceeds from long-term debt................. (3,292) 71,648 23,197 Other...................................................... (104) (553) --------- --------- --------- Net cash (used in) provided by financing activities.......... (95,909) 111,404 90,874 --------- --------- --------- Net (decrease) increase in cash and cash equivalents......... (15,766) 32,041 9,214 Cash and cash equivalents, beginning of year................. 41,257 9,216 2 --------- --------- --------- Cash and cash equivalents, end of year....................... $ 25,491 $ 41,257 $ 9,216 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 81 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--The Indiana Gaming Company, a wholly owned subsidiary of Argosy Gaming Company ("Argosy") (collectively with its controlled partnership Indiana Gaming Company L.P. ("Partnership") "the Company") was formed effective April 11, 1994 to provide riverboat gaming and related entertainment in Lawrenceburg, Indiana. The Company is a 57.5% general partner in the Partnership, together with three limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ Investments, Inc., a 4% limited partner. On December 10, 1996, the Company commenced operations at a temporary site and ceased being in the development stage. The Partnership opened its permanent pavilion on December 10, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. These consolidated financial statements include the accounts of the Company and the Partnership. All significant intercompany transactions have been eliminated. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the following estimated useful lives: Building and leasehold and shore improvements................. 5 to 33 years Riverboat, docks and improvements............................. 5 to 20 years Furniture, fixtures and equipment............................. 5 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents represented funds placed into an escrow account which were used to fund progress payments related to the construction of the Company's permanent landing facility. LICENSE APPLICATION FEES--License application fees associated with obtaining a gaming license have been capitalized and are a part of intangible assets at December 31, 1998 and 1997. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $271 and $141 at December 31, 1998 and 1997, respectively. REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, hotel rooms, food, beverage and other items provided to customers without charge has been included in 82 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1998 1997 1996 --------- --------- --------- Admissions....................................................... $ 11,278 $ 6,935 $ 190 Hotel rooms...................................................... 757 Food, beverage and other......................................... 4,898 1,200 4
PREOPENING COSTS--Preopening costs, which consisted primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. ADVERTISING COSTS--The Company expenses advertising costs as incurred. Advertising expense was $5,245, $4,877 and $503 for the years ended December 31, 1998, 1997 and 1996, respectively. INCOME TAXES--Earnings or losses from the Company are included in the consolidated income tax returns of Argosy. The Company computes federal and state income taxes on a separate return basis. Taxes due are settled between the Company and Argosy in accordance with the terms of a tax sharing arrangement. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Land............................................................ $ 16,045 $ 16,045 Building and leasehold and shore improvements................... 128,923 103,427 Riverboat, docks and improvements............................... 40,191 40,815 Furniture, fixtures and equipment............................... 31,134 21,809 Construction in progress........................................ 4,753 --------- --------- 216,293 186,849 Less accumulated depreciation and amortization.................. (21,562) (10,442) --------- --------- Net property and equipment...................................... $ 194,731 $ 176,407 --------- --------- --------- ---------
83 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT Long-term debt consists of the following at December 31, 1998 and 1997:
1998 1997 ---------- ---------- Capital loans payable to Argosy, noninterest bearing, no stated due date.................. $ 63,125 $ 116,127 Capital loans payable to Conseco, interest at prime plus 6% (13.75% at December 31, 1998) principal paid in annual installments through 2004................... 45,196 67,134 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (8.75% at December 31, 1998)........... 21,707 25,000 ---------- ---------- 130,028 208,261 Less current maturities................................................................... (11,095) (12,856) ---------- ---------- $ 118,933 $ 195,405 ---------- ---------- ---------- ----------
Interest expense on the capital loans from Conseco compounds quarterly to the extent unpaid. The Company is obligated to pay contemporaneously with distributions of Cash Flow, as defined, current and accrued interest and then principal on the capital loans to the Partners, pro rata, in relation to their principal balance of the respective capital loans then outstanding. Capital loans payable to Argosy are paid with distributions of Cash Flow from the Partnership. Interest expense amounted to $10,254 (net of $1,086 capitalized), $3,588 (net of $8,391 capitalized) and $192 (net of $1,680 capitalized) in the years ended December 31, 1998, 1997 and 1996, respectively. Maturities of long-term debt, excluding the capital loans payable to Argosy, at December 31, 1998 are as follows: 1999............................................................... $ 11,095 2000............................................................... 11,475 2001............................................................... 21,736 2002............................................................... 7,533 2003............................................................... 7,533 Thereafter......................................................... 7,531
84 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 4. INCOME TAXES Income tax expense for years ended December 31, 1998, 1997 and 1996 consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Current: Federal................................................ $ 16,863 $ 5,337 State.................................................. 2,474 781 --------- --------- --------- Total current............................................ 19,337 6,118 --------- --------- --------- Deferred: Federal................................................ 1,642 (2,466) State.................................................. 241 (393) --------- --------- --------- Total deferred........................................... 1,883 (2,859) --------- --------- --------- Income tax expense....................................... $ 21,220 $ 3,259 --------- --------- --------- --------- --------- ---------
The provision for income taxes for the year ended December 31, 1998, 1997 and 1996 differs from that computed at the Federal Statutory tax rate as follows:
1998 1997 1996 --------- --------- --------- Federal statutory rate................................................. 35.0% 35.0% (35.0)% State income taxes, net of federal benefit............................. 5.1 5.1 (5.1) Valuation allowance.................................................... (20.0) 39.1 Other.................................................................. 0.1 (0.3) 1.0 --- --------- --------- 40.2% 19.8% % --- --------- --------- --- --------- ---------
The tax effects of significant temporary differences representing deferred tax assets at December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 --------- --------- --------- Depreciation............................................................. $ (1,384) $ -- $ -- Preopening............................................................... 2,106 2,785 3,239 Net operating loss carryforward.......................................... 60 Other, net............................................................... 254 74 5 --------- --------- --------- 976 2,859 3,304 Valuation allowance...................................................... (3,304) --------- --------- --------- $ 976 $ 2,859 --------- --------- --------- --------- --------- ---------
In 1996, the Company recorded a valuation allowance against all of its deferred tax assets due to the uncertainty of realization. The Company utilized a net operating loss carryforward for income tax purposes of approximately $260 during 1997. 85 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amount of $1,798, $4,154 and $5,056 in 1998, 1997 and 1996, respectively, which was financed through installment contracts. The Company paid $12,467 (including $9,908 to related parties), $5,300 (including $5,007 to related parties) and $207 in interest for the years ended December 31, 1998, 1997 and 1996. The Company paid $778 and $143 in taxes for the year ended December 31, 1998 and 1997, respectively. No taxes were paid in 1996. 6. RELATED PARTY TRANSACTIONS The Partnership has entered into a Management Agreement, as amended ("Management Agreement"), with the Company, as the sole and exclusive manager of all operations of the Partnership. The term of the Management Agreement is twenty years, however, the term may be extended in the event that the term of the Partnership is extended beyond the year 2014. The Partnership will pay to the Company a Management Fee in the amount of 12.5% of the operating profit of the Partnership, as defined. Under a separate financial advisory agreement the Company has agreed to pay Conseco a financial advisory fee equal to 40% of the management fee. The partnership agreement stipulates that the Partnership shall distribute excess cash flow, as defined, to the partners at least quarterly, in the following order: (i) partner tax distributions, (ii) prepayment of principal on capital loans, (iii) accrued preferred equity return, (iv) return of preferred equity and, (v) return of common equity. The Company entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals were approximately $500 for these facilities. Total expense recognized under the leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases expired in 1997. Argosy provides certain services for the Company which consist primarily of centralized reservations and insurance. Reimbursement for these expenses has been included in the income statement in the appropriate cost categories. The Company has entered into leases with shareholders of a limited partner for parking lots and outdoor advertising. Total expense recognized under these leases was $106, $107 and $133 in 1998, 1997 and 1996, respectively. 7. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan which covers substantially all of its full-time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized under the Plan was $410, $517 and $52 for the years ended December 31, 1998, 1997 and 1996, respectively. 86 THE INDIANA GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 8. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year, including related party leases, as of December 31, 1998, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1999.................................................................................. $ 503 2000.................................................................................. 262 2001.................................................................................. 16
Rent expense for the years ended December 31, 1998, 1997, 1996 was $745, $6,459 and $2,837, respectively. CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with the terms of a development agreement, the Company entered into a lease with the City of Lawrenceburg for docking privileges for the riverboat casino. The initial term of the lease is for six years and thereafter automatically extends for up to nine renewal term periods of five years each, unless terminated by the Company. Under the terms of the development agreement, the Company pays an annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross Receipts, as defined, with a minimum of $6 million per year. The Company paid the City of Lawrenceburg approximately $33,848 in reimbursements for infrastructure improvements and unrestricted grants. These have been recorded as an intangible asset in the balance sheet at December 31, 1998 and 1997. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the development agreement. Accumulated amortization was $2,256 and $1,151 for the years ended December 31, 1998 and 1997, respectively. BONDING OBLIGATION--The Company is required, by Indiana Gaming Statute, to post a bond in favor of the Indiana Gaming Commission to collateralize certain obligations to the City of Lawrenceburg under the Development Agreement, and to the State of Indiana. This bond is collateralized by certain real estate of the Company. TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the partnership agreement, after December 10, 1999, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests). In the event of this occurrence, if the partners cannot agree on a selling price, the Partnership will be sold in its entirety. GUARANTY OF PARENT OBLIGATIONS--Argosy has issued $235 million of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The Company has pledged its interest in the Partnership, and its rights to certain payments from the Partnership, as collateral, under the terms of the Mortgage Notes. Additionally, the Company is a guarantor of the Mortgage Notes. 87 REPORT OF INDEPENDENT AUDITORS The Partners Indiana Gaming Company, L.P. We have audited the accompanying balance sheets of Indiana Gaming Company, L.P. as of December 31, 1998 and 1997, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indiana Gaming Company, L.P. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Ernst & Young LLP Indianapolis, Indiana January 29, 1999 88 INDIANA GAMING COMPANY, L.P. BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents............................................. $ 25,491 $ 41,257 Accounts receivable, net of allowance for doubtful accounts of $701 and $347, respectively.............................................. 707 382 Other current assets.................................................. 642 1,179 --------- --------- Total current assets................................................ 26,840 42,818 --------- --------- NET PROPERTY AND EQUIPMENT.............................................. 193,469 175,030 OTHER ASSETS: Deposits.............................................................. 589 Restricted cash and cash equivalents.................................. 13,114 Intangible assets, net of accumulated amortization of $2,675 and $1,292, respectively................................................ 29,566 30,844 --------- --------- Total other assets.................................................. 29,566 44,547 --------- --------- TOTAL ASSETS............................................................ $ 249,875 $ 262,395 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable...................................................... $ 2,744 $ 5,936 Accrued payroll and related expenses.................................. 4,195 2,924 Accrued interest and preferred equity return.......................... 4,574 12,571 Installment contracts payable......................................... 1,961 3,288 Accrued admission and gaming taxes.................................... 10,835 900 Other accrued liabilities............................................. 8,360 4,603 Due to affiliates..................................................... 945 1,182 Current maturities of other long-term obligations..................... 4,583 Current maturities of long-term debt.................................. 21,478 25,832 --------- --------- Total current liabilities........................................... 55,092 61,819 --------- --------- LONG-TERM DEBT.......................................................... 107,722 143,570 OTHER LONG-TERM OBLIGATIONS............................................. 2,000 PARTNERS' EQUITY: General partner....................................................... 56,592 37,395 Limited partners...................................................... 30,469 17,611 --------- --------- Total partners' equity.............................................. 87,061 55,006 --------- --------- TOTAL LIABILITIES AND PARTNERS' EQUITY.................................. $ 249,875 $ 262,395 --------- --------- --------- ---------
See accompanying notes to financial statements. 89 INDIANA GAMING COMPANY, L.P. STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES: Casino...................................................... $ 264,352 $ 127,908 $ 3,930 Admissions.................................................. 16,025 7,895 776 Food, beverage, hotel and other............................. 24,922 7,005 167 --------- --------- --------- 305,299 142,808 4,873 Less promotional allowances................................. (20,578) (5,784) (462) --------- --------- --------- Net revenues.................................................. 284,721 137,024 4,411 --------- --------- --------- COSTS AND EXPENSES: Casino...................................................... 110,330 58,081 2,116 Food, beverage, hotel and other............................. 18,879 5,746 149 Other operating expenses.................................... 8,222 13,119 711 Selling, general and administrative......................... 41,615 21,607 685 Management fees-related parties............................. 13,209 4,809 94 Depreciation and amortization............................... 12,567 10,922 378 Preopening.................................................. 10,979 --------- --------- --------- 204,822 114,284 15,112 --------- --------- --------- Income (loss) from operations................................. 79,899 22,740 (10,701) OTHER INCOME (EXPENSE): Interest income............................................. 1,205 1,400 127 Interest expense............................................ (19,874) (7,694) (534) --------- --------- --------- (18,669) (6,294) (407) --------- --------- --------- Net income (loss) prior to preferred equity return............ 61,230 16,446 (11,108) Preferred equity return....................................... (5,554) (5,443) (3,726) --------- --------- --------- Net income (loss) attributable to common equity partners...... $ 55,676 $ 11,003 $ (14,834) --------- --------- --------- --------- --------- ---------
See accompanying notes to financial statements. 90 INDIANA GAMING COMPANY, L.P. STATEMENTS OF PARTNERS' EQUITY (IN THOUSANDS)
COMMON EQUITY (DEFICIT) PREFERRED EQUITY --------------------------------- ----------------------------------- TOTAL GENERAL LIMITED GENERAL LIMITED PARTNERS' PARTNER PARTNERS TOTAL PARTNER PARTNERS TOTAL EQUITY --------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1995................. $ 7,522 $ 1,709 $ 9,231 $ 5,336 $ 5,336 $ 14,567 Capital contributions.................... 3,850 3,850 15,220 15,194 30,414 34,264 Net loss prior to preferred equity return................................. (6,387) (4,721) (11,108) (11,108) Preferred equity return.................. (2,142) (1,584) (3,726) 2,184 1,542 3,726 Accrued preferred equity distribution.... (2,184) (1,542) (3,726) (3,726) --------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1996................. (1,007) (746) (1,753) 20,556 15,194 35,750 33,997 Net income prior to preferred equity return................................. 9,456 6,990 16,446 16,446 Preferred equity return.................. (3,130) (2,313) (5,443) 3,136 2,307 5,443 Accrued preferred equity distribution.... (3,136) (2,307) (5,443) (5,443) Common equity distributions.............. (2,049) (1,514) (3,563) (3,563) Capital contributions.................... 13,569 13,569 13,569 --------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1997................. 16,839 2,417 19,256 20,556 15,194 35,750 55,006 Net income prior to preferred equity..... 35,207 26,023 61,230 61,230 Preferred equity return.................. (3,199) (2,355) (5,554) 3,194 2,360 5,554 Accrued preferred equity distribution.... (3,194) (2,360) (5,554) (5,554) Common equity distributions.............. (14,625) (10,810) (25,435) (25,435) Capital contributions.................... 1,814 1,814 1,814 --------- ----------- --------- ----------- ----------- --------- ----------- Balance, December 31, 1998................. $ 36,036 $ 15,275 $ 51,311 $ 20,556 $ 15,194 $ 35,750 $ 87,061 --------- ----------- --------- ----------- ----------- --------- ----------- --------- ----------- --------- ----------- ----------- --------- -----------
See accompanying notes to financial statements. 91 INDIANA GAMING COMPANY, L.P. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) attributable to common equity partners.................... $ 55,676 $ 11,003 $ (14,834) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............................................. 12,567 10,922 453 Accrued preferred equity dividends........................................ 5,554 5,443 3,726 Loss on disposal of equipment............................................. 391 Changes in operating assets and liabilities: Accounts receivable....................................................... (325) (244) (138) Other current assets...................................................... 537 527 (941) Accounts payable.......................................................... (3,192) 3,502 1,977 Accrued interest payable.................................................. (8,010) 4,625 1,514 Accrued liabilities....................................................... 17,914 5,436 2,289 ---------- ---------- ---------- Net cash provided by (used in) operating activities..................... 81,112 41,214 (5,954) ---------- ---------- ---------- CASH FLOWS USED IN INVESTING ACTIVITIES: Restricted cash held in escrow.............................................. 13,114 1,805 (14,919) Purchases of property and equipment......................................... (27,676) (112,867) (51,955) Payments under development agreement........................................ (6,583) (13,586) (6,946) ---------- ---------- ---------- Net cash used in investing activities................................... (21,145) (124,648) (73,820) ---------- ---------- ---------- CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES: Payments on installment contracts........................................... (3,125) (4,116) (1,805) Payment of preferred return to partners..................................... (8,680) (2,736) Proceeds from contributed capital........................................... 1,814 13,569 34,264 Repayment of long-term debt-related party................................... (36,911) (6,369) Repayment of long-term debt-outside party................................... (3,292) Proceeds from long-term debt................................................ 119,243 56,529 Partnership equity distributions............................................ (25,435) (3,563) Other....................................................................... (104) (553) ---------- ---------- ---------- Net cash (used in) provided by financing activities..................... (75,733) 115,475 88,988 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents.......................... (15,766) 32,041 9,214 Cash and cash equivalents, beginning of year.................................. 41,257 9,216 2 ---------- ---------- ---------- Cash and cash equivalents, end of year........................................ $ 25,491 $ 41,257 $ 9,216 ---------- ---------- ---------- ---------- ---------- ----------
See accompanying notes to financial statements. 92 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Indiana Gaming Company, L.P. ("Partnership"), an Indiana limited partnership, was formed to provide riverboat gaming and related entertainment in Lawrenceburg, Indiana. The Partnership is comprised of a 57.5% general partner, The Indiana Gaming Company ("General Partner"), a wholly owned subsidiary of Argosy Gaming Company, ("Argosy"), and three limited partners including, Conseco Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ Investments, Inc., a 4% limited partner. Net income (loss) is allocated to the partners based on their respective ownership interests. On December 10, 1996, the Partnership commenced operations at a temporary site and ceased being in the development stage. The Partnership opened its permanent pavilion on December 10, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. Partnership loans of $13,569 were reclassified as Partner's equity because the Partnership contribution cap, as defined by the Partnership agreement, was exceeded. CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the following estimated useful lives: Building and leasehold and shore improvements................. 5 to 33 years Riverboat, docks and improvements............................. 5 to 20 years Furniture, fixtures and equipment............................. 5 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents represented funds placed into an escrow account which were used to fund progress payments related to the construction of the Partnership's permanent landing facility. LICENSE APPLICATION FEES--License application fees associated with obtaining a gaming license have been capitalized and included in the balance sheet as a part of intangible assets at December 31, 1998 and 1997. These costs are being amortized over the life of the gaming license, which is five years. Accumulated amortization was $271 and $141 at December 31, 1998 and 1997, respectively. REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of 93 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) admissions, hotel rooms, food, beverage and other items provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
1998 1997 1996 --------- --------- --------- Admissions....................................................... $ 11,278 $ 6,935 $ 190 Hotel rooms...................................................... 757 Food, beverage and other......................................... 4,898 1,200 4
PREOPENING COSTS--Preopening costs, which consisted primarily of labor, vessel rent, training and marketing costs incurred prior to the commencement of gaming operations, were expensed as incurred. ADVERTISING COSTS--The Partnership expenses advertising costs as incurred. Advertising expense was $5,245, $4,877 and $503 for the years ended December 31, 1998, 1997 and 1996, respectively. INCOME TAXES--No provision (credit) for federal or state income taxes is recorded in the financial statements, as income taxes are the responsibility of the individual partners. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Land............................................................ $ 16,045 $ 16,045 Building and leasehold and shore improvements................... 127,605 102,050 Riverboat, docks and improvements............................... 40,191 40,815 Furniture, fixtures and equipment............................... 31,135 21,809 Construction in progress........................................ 4,753 --------- --------- 214,976 185,472 Less accumulated depreciation and amortization.................. (21,507) (10,442) --------- --------- Net property and equipment...................................... $ 193,469 $ 175,030 --------- --------- --------- ---------
94 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, -------------------- 1998 1997 --------- --------- Capital loans payable to partners, interest at prime plus 6% (13.75% at December 31, 1998), principal paid in annual installments through 2004...................................... $ 107,493 $ 144,402 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime plus 1% (8.75% at December 31, 1998).......................................... 21,707 25,000 --------- --------- 129,200 169,402 Less current maturities......................................... (21,478) (25,832) --------- --------- $ 107,722 $ 143,570 --------- --------- --------- ---------
Interest expense on the capital loans from the partners compounds quarterly to the extent unpaid. The Partnership is obligated to pay contemporaneously with distributions of Cash Flow, as defined, current and accrued interest, first, and then principal, on the Capital Loans to the Partners, pro rata, in relation to the principal balances of their respective Capital Loans then outstanding. The Notes payable are collateralized by the vessel and certain equipment. Interest expense to related parties amounted to $18,444 (net of $1,146 capitalized), $7,320 (net of $8,321 capitalized), and $636 (net of $874 capitalized) for the years ended December 31, 1998, 1997, and 1996, respectively. Maturities of long-term debt at December 31, 1998 are as follows: 1999............................................................... $ 21,478 2000............................................................... 21,856 2001............................................................... 32,119 2002............................................................... 17,915 2003............................................................... 17,916 Thereafter......................................................... 17,916
4. PREFERRED EQUITY Under the terms of the partnership agreement governing the Partnership, preferred equity of $35,750 has been contributed to the Partnership. Of this amount $20,556 was contributed by the General Partner and $15,194 was contributed by Conseco. The preferred equity carries a 14% dividend rate which is cumulative and is compounded annually. The preferred equity return is to be paid from available cash flow, as defined, in accordance with the terms of the partnership agreement. 95 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 5. SUPPLEMENTAL CASH FLOW INFORMATION The Partnership acquired equipment in the amount of $1,798, $4,154 and $5,056 in 1998, 1997, and 1996, respectively, which was financed through installment contracts. The Partnership paid $25,889 ($23,329 to related parties), $12,004 ($11,712 to related parties) and $207 in interest for the years ended December 31, 1998, 1997 and 1996, respectively. 6. OTHER RELATED PARTY TRANSACTIONS The Partnership has entered into a Management Agreement, as amended ("Management Agreement"), with the General Partner, as the sole and exclusive manager of all operations of the Partnership. The term of the Management Agreement is twenty years, however, the term may be extended in the event that the term of the Partnership is extended beyond the year 2014. The Partnership will pay to the General Partner a Management Fee in the amount of 12.5% of the operating profit of the Partnership, as defined. Under a separate financial advisory agreement the General Partner has agreed to pay Conseco a financial advisory fee equal to 40% of the Management Fee. The partnership agreement stipulates that the Partnership shall distribute excess cash flow, as defined, to the partners at least quarterly, in the following order: (i) partner tax distributions, (ii) prepayment of principal on capital loans, (iii) accrued preferred equity return, (iv) return of preferred equity and, (v) return of common equity. The Partnership entered into lease agreements with Argosy for the temporary riverboat casino and related landing facility. Aggregate monthly rentals were approximately $500 for these facilities. Total expense recognized under the leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases expired in 1997. Argosy provides certain services for the Partnership which consist primarily of centralized reservations and insurance. Reimbursement for these expenses has been included in the income statement in the appropriate cost categories. The Partnership has entered into leases with shareholders of a limited partner for parking lots and outdoor advertising. Total expense recognized under these leases was $106, $107 and $133 in 1998, 1997, and 1996, respectively. 7. EMPLOYEES BENEFIT PLAN The Company participates in the Argosy Gaming Company Employees Savings Trust, a 401(k) defined contribution plan, which covers substantially all of its full time employees. Participants may contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants contributions in an amount determined annually by the Company. Expense recognized by the Company under the Plan was $410, $517 and $52 for the years ended December 31, 1998, 1997 and 1996, respectively. 96 INDIANA GAMING COMPANY, L.P. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 8. COMMITMENTS AND CONTINGENCIES Future minimum lease payments for operating leases with initial terms in excess of one year, including related party leases, as of December 31, 1998, are as follows:
YEARS ENDING DECEMBER 31, - -------------------------------------------------------------------------------------- 1999.................................................................................. $ 503 2000.................................................................................. 262 2001.................................................................................. 16
Rent expense, including related party leases, for the years ended December 31, 1998, 1997 and 1996 was $745, $6,459 and $2,837, respectively. CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with the terms of a development agreement, the Partnership entered into a lease with the City of Lawrenceburg for docking privileges for its riverboat casino. The initial term of the lease is for six years and thereafter automatically extends for up to nine renewal term periods of five years each, unless terminated by the Partnership. Under the terms of the development agreement, the Partnership pays an annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross Receipts, as defined, with a minimum of $6 million per year. The Partnership paid the City of Lawrenceburg $33,848 in reimbursements for infrastructure improvements and unrestricted grants. Subsequent to the commencement of operations at the temporary site, these have been recorded as an intangible asset in the balance sheet at December 31, 1998 and 1997. The reimbursement for infrastructure improvements and unrestricted city grants are being amortized over the 28 year term, including extensions, of the development agreement. Accumulated amortization was $2,256 and $1,151 at December 31, 1998 and 1997, respectively. BONDING OBLIGATION--The Partnership is required, by Indiana Gaming Statute, to post a bond in favor of the Indiana Gaming Commission to collateralize certain obligations to the City of Lawrenceburg under the Development Agreement, and to the State of Indiana. This bond is collateralized by certain real estate of the Partnership. TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership Agreement, after December 10, 1999, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests). In the event of this occurrence, if the partners cannot agree on a selling price, the Partnership will be sold in its entirety. 97 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 98 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this item is set forth under the captions "Election of Directors" and "Management" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this item is set forth under the caption "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required in response to this item is set forth under the caption "Record Date, Required Vote, Outstanding Shares and Holdings of Certain Stockholders--Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this item is set forth under the caption "Certain Transactions" in the Proxy Statement and is incorporated herein by reference. 99 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K. 1. The following consolidated financial statements of the Company and independent auditors' report thereon, included in the Annual Report, are incorporated by reference in Item 8. The remaining information appearing in the Annual Report is not deemed to be filed as part of this report, except as expressly provided herein. Consolidated Balance Sheets--December 31, 1998 and 1997. Consolidated Statements of Operations--years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows--years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity--years ended December 31, 1998, 1997 and 1996. Notes to Consolidated Financial Statements. Report of Independent Auditors. 2. The following consolidated financial schedules of Argosy Gaming Company are included in response to Item 14 (a): I. Condensed Financial Information of Registrant S-1. All other schedules specified under Regulation S-X for Argosy Gaming Company have been omitted because they are either non-applicable, not required or because the information required is included in the financial statements or notes thereto. 3. The exhibits listed on the "Index to Exhibits" on page 101 are filed with this Form 10-K or incorporated by reference as set forth below. 100 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Certification of Incorporation of the Company (previously filed with the Securities and Exchange Commission ("SEC") as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 4.1 Form of the Company's 13 1/4% First Mortgage Notes due 2004 issued on June 5, 1996 in the aggregate principal amount of $235,000,000 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.2 Form of Guarantee issued on June 5, 1996 by Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.3 Indenture dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and the Guarantors named therein, for the Company's $235,000,000 of 13 1/4% First Mortgage Notes due 2004 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.4 Registration Rights Agreement dated as of June 5, 1996 by and among the Company, the Guarantors named therein and the Initial Purchasers named therein (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.5 Cash Collateral and Disbursement Agreement dated June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and LaSalle National Trust, N.A., as disbursement agent (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.6 Form of Security Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and the Company, as Grantor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.7 Form of Subsidiary Security Agreements dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company, each as a Grantor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
101
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and the Company, as Pledgor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc., The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference). 4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference). 4.17 Form of Securities Purchase Agreement dated May 29, 1998 between the Company and the Buyers named therein (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference).
102
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 4.18 Form of Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock of Argosy Gaming Company (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 4.19 Form of Warrant to Purchase Common Stock (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 4.20 Form of Registration Rights Agreement dated May 29, 1998 between the Company and the Buyers named therein (previously filed with the SEC as an Exhibit to the Company's Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.8 Employment Agreement between the Company and Virginia M. McDowell (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference).
103
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.9 Letter Agreement dated as of January 28, 1993 by and between L. Thomas Lakin and the Alton Riverboat Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference). 10.10 Letter Agreement dated as of January 28, 1993 by and between the Alton Riverboat Gambling Partnership and H. Steven Norton (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference.) 10.11 Letter Agreement dated March 29, 1995 by and between Floyd C. Warmann and the Company (previously filed with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 dated March 31, 1995 and incorporated herein by reference). 10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 10, 1994 and incorporated herein by reference). 10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana Gaming Company as amended by Amendment No. 1 to Management Agreement dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference). 10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
104
EXHIBIT NUMBER DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino-New York, Inc. and The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K dated March 31, 1995 and incorporated herein by reference). 10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as obligee with USF&G, as surety. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). 10.22 Employment Agreement between the Company and James B. Perry (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 10.23 Employment Agreement between the Company and James G. Gulbrandsen. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). 13 Portions of the 1998 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of Contents. 21 List of Significant Subsidiaries 23 Consent of Independent Auditors 24 Power of Attorney 27 Financial Data Schedule
- ------------------------ (b) The following Reports on Form 8-K were filed by the Registrant with the Securities and Exchange Commission during the quarter ended December 31, 1998: 1. Report on Form 8-K dated December 1, 1998, filed with the Securities and Exchange Commission containing the press release regarding an amendment to the Company's Series A Convertible Preferred Stock Agreement. (c) The Exhibits filed herewith, if any, are identified on the Exhibit index 105 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 19th day of March, 1999. ARGOSY GAMING COMPANY By: /s/ JAMES B. PERRY ----------------------------------------- James B. Perry PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the date indicated. NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ JAMES B. PERRY - ------------------------------ President and Chief James B. Perry Executive Officer Vice President--Chief /s/ DALE R. BLACK Financial Officer - ------------------------------ (Principal Accounting Dale R. Black Officer) /s/ EDWARD F. BRENNAN - ------------------------------ Director Edward F. Brennan /s/ FELIX LANCE CALLIS - ------------------------------ Director Felix Lance Callis /s/ WILLIAM F. CELLINI - ------------------------------ Director William F. Cellini /s/ JIMMY F. GALLAGHER - ------------------------------ Director Jimmy F. Gallagher /s/ JOHN BIGGS PRATT, SR. - ------------------------------ Director John Biggs Pratt, Sr. /s/ WILLIAM MCENERY - ------------------------------ Director William McEnery *BY: /s/ DALE R. BLACK ------------------------- Dale R. Black ATTORNEY-IN-FACT March 19, 1999 106 ARGOSY GAMING COMPANY SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) DECEMBER 31, 1998 AND 1997 (ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------- 1998 1997 --------- --------- CURRENT ASSETS: Cash and cash equivalents............................................. $ 50,818 $ 5,787 Income taxes receivable............................................... 747 1,176 Receivables........................................................... 796 698 Deferred income taxes................................................. 183 768 Other current assets.................................................. 1,047 1,677 --------- --------- Total current assets................................................ 53,591 10,106 Net property and equipment............................................ 644 1,153 Restricted cash and cash equivalents.................................. 12,431 Investment in and advances to consolidated subsidiaries............... 332,528 351,356 Other assets.......................................................... 13,028 14,907 Deferred taxes........................................................ 3,546 1,521 --------- --------- TOTAL ASSETS........................................................ $ 403,337 $ 391,474 --------- --------- --------- --------- CURRENT LIABILITIES: Accounts payable and accrued liabilities............................ $ 7,134 $ 8,811 Long-term debt.......................................................... 350,000 350,000 Series A Convertible Preferred Stock, $.01 par value, 10,000,000 shares authorized, 800 shares issued and 547 shares outstanding.............. 5,340 STOCKHOLDERS' EQUITY: Common stock, $.01 par; 60,000,000 shares authorized; 25,830,313 shares issued and outstanding in 1998, and 24,498,333 issued and outstanding in 1997............................................................... 258 245 Capital in excess of par................................................ 74,484 72,038 Accumulated deficit..................................................... (33,879) (39,620) --------- --------- 40,863 32,663 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 403,337 $ 391,474 --------- --------- --------- ---------
See accompanying notes to condensed financial statements. 107 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY) DECEMBER 31, 1998, 1997 AND 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- REVENUES Management fees and other...................................... $ 1,988 $ 5,795 $ 4,875 COSTS AND EXPENSES General and administrative..................................... 9,475 23,035 15,208 Development and preopening costs............................... 509 595 835 --------- --------- --------- 9,984 23,630 16,043 --------- --------- --------- Loss from operations........................................... (7,996) (17,835) (11,168) Net interest expense........................................... (38,356) (32,145) (22,177) Equity in net income (loss) of consolidated subsidiaries....... 27,488 7,287 (6,769) --------- --------- --------- Loss before income taxes and extraordinary item................ (18,864) (42,693) (40,114) Income tax benefit............................................. 25,425 2,480 16,165 --------- --------- --------- Net income (loss) before extraordinary item.................... 6,561 (40,213) (23,949) Extraordinary loss on extinguishment of debt (net of income tax benefit of $594)............................................. (890) --------- --------- --------- Net income (loss).............................................. 6,561 (40,213) (24,839) Preferred stock dividend and accretion......................... (820) --------- --------- --------- Net income (loss) attributable to common shareholders.......... $ 5,741 $ (40,213) $ (24,839) --------- --------- --------- --------- --------- ---------
See accompanying notes to condensed financial statements. 108 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) DECEMBER 31, 1998, 1997 AND 1996 (ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................. $ 6,561 $ (40,213) $ (24,839) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation.................................................. 554 2,100 1,671 Amortization.................................................. 1,904 1,933 1,761 Extraordinary item............................................ 890 Writedown of assets held for sale............................. 9,600 Compensation expense recognized on issuance of stock.......... 239 175 Deferred income taxes......................................... (1,440) 6,454 (8,596) Changes in operating assets and liabilities: Other current assets........................................ 1,808 11,254 (11,741) Accounts payable and accrued liabilities.................... (1,677) (1,714) 2,866 --------- --------- --------- Net cash provided by (used in) operating activities....... 7,949 (10,411) (37,988) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of marketable securities................................ 1,952 Purchases of marketable securities............................ (126) Investment in and advances to subsidiaries.................... 17,969 (53,350) (52,719) Restricted cash held by trustee............................... 12,431 57,201 (69,632) Purchases of property and equipment........................... (58) (2,084) (7,641) --------- --------- --------- Net cash provided by (used in) investing activties.......... 30,342 1,767 (128,166) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit.................................. 44,500 Retirement of line of credit.................................. (90,000) Proceeds from the issuance of long term debt.................. 235,000 Issuance of preferred stock................................... 7,365 Increase in deferred finance costs............................ (85) (9,716) Other......................................................... (625) --------- --------- --------- Net cash provided by (used in) financing activities......... 6,740 (85) 179,784 --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ 45,031 (8,729) 13,630 Cash and cash equivalents, beginning of year.................... 5,787 14,516 886 --------- --------- --------- Cash and cash equivalents, end of year.......................... $ 50,818 $ 5,787 $ 14,516 --------- --------- --------- --------- --------- ---------
See accompanying notes to condensed financial statements. 109 ARGOSY GAMING COMPANY SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY ONLY) DECEMBER 31, 1998, 1997 AND 1996 BASIS OF PRESENTATION The accompanying condensed financial information of Argosy Gaming Company ("Argosy") includes the accounts of Argosy, and on an equity basis, the subsidiaries which it controls. The accompanying condensed financial information should be read in conjunction with the consolidated financial statements of Argosy. 110 EX-13 2 EXHIBIT 13 Exhibit 13 - -------------------------------------------------------------------------------- ANNUAL REPORT 1998 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company, through its subsidiaries or joint ventures, owns and operates the Alton Belle Casino, in Alton, Illinois; the Argosy Casino in Riverside, Missouri; the Belle of Baton Rouge in Baton Rouge, Louisiana; the Belle of Sioux City in Sioux City, Iowa; and the Argosy Casino and Hotel in Lawrenceburg, Indiana. The Lawrenceburg casino opened at a temporary site in Lawrenceburg, Indiana on December 10, 1996, moved to and opened the permanent pavilion on December 10, 1997, and opened a hotel in May 1998. The Company's results of operations for the year ended December 31, 1998 were favorably impacted by improved performance at Lawrenceburg due to the opening of the permanent pavilion in December of 1997, and by improved performance in Alton, Baton Rouge, Riverside and Sioux City due to focused marketing efforts and operating efficiencies. The results of operations of the Company's Baton Rouge casino are significantly impacted by the imposition of a head tax. Under the terms of an agreement with the City of Baton Rouge, the Company is required to pay a head tax of $2.50 per passenger until such time as the Company commences construction of a hotel. Once construction commences, the head tax ceases and the Company would save approximately $3.0 million to $3.5 million annually. The Company is in negotiations with several developers pertaining to the construction of a hotel; however, no assurances can be given as to the timing of the development of a hotel or as to the required financial commitment of the Company. The Company's ability to recover the carrying amount of its long-lived assets in Baton Rouge is dependent on several factors including achieving anticipated operating results, the competitive environment, and the hotel development. If the Company is unable to develop the hotel or if the Company's operating results do not improve through cost efficiencies or following the elimination of video poker at competing outlets, management's evaluation of recoverability could change and the Company could record an impairment loss amounting to a substantial portion of its $115 million Baton Rouge investment. The Company has not recorded any federal tax expense on its 1998 net income or any federal tax benefit on its 1997 net loss, as the Company was in an operating loss carryforward position at December 31, 1998 and 1997. ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (In Thousands)
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- CASINO REVENUES Alton Belle Casino $ 67,798 $ 61,877 $ 72,369 Argosy Casino Riverside 71,955 61,750 82,247 Belle of Baton Rouge Casino 46,828 47,628 51,007 Belle of Sioux City Casino 22,572 20,667 18,835 Argosy Casino Lawrenceburg 264,352 127,908 3,930 ---------- ---------- ----------- Total $ 473,505 $ 319,830 $ 228,388 ---------- ---------- ----------- ---------- ---------- ----------- NET REVENUES Alton Belle Casino $ 72,064 $ 67,208 $ 77,933 Argosy Casino Riverside 76,960 66,548 88,473 Belle of Baton Rouge Casino 49,054 50,436 53,420 Belle of Sioux City Casino 23,526 21,672 19,887 Argosy Casino Lawrenceburg 284,721 137,024 4,412 Other 343 1,195 692 ---------- ---------- ----------- Total $ 506,668 $ 344,083 $ 244,817 ---------- ---------- ----------- ---------- ---------- ----------- INCOME (LOSS) FROM OPERATIONS(1) Alton Belle Casino $ 13,850 $ 7,489 $ 12,240 Argosy Casino Riverside(3) 5,369 2,481 9,410 Belle of Baton Rouge Casino(4) (3,381) (4,146) 3,507 Belle of Sioux City Casino 1,919 848 295 Argosy Casino Lawrenceburg (5) 87,907 25,625 334 Jazz (6,312) (4,655) (3,435) Corporate (6) (9,990) (11,432) (14,207) Other (1,551) 1,701 (1,012) ---------- ---------- ----------- Total $ 87,811 $ 17,911 $ 7,132 ---------- ---------- ----------- ---------- ---------- ----------- EBITDA(1)(2) Alton Belle Casino $ 17,835 $ 11,944 $ 16,446 Argosy Casino Riverside (3) 11,293 8,428 16,134 Belle of Baton Rouge Casino (4) 1,891 1,322 9,151 Belle of Sioux City Casino 3,016 1,861 1,141 Argosy Casino Lawrenceburg (5) 100,474 36,547 712 Jazz (3,633) (2,301) (2,053) Corporate (6) (9,436) (9,324) (12,520) Other (193) 2,726 537 ---------- ---------- ----------- Total $ 121,247 $ 51,203 $ 29,548 ---------- ---------- ----------- ---------- ---------- -----------
(1) Income from operations and EBITDA are presented before consideration of any management fees paid to the Company and in the case of the Belle of Sioux City and the Argosy Casino Lawrenceburg before the 30% and 42.5% minority interests, respectively. (2) "EBITDA" is defined as earnings before interest, taxes, depreciation and amortization and is presented before any management fees paid to Argosy. EBITDA should not be construed as an alternative to operating income, or net income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or as an alternative to cash flows generated by operating, investing and financing activities (as an indicator of cash flow or a measure of liquidity). EBITDA is presented solely as a supplemental disclosure because management believes that it is a widely used measure of operating performance in the gaming industry and for companies with a significant amount of depreciation and amortization. EBITDA may not be comparable to similarly titled measures reported by other companies. The Company has other significant uses of cash flows, including debt service and capital expenditures, which are not reflected in EBITDA. (3) Excludes $3,508 for the year ended December 31, 1996 related to lease termination costs in connection with assets formerly used at the Riverside temporary facility. (4) Excludes operating expenses of $1,347 for the year ended December 31, 1996 related to referendum costs. (5) Excludes preopening expenses of $11,528 for the year ended December 31, 1996. (6) Excludes severance expenses of $1,750 and a loss of $9,600 in connection with a writedown of assets held for sale for the year ended December 31, 1997 and a charge of $1,500 in connection with the termination of a private debt placement for the year ended December 31, 1996. ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 CASINO--Casino revenues for the year ended December 31, 1998, increased by 48.1% to $473.5 million from $319.8 million for the year ended December 31, 1997, due primarily to a $136.4 million increase in casino revenues at the Lawrenceburg casino, which generated total casino revenues of $264.4 million for the year ended December 31, 1998. The Company's other properties reported an aggregate 9.0% increase in casino revenues from $191.9 to $209.2 million. Specifically, Alton casino revenues increased from $61.9 to $67.8 million; Riverside casino revenues increased from $61.8 to $72.0 million; Sioux City casino revenues increased from $20.7 to $22.6 million, offset by a decrease in Baton Rouge casino revenues from $47.6 to $46.8 million. Casino expenses increased 35.3% to $221.7 million for the year ended December 31, 1998, from $163.9 million for the year ended December 31, 1997. This is primarily due to a $52.2 million increase in Lawrenceburg casino expenses associated with the overall increase in Lawrenceburg casino revenues. Casino expenses increased $4.6 million at Riverside in connection with the increase in casino revenues. Alton casino expenses decreased slightly while casino revenues increased 10%. This decrease in casino expenses in Alton is attributable to improved operating efficiencies and the implementation of cost reduction programs. ADMISSIONS--Admissions revenues (net of complimentary admissions) increased from $4.6 million in 1997 to $7.2 million in 1998 due to an increased number of customers at the Lawrenceburg casino. FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased from $34.8 million to $51.1 million for the year ended December 31, 1998, due to the expanded food and beverage facilities in Lawrenceburg. Food, beverage and other net profit improved $5.6 million to $10.5 million for the year ended December 31, 1998, due primarily to this increase in sales. The Lawrenceburg hotel, which opened in May 1998, contributed $2.5 million in net revenues and $0.7 million of operating profit. The hotel occupancy percentage was 73.5% and the average daily room rate was $79. OTHER OPERATING EXPENSES--Other operating expenses decreased from $28.7 million to $26.6 million for the year ended December 31, 1998, due primarily to a decrease at Lawrenceburg of $2.3 million related to renting the temporary vessel in 1997. SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative expenses increased 37.7% to $96.0 million for the year ended December 31, 1998, due primarily to an increase of $20.0 million at Lawrenceburg related to expanded marketing and operating costs of the larger facility, an increase of $2.3 million at Riverside due to expanded marketing efforts and a $1.4 million charge related to a writeoff of deferred lease costs at the Catfish Town real estate project in Baton Rouge. The increase in selling, general and administrative expenses was offset by a $1.5 million decrease at Baton Rouge related primarily to insurance costs. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased slightly to $33.4 million for the year ended December 31, 1998, from $33.3 million in 1997. INTEREST EXPENSE--Net interest expense increased $12.7 million to $53.9 million for the year ended December 31, 1998. The increase in interest expense is primarily attributable to a decrease of $7.3 million in the amount of capitalized interest due to the completion of the final phase of the Lawrenceburg project in June 1998, a weighted average increase of $11.0 million in the balance of partner loans related to the Lawrenceburg casino, and an equipment loan at the Indiana Partnership which was outstanding for the entire year of 1998. NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS--The Company reported net income attributable to common stockholders of $5.7 million for the year ended December 31, 1998 as opposed to a net loss of $40.2 million for the year ended December 31, 1997, due primarily to the factors discussed above. In addition, in 1998, the Company recorded $0.8 million in preferred dividends and accretion related to the sale of Preferred Stock and Warrants in June 1998. In 1997, the Company recorded pretax charges of $9.6 million relating to the write-down of assets held for sale and approximately $1.8 million in severance expenses. Due to its net operating loss position, the Company's effective tax rate for 1998 was 3.4%. ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 CASINO--Casino revenues for the year ended December 31, 1997, increased to $319.8 million from $228.4 million for the year ended December 31, 1996, due to the opening of the Lawrenceburg casino, which generated $127.9 million of casino revenues, offset by decreased revenues at three of the Company's other properties. Alton casino revenues decreased from $72.4 to $61.9 million and Riverside casino revenues decreased from $82.2 to $61.8 million due to the effects of increased competition. Baton Rouge casino revenues decreased from $51.0 to $47.6 million due primarily to an overall decline in the Baton Rouge market. Casino expenses increased to $163.9 million for the year ended December 31, 1997, from $121.0 million for the year ended December 31, 1996, due primarily to the opening of the Lawrenceburg casino. Casino expenses decreased in Alton, Riverside and Baton Rouge in connection with the decline in revenues. ADMISSIONS--Admissions revenues (net of complimentary admissions) increased from $0.6 million in 1996 to $4.6 million in 1997 due to net admission fees in Lawrenceburg. FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased $5.6 million to $34.8 million for the year ended December 31, 1997, due primarily to the opening of the Lawrenceburg casino. Food, beverage and other expenses increased from $23.8 million in 1996 to $30.0 million in 1997 due primarily to the opening of the Lawrenceburg casino. OTHER OPERATING EXPENSES--Other operating expenses increased $9.6 million to $28.7 million for the year ended December 31, 1997. This increase is due primarily to costs associated with operating the Lawrenceburg casino offset somewhat by a $1.1 million decrease in Riverside due to cost control measures. SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative expenses increased $17.7 million to $69.7 million for the year ended December 31, 1997, due primarily to the opening of the Lawrenceburg casino resulting in an increase of $20.9 million. This amount was offset by decreased costs recognized through cost savings initiatives implemented at the Company's other properties and the corporate office, the absence of 1996 expenses of approximately $1.5 million related to the Company's response to a Marion County, Indiana grand jury document subpoena and the related termination of a private placement of first mortgage notes. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $10.9 million from $22.4 million for the year ended December 31, 1996, to $33.3 million for the year ended December 31, 1997. This increase is largely attributable to additional assets associated with the Lawrenceburg casino. DEVELOPMENT AND PREOPENING COSTS--Development and preopening costs decreased from $12.4 million for the year ended December 31, 1996, to $0.6 million for the year ended December 31, 1997, due primarily to expenses related to developing the casino in Lawrenceburg, Indiana in 1996. INTEREST EXPENSE--Net interest expense increased $10.6 million to $41.2 million for the year ended December 31, 1997. The increase is attributable to borrowings on the Company's $235 million First Mortgage Notes that were issued in June 1996. This increase was offset somewhat by $8.4 million of capitalized interest in 1997, as opposed to $3.0 million in 1996. NET LOSS--Net loss increased from $24.8 million for the year ended December 31, 1996, to $40.2 million for the year ended December 31, 1997, primarily for the reasons discussed above. In addition, in 1997, the Company recorded pretax charges of $9.6 million relating to the write-down of assets held for sale and $1.8 million for severance expenses. In 1996 the Company recorded a pretax charge of $3.5 million related to lease termination costs related to assets formerly used at its temporary facility in Riverside. Also, the Company recorded an extraordinary loss of $0.9 million (net of tax) related to the writeoff of deferred finance costs associated with extinguishment of its revolving secured line of credit in 1996. The Company is in a net operating loss position and, therefore, has not recorded any federal tax benefits against its losses for the year ended December 31, 1997. ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES During 1998, the Company generated cash flows from operating activities of $81.7 million compared to $31.6 million for 1997. Cash flows from operating activities increased by $59.5 million for the year ended December 31, 1998 over 1997 after eliminating the effects of income tax refunds in both years. This increase is attributable to substantial cash flow increases from the Lawrenceburg facility as well as improved cash flows from the Company's Alton, Riverside, Baton Rouge and Sioux City properties. During 1998, the Company used cash flows for investing activities of $14.2 million versus $72.6 million for 1997. The primary use of funds in both years was capital investment in the Company's properties including the construction of the Lawrenceburg facility. Overall capital expenditures have decreased between periods reflecting the completion of the Lawrenceburg casino. During 1998, the Company used $37.0 million in cash flows for financing activities compared to generating $62.0 million of cash flows from financing activities for the same period in 1997. The uses of cash flows in 1998 were to repay loans related to the Company's Lawrenceburg casino, partnership equity distributions at the Indiana Partnership, and for payments on installment contracts and other long-term debt, offset by net proceeds of $7.4 million from the sale of Convertible Preferred Stock and Warrants in June 1998. The primary sources of cash flows from financing activities in 1997 were $46.6 million in loans from the Company's partner in Lawrenceburg and $25.0 million in proceeds from an equipment loan at the Lawrenceburg Partnership offset by payments on installment contracts and payments to partners. The Company has outstanding $235 million of First Mortgage Notes, which were issued in June 1996, and are due June 2004 ("Mortgage Notes"). The Mortgage Notes indenture requires the Company to make annual cash offers to purchase Mortgage Notes at 101% of their original issue value in an amount equal to 50% of certain distributions from Indiana Gaming L.P. to the Company when an aggregate of $20 million of these distributions are reached. The Company is expecting to reach the $20 million amount in the first quarter of 1999 and will make the required tender offer to purchase the Mortgage Notes. To the extent the tender offer is not accepted, the funds made available to meet the tender obligation will again be available for general corporate purposes. Additionally, the Company has outstanding $115 million of Convertible Subordinated Notes which were issued in June 1994 and are due June 2001. As of December 31, 1998, the Company had approximately $89.9 million of cash and cash equivalents, including approximately $25.5 million held at the Indiana Partnership. During an ongoing audit, the Internal Revenue Service (IRS) has challenged the S-corporation status of a predecessor entity of the Company. If the IRS challenge is successful, the Company currently estimates that it would require up to approximately $13.5 million (excluding penalties) to fund the potential federal and any state income tax liability. The Company believes it has substantial legal grounds for its tax position related to this matter and is vigorously contesting the IRS challenge; however, no assurance can be given that the Company will not be required to pay some or all of the disputed amount. The Company has made a significant investment in property and equipment and plans to make significant additional investments at certain of its existing properties. In 1999, the Company expects to spend approximately $25 million to fund its capital expenditures program principally related to upgrading its gaming facilities and purchasing gaming equipment. The Company believes that cash on hand and operating cash flows will be sufficient to fund its current operating, capital expenditure and debt service obligations. While the Company believes that its sources of liquidity are sufficient to meet its cash obligations during the next 12 months, the Company's ability to meet its operating and debt service requirements, however, is substantially dependent upon the success of the Lawrenceburg casino. If the operating results of the Lawrenceburg casino would deteriorate significantly or there are any other events that materially impact its sources or uses of cash, the Company may be unable to meet future debt service payments without obtaining additional debt or equity financing or without the disposition of assets. No assurance can be given that the Company would be able to obtain such additional financing on suitable terms or sell assets on favorable terms, if required. ARGOSY GAMING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) MARKET RISK - INTEREST RATE SENSITIVITY The market risk inherent in the Company's financial instruments is the potential loss in fair value arising from adverse changes in interest rates. Currently, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes as the vast majority of the Company's indebtedness is financed at fixed rates. The following table provides information about the Company's debt obligations that are sensitive to changes in interest rates. The following table presents principal cash flows and related weighted-average interest rates by expected maturity dates and estimated fair value of the Company's debt obligations.
FAIR VALUE (dollars in thousands) 1999 2000 2001 2002 2003 THEREAFTER TOTAL 12/31/98 - ---------------------- ---- ---- ---- ---- ---- ---------- ----- -------- Fixed Rate Debt $ 545 $ 604 $ 115,670 $ 743 $ 825 $ 238,710 $357,097 $379,022 Average Interest Rate 10.5% 10.5% 12.0% 10.5% 10.5% 13.3% Variable Rate Debt 11,095 11,474 21,736 7,532 7,533 7,533 66,903 66,903 Average Interest Rate 12.0% 12.0% 10.0% 13.8% 13.8% 13.8%
YEAR 2000 The Company has determined that it will need to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the Year 2000 and beyond. As the Company is dependent on third party software for all of its major applications the Company has initiated discussions with its significant software vendors and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues. Through these discussions, the Company has determined that all of the systems that are critical to the Company's operations are either Year 2000 compliant or that Year 2000 compliant versions exist that can be implemented by the Company. The next phase in the Company's efforts will be to plan for and implement the Year 2000 versions of the software into the Company's systems. The Company has a June 1999 target date to complete its implementation efforts. As of December 31, 1998, the Company has incurred less than $100,000 of costs related to Year 2000 issues. The Company estimates it will incur less than $400,000 in future expenses to ensure all systems will function properly with respect to dates in the Year 2000. These expenses are not expected to have a material impact on the financial position, cash flow or operations of the Company. CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "EXPECT" AND SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS, INCLUDING THOSE REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY OR ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT NOT LIMITED TO, (I) GENERAL ECONOMIC CONDITIONS IN THE MARKETS IN WHICH THE COMPANY OPERATES, (II) INCREASED COMPETITIVE PRESSURES IN THE MARKETS IN WHICH THE COMPANY OPERATES, (III) THE EFFECT OF FUTURE LEGISLATION OR REGULATORY CHANGES ON THE COMPANY'S OPERATIONS, AND (IV) OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING STATEMENTS. ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data)
DECEMBER 31, ------------ 1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 89,857 $ 59,354 Accounts receivable, net of allowance for doubtful accounts of $1,936 and $1,624, respectively 2,375 2,139 Income taxes receivable 747 1,176 Deferred income taxes 1,471 2,011 Other current assets 4,806 5,303 --------- --------- Total current assets 99,256 69,983 --------- --------- Net property and equipment 395,920 390,343 --------- --------- OTHER ASSETS: Restricted cash and cash equivalents 25,545 Deferred finance costs, net of accumulated amortization of $6,363 and $4,312, respectively 8,758 10,809 Goodwill and other intangible assets, net of accumulated amortization of $5,353 and $3,360, respectively 51,817 54,689 Other 7,001 8,487 --------- --------- Total other assets 67,576 99,530 --------- --------- Total assets $562,752 $559,856 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. ARGOSY GAMING COMPANY CONSOLIDATED BALANCE SHEETS (In thousands except share and per share data)
DECEMBER 31, ------------ 1998 1997 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 10,500 $ 12,570 Accrued payroll and related expenses 9,857 8,912 Other accrued liabilities 34,898 27,870 Accrued interest 4,490 6,299 Current maturities of long-term debt 11,640 13,348 ----------- ----------- Total current liabilities 71,385 68,999 ----------- ----------- LONG-TERM DEBT 412,360 436,442 DEFERRED INCOME TAXES 1,943 1,947 OTHER LONG-TERM OBLIGATIONS 201 2,186 MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES 30,660 17,619 COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 17) SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, 547 SHARES ISSUED AND OUTSTANDING 5,340 STOCKHOLDERS' EQUITY: Common stock, $.01 par; 60,000,000 shares authorized; 25,830,313 and 24,498,333 shares issued and outstanding at December 31, 1998 and 1997, respectively 258 245 Capital in excess of par 74,484 72,038 Retained (deficit) earnings (33,879) (39,620) ----------- ----------- Total stockholders' equity 40,863 32,663 ----------- ----------- Total liabilities and stockholders' equity $ 562,752 $ 559,856 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except share and per share data)
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- REVENUES: Casino $ 473,505 $ 319,830 $ 228,388 Admissions 16,025 7,895 2,759 Food, beverage and other 51,057 34,836 29,212 ---------- ---------- ----------- 540,587 362,561 260,359 Less promotional allowances (33,919) (18,478) (15,542) ---------- ---------- ----------- Net revenues 506,668 344,083 244,817 ---------- ---------- ----------- COSTS AND EXPENSES: Casino 221,682 163,935 121,004 Food, beverage and other 40,550 29,962 23,769 Other operating expenses 26,639 28,695 19,111 Selling, general and administrative 96,041 69,725 52,048 Depreciation and amortization 33,436 33,292 22,416 Development and preopening costs 509 594 12,365 Lease termination costs 3,508 Referendum expenses 1,347 Severance expenses 1,750 Write-down of assets held for sale 9,600 ---------- ---------- ----------- 418,857 337,553 255,568 ---------- ---------- ----------- Income (loss) from operations 87,811 6,530 (10,751) ---------- ---------- ----------- OTHER INCOME (EXPENSE): Interest income 3,582 5,937 4,235 Interest expense (57,487) (47,116) (34,842) ---------- ---------- ----------- (53,905) (41,179) (30,607) ---------- ---------- ----------- Income (loss) before minority interests, income taxes and extraordinary item 33,906 (34,649) (41,358) Minority interests (26,205) (6,916) 4,879 Income tax (expense) benefit (1,140) 1,352 12,530 ---------- ---------- ----------- Net income (loss) before extraordinary item 6,561 (40,213) (23,949) Extraordinary loss on extinguishment of debt (net of income tax benefit of $594) (890) ---------- ---------- ----------- Net income (loss) 6,561 (40,213) (24,839) Preferred stock dividends and accretion (820) ---------- ---------- ----------- Net income (loss) attributable to common stockholders $ 5,741 $ (40,213) $ (24,839) ---------- ---------- ----------- ---------- ---------- ----------- Basic net income (loss) per share $ 0.23 $ (1.65) $ (1.02) ---------- ---------- ----------- ---------- ---------- ----------- Diluted net income (loss) per share $ 0.23 $ (1.65) $ (1.02) ---------- ---------- ----------- ---------- ---------- -----------
See accompanying notes to consolidated financial statements. ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands except share and per share data)
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 6,561 $ (40,213) $ (24,839) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 31,011 31,250 21,501 Amortization 4,329 3,968 2,660 Deferred income taxes 536 (753) (3,538) Compensation expense recognized on issuance of stock 239 175 Loss (gain) on the disposal of equipment 789 (153) Minority interests 26,205 6,916 (4,879) Lease termination costs 1,941 Extraordinary item 890 Write-down of assets held for sale 9,600 Changes in operating assets and liabilities: Accounts receivable (236) (221) 1,279 Other current assets 1,184 3,057 (2,033) Accounts payable (2,070) (2,723) 3,011 Accrued liabilities 12,686 10,637 5,614 Income taxes receivable 429 9,935 (8,914) ---------- ---------- ----------- Net cash provided by (used in) operating activities 81,663 31,628 (7,460) ---------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of marketable securities 1,826 Proceeds from sales of property and equipment 153 Long-term obligations (6,583) (13,586) Purchases of property and equipment (34,051) (117,444) (97,409) Other long-term assets 908 (543) 171 Restricted cash held by trustees 25,545 59,006 (84,551) ---------- ---------- ----------- Net cash used in investing activities (14,181) (72,567) (179,810) ---------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 25,000 235,000 Proceeds (net of issuance costs) from sale of Convertible Preferred Stock and Warrants 7,365 Repayment of line of credit (45,500) Payments on installment contracts (3,514) (4,211) (2,991) Payments on long-term debt (3,785) (115) (2,191) Increase in deferred finance costs (638) (9,716) Proceeds from (repayment of) partner loans (21,939) 43,938 23,197 Capital contributions from partner 19,044 Partnership equity distributions (10,808) (1,514) Payment of preferred equity return to partner (3,688) (1,163) Other (610) 712 (7,448) ---------- ---------- ----------- Net cash (used in) provided by financing activities (36,979) 62,009 209,395 ---------- ---------- ----------- Net increase in cash and cash equivalents 30,503 21,070 22,125 Cash and cash equivalents, beginning of year 59,354 38,284 16,159 ---------- ---------- ----------- Cash and cash equivalents, end of year $ 89,857 $ 59,354 $ 38,284 ---------- ---------- ----------- ---------- ---------- -----------
See accompanying notes to consolidated financial statements. ARGOSY GAMING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except share and per share data)
RETAINED TOTAL COMMON CAPITAL IN EARNINGS STOCKHOLDERS' SHARES STOCK EXCESS OF PAR (DEFICIT) EQUITY ------ ----- ------------- --------- ------ Balance, December 31, 1995 24,333,333 $ 243 $ 71,865 $ 25,432 $ 97,540 Net loss (24,839) (24,839) ------------ ------------ ----------- ----------- ------------- Balance, December 31, 1996 24,333,333 243 71,865 593 72,701 Restricted Stock issued 165,000 2 173 175 Net loss (40,213) (40,213) ------------ ------------ ----------- ----------- ------------- Balance, December 31, 1997 24,498,333 245 72,038 (39,620) 32,663 Restricted Stock compensation expense 239 239 Issuance of Convertible Preferred Stock and Warrants (235) (235) Preferred Stock conversion 1,331,980 13 2,442 2,455 Net income 6,561 6,561 Preferred Stock dividends and accretion (820) (820) ------------ ------------ ----------- ----------- ------------- Balance, December 31, 1998 25,830,313 $ 258 $ 74,484 $ (33,879) $ 40,863 ------------ ------------ ----------- ----------- ------------- ------------ ------------ ----------- ----------- -------------
See accompanying notes to consolidated financial statements. ARGOSY GAMING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share and per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION--Argosy Gaming Company (collectively with its subsidiaries, "Argosy" or "Company") is engaged in the business of providing casino style gaming and related entertainment to the public and, through its subsidiaries or joint ventures, operates riverboat casinos in Alton, Illinois; Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana; and Sioux City, Iowa. Indiana Gaming Company, L.P. ("Indiana Partnership"), a limited partnership in which the Company is general partner and holds a 57.5% partnership interest, opened a riverboat casino and related entertainment and support facilities at a temporary site in Lawrenceburg, Indiana on December 10, 1996. The Partnership opened its permanent pavilion on December 10, 1997, and its hotel in May 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of Argosy and its controlled subsidiaries and partnerships. All significant intercompany transactions have been eliminated. Under certain conditions, subsidiaries are required to obtain approval from state gaming authorities before making distributions to Argosy. Certain 1997 and 1996 amounts have been reclassified to conform to the 1998 presentation. CASH AND CASH EQUIVALENTS -- The Company considers cash and all highly liquid investments with an original maturity of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost. Leasehold improvements are amortized over the life of the respective lease. Depreciation is computed on the straight-line method over the following estimated useful lives:
Buildings and shore improvements 5 to 33 years Riverboats, docks and improvements 5 to 20 years Furniture, fixtures and equipment 5 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the expected future undiscounted cash flows from the assets is estimated and compared with the carrying amount of the assets. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the assets, an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets' carrying amount or fair value less costs related to the assets' disposition. DEFERRED FINANCE COSTS -- Deferred finance costs are amortized over the life of the respective loans using the effective interest method. GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill represents the cost in excess of fair value of net assets acquired, and is amortized over 40 years. Other intangible assets, primarily payments to cities, are amortized over the lives of the respective leases or development agreements including extensions. CASINO REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as casino revenues the net win from gaming activities, which is the difference between gaming wins and losses. The retail value of admissions, hotel rooms, food, beverage and other items which were provided to customers without charge has been included in revenues, and a corresponding amount has been deducted as promotional allowances. The estimated direct cost of providing promotional allowances has been included in costs and expenses as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------- ------- ------- Admissions $11,278 $ 6,935 $ 505 Hotel rooms 757 Food, beverage and other 11,505 7,626 4,054
ADMISSIONS REVENUE -- Admissions revenue is recognized at the time the related service is performed. ADVERTISING COSTS -- The Company expenses advertising costs as incurred. Advertising expense was $9,833, $12,475 and $9,192 in 1998, 1997 and 1996, respectively. DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an effort to identify and develop new gaming locations are expensed as incurred, as there can be no assurance that such costs, if capitalized, would be realizable. Preopening costs are expensed as incurred. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ------------ 1998 1997 --------- --------- Land $ 39,002 $ 38,890 Buildings, leasehold and shore improvements 216,067 189,058 Riverboats, docks and improvements 148,162 149,318 Furniture, fixtures and equipment 93,868 78,168 Construction in progress 217 6,695 --------- --------- 497,316 462,129 Less accumulated depreciation and amortization (101,396) (71,786) --------- --------- Net property and equipment $ 395,920 $ 390,343 --------- --------- --------- ---------
3. ASSETS HELD FOR SALE The Company recorded a charge of $9,600 to adjust the carrying value of certain assets held for sale to their estimated fair value in 1997. These assets include the original riverboat casino the Company utilized in Alton, Illinois from September 1991 until May 1993 and a barge utilized as a temporary landing facility in Lawrenceburg, Indiana until December 10, 1997. The estimated fair value of the assets was determined through discussions with a broker and comparison to other riverboats and barges currently available for sale. The adjusted carrying value of the boat and barge of approximately $4,300 is included in other assets in the accompanying balance sheets at December 31, 1998 and 1997. 4. OTHER ACCRUED LIABILITIES Other accrued liabilities consist of the following:
DECEMBER 31, ------------------------------- 1998 1997 -------------- -------------- Accrued gaming and admission taxes $ 12,020 $ 2,386 Installment contracts payable 2,614 3,288 Slot club liability 3,667 2,475 Accrued insurance 4,529 4,400 Current portion of long-term obligations 4,583 Other 12,068 10,738 -------------- -------------- $ 34,898 $ 27,870 -------------- -------------- -------------- --------------
5. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, ------------ 1998 1997 -------- -------- First mortgage notes due June 1, 2004, interest payable semi-annually at 13.25% $235,000 $235,000 Convertible subordinated notes due June 1, 2001, convertible into common stock at $17.70 per share, interest payable semi-annually at 12% 115,000 115,000 Notes payable, principal and interest payments due quarterly through September 2015, discounted at 10.5% 7,097 7,656 Notes payable, principal and interest payments due monthly through December 2001, interest payable at prime + 1% (8.75% at December 31, 1998), secured by gaming vessel and certain equipment 21,707 25,000 Loans from partner, principal due in annual installments through 2004, interest payable at prime + 6% (13.75% at December 31, 1998) 45,196 67,134 -------- -------- 424,000 449,790 Less: current maturities 11,640 13,348 -------- -------- Long-term debt, less current maturities $412,360 $436,442 -------- -------- -------- --------
On June 5, 1996, the Company issued $235,000 of First Mortgage Notes due 2004 ("Mortgage Notes"). The Mortgage Notes are senior obligations of the Company secured by substantially all of its assets, except the assets of the Indiana Partnership, and are guaranteed by substantially all of the Company's subsidiaries, other than the Indiana and Sioux City partnerships. The Mortgage Notes contain certain restrictions on the payment of dividends on the Company's common stock and the occurrence of additional indebtedness, as well as other covenants customary in senior secured financings. Under terms of the indenture governing the Mortgage Notes, Argosy is required to make cash offers to purchase Mortgage Notes, at 101% of their principal amount, at an amount equal to 50% of the proceeds from certain distributions, above specified levels, received from the Indiana Partnership. The Company used a portion of the proceeds from the issuance of the Mortgage Notes to repay and terminate its senior secured line of credit ("Line of Credit"). In connection with this early termination of the Line of Credit, the Company expensed approximately $1,484 of deferred finance costs ($890 net of tax). The convertible subordinated notes ("Notes") are convertible into common stock at any time and may be redeemed by the Company in whole or in part, at specified percentages of principal plus accrued and unpaid interest to the date of redemption. The Notes are subordinated to prior payment in full of all senior indebtedness as defined, including such indebtedness incurred in the future. Interest expense for the years ended December 31, 1998, 1997, and 1996, was $57,487 (net of $1,086 capitalized), $47,116 (net of $8,391 capitalized), and $34,842 (net of $3,033 capitalized), respectively. Maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 11,640 2000 12,078 2001 137,406 2002 8,275 2003 8,358 Thereafter 246,243
6. CONVERTIBLE PREFERRED STOCK AND WARRANTS On June 16, 1998, the Company issued $8,000 of Series A Convertible Preferred Stock ("Preferred Shares"), together with warrants to purchase an additional 292,612 shares of Common Stock at $3.89 per share. The Preferred Shares mature in 2005, and the Company has the right to force conversion and/or redemption at maturity. A portion of the proceeds was allocated to the warrants and this discount will be accreted over seven years. The warrants expire in 2003. The Preferred Shares provide for a 4% dividend per annum, payable in cash and/or in kind, at the time of conversion or maturity, at the Company's option. The Preferred Shares are convertible at the lower of the fixed initial strike price ($3.89 per share) or a floating price. The fixed strike price may be reset downward on March 11, 1999, depending on the then current market price and is subject to adjustment upon the occurrence of certain events. The floating price is based on the market price of the Company's common stock. The Preferred Shares are convertible in increments and become fully convertible on January 10, 1999. The warrants may be exercised at the fixed strike price subject to the same adjustment provisions. This transaction provided for put and call options which, subject to certain restrictions and limitations, allowed for up to an additional $8,000 of Preferred Shares and Warrants to be issued. In December 1998, the Company amended its agreement with the holders of the Preferred Shares to terminate both the holders' right to purchase, and the Company's right to require such holders to purchase, the additional $8 million tranche of Preferred Shares and related warrants. The Company paid $625 to amend the agreement, and this amount is included in preferred stock dividends and accretion in the accompanying statement of operations for 1998. Through December 31, 1998, 253 Preferred Shares had been converted into 1,331,980 shares of common stock. Through January 29, 1999, 443 Preferred Shares had been converted into 2,208,201 shares of common stock. 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- NUMERATOR: Net income (loss) $ 6,561 $ (40,213) $ (24,839) Preferred stock dividends and accretion (820) ----------------- ----------------- ----------------- Numerator for basic and diluted earnings per share Net income (loss) attributable to common stockholders $ 5,741 $ (40,213) $ (24,839) ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- DENOMINATOR: Denominator for basic earnings per share - Weighted-average shares outstanding 24,498,905 24,333,333 24,333,333 Effect of dilutive securities: Restricted stock 105,580 ----------------- ----------------- ----------------- Denominator for diluted earnings per share - adjusted Weighted-average shares and assumed conversions 24,604,485 24,333,333 24,333,333 ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- Basic net income (loss) per share $ 0.23 $ (1.65) $ (1.02) ----------------- ----------------- ----------------- ----------------- ----------------- ----------------- Diluted net income (loss) per share $ 0.23 $ (1.65) $ (1.02) ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
Employee and directors stock options to purchase 1,592,179 shares of common stock at prices ranging from $3.13 to $16.75 were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. Warrants to purchase 292,612 shares of common stock at $3.89 per share were outstanding at December 31, 1998, but were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. Convertible preferred stock (convertible into 1,528,081 weighted-average shares of common stock at December 31, 1998) was not included in the computation of diluted earnings as the amount of dividend and accretion recognized during the year per weighted-average common share obtainable on conversion exceeded basic earnings per share; thus the effect would be anti-dilutive. Twelve percent convertible debentures (convertible into 6,497,175 shares of common stock at $17.70 per share) were outstanding at December 31, 1998, but were not included in the computation of diluted earnings per share as the net interest expense per common share obtainable on conversion exceeded basic earnings per share; thus the effect would be anti-dilutive. 8. INCOME TAXES Income tax benefit (expense) for the years ended December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996 ------------- ------------- ------------- Current: Federal $ $ $ 7,877 State (604) 866 1,117 ------------- ------------- ------------- (604) 866 8,994 ------------- ------------- ------------- Deferred: Federal 2,521 State (536) 486 1,015 ------------- ------------- ------------- (536) 486 3,536 ------------- ------------- ------------- Income tax benefit (expense) $ (1,140) $ 1,352 $ 12,530 ------------- ------------- ------------- ------------- ------------- -------------
The provision for income taxes for the years ended December 31, 1998, 1997 and 1996, differs from that computed at the federal statutory corporate tax rate as follows:
1998 1997 1996 -------------- ------------- -------------- Federal statutory rate 35.0 % (35.0)% (35.0)% State income taxes, net of federal benefit 2.2 (2.6) (2.5) Valuation allowance (7.8) 38.7 Goodwill amortization 0.6 0.4 0.5 Minority interest in partnership income (27.0) (6.7) 4.6 Other, net 0.4 1.3 2.1 -------------- ------------- -------------- 3.4 % (3.9)% (30.3)% -------------- ------------- -------------- -------------- ------------- --------------
The tax effects of significant temporary differences representing deferred tax assets and liabilities at December 31, 1998 and 1997, are as follows:
1998 1997 ----------- ------------ Basis of assets held for sale $ 3,739 $ 3,727 Depreciation (14,241) (13,392) Preopening 3,709 4,755 Benefit of net operating loss carryforward 18,357 17,986 Other, net 575 1,320 ----------- ------------ 12,139 14,396 Valuation allowance (12,611) (14,332) ----------- ------------ Net deferred tax asset (liability) $ (472) $ 64 ----------- ------------ ----------- ------------
The valuation allowance relates to deferred tax assets established under SFAS 109 for net operating loss carryforwards of approximately $42,800 and $46,600 at December 31, 1998 and 1997, respectively. These loss carryforwards, which will expire through 2012, will be carried forward to future years for possible utilization. 9. SUPPLEMENTAL CASH FLOW INFORMATION The Company acquired equipment in the amounts of $2,841, $4,154 and $5,191 in 1998, 1997 and 1996, respectively, which was financed through installment contracts. The Company paid $58,356, $51,185 and $33,302 for interest, and $784, $143 and $332 for income taxes in 1998, 1997 and 1996, respectively. The Company issued 1,331,980 shares of additional common stock upon the conversion of 253 shares of Preferred Stock. 10. LEASES Future minimum lease payments for operating leases with initial terms in excess of one year as of December 31, 1998, are as follows:
YEARS ENDING DECEMBER 31, ------------------------- 1999 $ 1,702 2000 1,231 2001 864 2002 450 2003 328 Thereafter 14,948
Rent expense for the years ended December 31, 1998, 1997 and 1996, was $4,137, $7,205 and $6,204, respectively. 11. STOCK OPTION PLANS The Company adopted the Argosy Gaming Company Stock Option Plan, as amended, ("Stock Option Plan"), which provides for the grant of non-qualified stock options for up to 2,500,000 shares of common stock to key employees of the Company. These options expire 10 years after their respective grant dates and become exercisable over a specified vesting period. At December 31, 1998, options for 843,241 shares are exercisable under the Stock Option Plan. The weighted average life of outstanding options at December 31, 1998 is approximately five years. On November 7, 1997 ("Grant Date"), the Company's board of directors approved a plan that allowed certain employees to exchange their existing stock options for an amount of options equal to the number of options to be exchanged multiplied by a fraction: the numerator of which is $4.25 (closing price on Grant Date) and the denominator of which is the prior option price. This exchange of options was finalized during 1998, and options for 625,373 shares of stock were exchanged for options for 157,524 shares of stock. The Company also has adopted the Argosy Gaming Company 1993 Directors Stock Option Plan ("Directors Option Plan"), which provides for a total of 50,000 shares of common stock to be authorized and reserved for issuance. The Directors Option Plan provides for the grant of non-qualified stock options at fair market value to non-employee directors of the Company as of the date such individuals become directors of the Company. These options expire five years after their respective grant dates and become exercisable over a specified vesting period. At December 31, 1998 options for 6,000 shares are exercisable under the Directors' Option Plan. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation." Accordingly, no compensation expense has been recognized for either stock plan. Had the valuation methods under SFAS 123 been used for the Company's stock option grants, the fiscal 1998 pro forma net income attributable to common shareholders would have been $5,579 and the pro forma income per share would have been $0.23. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of zero; expected volatility 52.7%; risk-free interest rate of 6% and expected option life of three years. The fiscal 1997 pro forma net loss would have been $40,336 and the pro forma loss per share would have been $1.66. The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of zero; expected volatility 36.5%; risk-free interest rate of 6% and expected option life of five years. There was no pro forma compensation expense in 1996. These pro forma amounts may not be representative of future disclosures because the estimated fair value of the options is amortized to expense over the vesting period and additional options may be granted in the future. A summary of stock option activity is as follows:
STOCK OPTION PLAN DIRECTORS OPTION PLAN EXERCISE EXERCISE PRICE PRICE SHARES PER SHARE SHARES PER SHARE ----------------- ---------------------------- ------------ ----------------------- Outstanding, December 31, 1995 2,415,253 $ 16.75 - $ 19.38 21,000 $11.50 - $19.00 Forfeited (10,000) 16.75 ----------------- ---------------------------- ------------ ----------------------- Outstanding, December 31, 1996 2,405,253 16.75 - 19.38 21,000 11.50 - 19.00 Granted 406,000 3.13 - 3.44 Forfeited (744,343) 16.75 - 19.38 ----------------- ---------------------------- ------------ ----------------------- Outstanding, December 31, 1997 2,066,910 3.13 - 19.38 21,000 11.50 - 19.00 Exchange of options (467,849) 4.25 - 19.38 Granted 232,156 3.31 - 3.44 Forfeited (239,038) 4.25 - 19.38 (15,000) 19.00 ----------------- -------------- ------------ ------------ ----------------------- Outstanding, December 31, 1998 1,592,179 $ 3.13 - $ 16.75 6,000 $ 11.50 ----------------- -------------- ------------ ------------ ----------------------- ----------------- -------------- ------------ ------------ -----------------------
12. RESTRICTED STOCK The Company issued 165,000 shares of restricted common stock to certain new employees in 1997. The value of these shares at their respective grant dates ranged from $ 3.13 to $3.63. In 1998, 66,000 shares of the restricted stock vested, and in 2000, 99,000 shares will vest. Compensation expense of $566 is being amortized over the period from the date of grant until the respective vesting dates. Compensation expense of $239 and $175 was recognized in 1998 and 1997, respectively. 13. EMPLOYEES BENEFIT PLAN The Company established a 401(k) defined-contribution plan which covers substantially all of its full-time employees. Participants can contribute a portion of their eligible salaries (as defined) subject to maximum limits, as determined by provisions of the Internal Revenue Code. The Company will match a portion of participants' contributions in an amount determined annually by the Company. Expense recognized under the Plan was approximately $1,134, $2,168 and $1,546 in 1998, 1997 and 1996, respectively. 14. SUBSIDIARY GUARANTORS On June 5, 1996, the Company issued the Mortgage Notes in a private placement transaction. In October 1996, the Company exchanged all of the outstanding privately placed Mortgage Notes for a like amount of identical Mortgage Notes registered with the Securities and Exchange Commission. The Mortgage Notes rank senior in right of payment to all existing and future indebtedness of the Company. The Mortgage Notes are unconditionally guaranteed, on a joint and several basis, by the following wholly owned subsidiaries of the Company: Alton Gaming Company; The Missouri Gaming Company; The St. Louis Gaming Company; Iowa Gaming Company; Jazz Enterprises, Inc.; Argosy of Louisiana, Inc.; Catfish Queen Partnership in Commendam; and The Indiana Gaming Company (the "Guarantors"). The Mortgage Notes are secured, subject to certain prior liens, by a first lien on (i) substantially all of the assets of the Company including the assets used in the Company's Alton, Riverside, Baton Rouge and Sioux City operations, (ii) a pledge of all the capital stock of, and partnership interests in, the Company's subsidiaries, excluding the Company's partnership interest in its Sioux City property, (iii) a pledge of the intercompany notes payable to the Company from its subsidiaries and (iv) an assignment of the proceeds of the management agreement relating to the Lawrenceburg casino project. The collateral for the Mortgage Notes does not include assets of the Indiana Partnership. The following tables present summarized balance sheet information of the Company as of December 31, 1998 and 1997, and summarized operating statement information for the years ended December 31, 1998, 1997 and 1996. The column labeled "Parent Company" represents the holding company for each of the Company's direct subsidiaries; the column labeled "Guarantors" represents each of the Company's direct subsidiaries; all of which are wholly owned by the parent company; and the column labeled "Non-Guarantors" represents the partnerships which operate the Company's casinos in Sioux City and in Lawrenceburg. The Company believes that separate financial statements and other disclosures regarding the Guarantors, except as otherwise required under Regulation S-X, are not material to investors. Summarized balance sheet information as of December 31, 1998 and 1997, is as follows:
DECEMBER 31, 1998 --------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------- ---------- ---------- ------------ ------------ ASSETS: Current assets $ 55,896 $ 22,236 $ 29,585 $ (8,461) $ 99,256 Non-current assets 347,441 360,354 227,439 (471,738) 463,496 -------- -------- -------- ---------- -------- $403,337 $382,590 $257,024 $(480,199) $562,752 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- -------- LIABILITIES AND EQUITY: Current $ 7,134 $ 47,507 $ 59,116 $ (42,372) $ 71,385 Non-current liabilities 350,000 269,878 111,208 (285,922) 445,164 Convertible preferred stocks 5,340 5,340 Stockholders' equity 40,863 65,205 86,700 (151,905) 40,863 -------- -------- -------- ---------- -------- $403,337 $382,590 $257,024 $(480,199) $562,752 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- -------- DECEMBER 31, 1997 --------------------------------------------------------------- PARENT NON- COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED ------- ---------- ---------- ------------ ------------ ASSETS: Current assets $ 10,106 $ 27,874 $ 44,581 $ (12,578) $ 69,983 Non-current assets 381,368 387,009 222,577 (501,081) 489,873 -------- -------- -------- ---------- -------- $391,474 $414,883 $267,158 $(513,659) $559,856 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- -------- LIABILITIES AND EQUITY: Current $ 8,811 $ 20,595 $ 57,088 $ (17,495) $ 68,999 Non-current liabilities 350,000 348,504 169,605 (409,915) 458,194 Stockholders' equity 32,663 45,784 40,465 ( 86,249) 32,663 -------- -------- -------- ---------- -------- $391,474 $414,883 $267,158 $(513,659) $559,856 -------- -------- -------- ---------- -------- -------- -------- -------- ---------- --------
Summarized operating statement information for the years ended December 31, 1998, 1997 and 1996, is as follows:
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------------------------------- PARENT COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------------- ---------------- ---------------------------------- ---------------- Net revenues $ 1,988 $ 230,867 $ 308,246 $ (34,433) $ 506,668 Costs and expenses 9,984 183,735 227,451 (2,313) 418,857 Net interest (expense) income (38,356) 4,067 (18,957) (659) (53,905) Net income (loss) attributable to common stockholders 5,741 27,832 56,285 (84,117) 5,741
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------------------------- PARENT COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------------- ---------------- ---------------------------------- ---------------- Net revenues $ 5,795 $ 189,388 $ 158,696 $ (9,796) $ 344,083 Costs and expenses 23,630 184,818 136,039 (6,934) 337,553 Net interest (expense) income (32,145) 2,366 (6,616) (4,784) (41,179) Net (loss) income (40,213) 8,696 10,599 (19,295) (40,213)
YEAR ENDED DECEMBER 31, 1996 ---------------------------------------------------------------------------------------- PARENT COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED ---------------- ---------------- ---------------------------------- ---------------- Net revenues $ 4,875 $ 211,319 $ 24,299 $ 4,324 $ 244,817 Costs and expenses 16,043 209,955 35,552 (5,982) 255,568 Net interest expense (22,177) (7,176) (738) (516) (30,607) Net (loss) income (24,839) (2,297) (15,718) 18,015 (24,839)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments at December 31, 1998, are as follows:
CARRYING FAIR AMOUNT VALUE ---------------- --------------- Cash and cash equivalents $ 89,857 $ 89,857 First mortgage notes 235,000 258,794 Convertible subordinated notes 115,000 113,131 Other long-term debt 74,000 74,000
The fair value of the first mortgage notes and the convertible subordinated notes are based on quoted market prices. The Company estimates that the fair value of the remainder of the Company's long-term debt approximates carrying value. 16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH --------------- --------------- --------------- ------------- 1998: Net revenues $ 115,700 $ 124,457 $ 133,533 $ 132,978 Income from operations 15,651 19,390 25,697 27,073 Other expense, net 13,482 13,363 13,694 13,366 Net income (loss) attributable to common stockholders (2,537) 244 4,016 4,018 Net income (loss) per share Basic (0.10) 0.01 0.17 0.16 Diluted (0.10) 0.01 0.15 0.14
FIRST SECOND THIRD FOURTH --------------- --------------- --------------- ------------- 1997: Net revenues $ 82,495 $ 87,509 $ 82,351 $ 91,728 Income (loss) from operations (a) 1,961 7,106 933 (3,470) Other expense, net 10,460 9,920 9,778 11,021 Net loss (9,017) (4,265) (9,623) (17,308) Basic and diluted net loss per share (0.37) (0.17) (0.39) (0.71)
(a) Income from operations includes a charge of $1,750 related to severance expense for the first quarter of 1997 and a charge of $9,600 for a write-down of assets held for sale in the fourth quarter of 1997. 17. COMMITMENTS AND CONTINGENT LIABILITIES LAWRENCEBURG, INDIANA--Under terms of the Lawrenceburg partnership agreement, after December 10, 1999, each limited partner has the right to sell its interest to the other partners (pro rata in accordance with their respective percentage interests). In the event of this occurrence, if the partners cannot agree on a selling price, the Indiana Partnership will be sold in its entirety. OTHER--A predecessor entity to the Company ("Predecessor"), as a result of a certain shareholder loan transaction, could be subject to federal and certain state income taxes (plus interest and penalties, if any) if it is determined that it failed to satisfy all of the requirements of the S-Corporation provisions of the Internal Revenue Code relating to the prohibition concerning a second class of stock. An audit is currently being conducted by the Internal Revenue Service ("IRS") of the Company's federal income tax returns for the 1992 and 1993 tax years and the IRS has identified the S-Corporation status as one of the issues, although the IRS has yet to make a formal claim of deficiency. If the IRS successfully challenges the Predecessor's S-Corporation status, the Company would be required to pay federal and certain state income taxes on the Predecessor's taxable income from the commencement of its operations until February 25, 1993 (plus interest and penalties, if any, thereon until the date of payment). If the Predecessor was required to pay federal and state income taxes on its taxable earnings through February 25, 1993, such payments could amount to approximately $13.5 million, including interest through December 31, 1998, but excluding penalties, if any. While the Company believes the Predecessor has legal authority for its position that it is not subject to federal and certain state income taxes because it met the S-Corporation requirements, no assurances can be given that the Predecessor's position will be upheld. This contingent liability could have a material adverse effect on the Company's results of operations, financial condition and cash flows. No provision has been made for this contingency in the accompanying consolidated financial statements. The Company is subject, from time to time, to various legal and regulatory proceedings, in the ordinary course of business. The Company believes that current proceedings will not have a material effect on the financial condition of the Company. REPORT OF INDEPENDENT AUDITORS The Board of Directors Argosy Gaming Company We have audited the accompanying consolidated balance sheets of Argosy Gaming Company as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Argosy Gaming Company at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois January 29, 1999 EX-21 3 EXHIBIT 21 Exhibit 21 LIST OF SIGNIFICANT SUBSIDIARIES The following is a list of the significant subsidiaries of the registrant:
STATE OF PERCENTAGE INCORPORATION OWNERSHIP NAME OF SIGNIFICANT SUBSIDIARY OR ORGANIZATION OF ENTITY - ------------------------------ --------------- --------- Alton Gaming Company Illinois Corporation 100% The Missouri Gaming Company Missouri Corporation 100% The St. Louis Gaming Company Missouri Corporation 100% The Indiana Gaming Company Indiana Corporation 100% Iowa Gaming Company Iowa Corporation 100% Iowa Development Corporation Iowa Corporation 100% Argosy of Louisiana, Inc. Louisiana Corporation 100% Jazz Enterprises, Inc. Louisiana Corporation 100% Catfish Queen Partnership In Commendam Louisiana Partnership 100% Indiana Gaming Company, L.P. Indiana Limited Partnership 57.5% Belle of Sioux City, L.P. Iowa Limited Partnership 70%
EX-23 4 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-76418) pertaining to the Stock Option Plan and Director Option Plan of Argosy Gaming Company of our report dated January 29, 1999, with respect to the consolidated financial statements of Argosy Gaming Company incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1998. Our audits also included the financial statement schedule of Argosy Gaming Company listed in Item 14 (a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Chicago, Illinois March 18, 1999 EX-24 5 EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Argosy Gaming Company, a Delaware corporation, which is about to file with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934 its Annual Report on Form 10-K for its fiscal year ended December 31, 1998 hereby constitutes and appoints James B. Perry and Dale R. Black and each of them, his true and lawful attorneys-in-fact and agents with full power to act without the other, to sign such Annual Report and to file such Annual Report and the exhibits thereto and any and all other documents in connection therewith with the Securities and Exchange Commission, and to do and perform any and all acts and things requisite and necessary to be done in connection with the foregoing as fully as he might or could do in person hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue hereof. Dated: January 21, 1999 /s/ Edward F. Brennan ---------------------------------------- Edward F. Brennan Director /s/ George L. Bristol ---------------------------------------- George L. Bristol Director /s/ Felix Lance Callis ---------------------------------------- Felix Lance Callis Director /s/ William F. Cellini ---------------------------------------- William F. Cellini Director /s/ Jimmy F. Gallagher ---------------------------------------- Jimmy F. Gallagher Director /s/ John Biggs Pratt, Sr. ---------------------------------------- John Biggs Pratt, Sr. Director /s/ William McEnery ---------------------------------------- William McEnery Director EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS OF ARGOSY GAMING COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 89,857 0 4,148 1,936 1,149 99,256 497,316 101,396 562,752 71,385 371,707 5,340 0 258 40,605 562,752 0 506,668 0 418,857 0 922 57,487 7,701 1,140 6,561 0 0 0 6,561 .23 .23
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