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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 19
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
COMMISSION FILE NUMBER: 0-21122
ARGOSY GAMING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1304247
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
219 PIASA STREET, ALTON, ILLINOIS 62002
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (618) 474-7500
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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13 1/4% First Mortgage Notes due 2004 New York
12% Convertible Subordinated Notes due 2001 New York
Common Stock, par value $.01 per share New York
Securities registered pursuant to Section 12(g) of the None
Act:
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 12, 1997, the aggregate market value of the registrant's Common
Stock held by non-affiliates was $54,715,732. The closing price of the Common
Stock on March 12, 1997 as reported on the New York Stock Exchange, was $4.
As of March 12, 1997, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 24,333,333.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1996, and of the registrant's Notice of Annual
Meeting of Stockholders and Proxy Statement for its Annual Meeting of
Stockholders to be held on April 22, 1997 as described in the Cross Reference
Sheet and a Table of Contents included herewith, is incorporated herein by
reference into Parts II and III of this Report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
PAGE REFERENCE
OR
REFERENCE(1)
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PART I
ITEM 1. BUSINESS............................................... 1
ITEM 2. PROPERTIES............................................. 20
ITEM 3. LEGAL PROCEEDINGS...................................... 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS(2)............................... 26
ITEM 6. SELECTED FINANCIAL DATA(3)............................. 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(4)............... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(5)......... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 96
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT(6)....................................... 97
ITEM 11. EXECUTIVE COMPENSATION(7)............................. 97
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT(8)....................................... 97
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(7)..... 97
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................... 98
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(1) Certain information is incorporated by reference, as indicated below, from
the Annual Report to Stockholders for the fiscal year ended December 31,
1996 (the "Annual Report") and the registrant's Notice of Annual Meeting of
Stockholders and Proxy Statement for its Annual Meeting of Stockholders to
be held on April 22, 1997, (the "Proxy Statement").
(2) Proxy Statement section entitled "Market for Registrant's Common Equity and
Related Stockholder Matters."
(3) Annual report, page 19, section entitled "Financial Highlights."
(4) Annual report, pages 21-29, section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(5) Annual report, pages 30-47, sections entitled "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of Cash
Flows," "Consolidated Statements of
Stockholders' Equity," "Notes to Consolidated Financial Statements," and
"Report of Independent Auditors."
(6) Proxy Statement sections entitled "Election of Directors" and "Management."
(7) Proxy Statement sections entitled "Executive Compensation" and "Certain
Transactions."
(8) Proxy Statement section entitled "Record Date, Required Vote, Outstanding
Shares and Holdings of Certain Stockholders--Security Ownership of Certain
Beneficial Owners and Management."
PART I
ITEM 1. BUSINESS
GENERAL
Argosy Gaming Company (the "Company") is a leading multi-jurisdictional
developer, owner and operator of riverboat casinos and related entertainment
facilities in the midwestern and southern United States. The Company, through
its subsidiaries, owns and operates riverboat casinos in Alton, Illinois,
Riverside, Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux
City, Iowa.
The Company's business strategy emphasizes the phased development of
attractive gaming and related entertainment facilities in gaming jurisdictions
that the Company believes possess favorable long-term demographic and
competitive characteristics. As part of this strategy, the Company endeavors to
be an early entrant in emerging gaming markets, to establish a customer base and
to develop its gaming properties in stages. The Company's casinos were the first
gaming facilities to open in each of the St. Louis, Kansas City and Baton Rouge
markets. By employing a phased development strategy, the Company believes it can
reduce its initial capital investment and adapt the nature and scope of
subsequent developments based on a continuing assessment of the size and
competitive outlook of each of the Company's gaming markets. The Company intends
to utilize management's proven ability to successfully open riverboat casino
properties in new markets by continuing to pursue opportunities to develop or
acquire (either independently or through joint ventures) riverboat, dockside
and/or land-based gaming operations.
The Company's operating strategy is to develop a loyal customer base by
offering a variety of gaming and non-gaming entertainment amenities at
attractive facilities that emphasize high standards of service and customer
satisfaction. In each of its gaming markets, the Company establishes marketing
programs that identify, target and attract local patrons typically residing
within a 100-mile radius of its gaming facilities. The Company's marketing
programs are designed to increase customer awareness, patronage and loyalty, as
well as to encourage repeat business. The Company focuses and evaluates its
marketing efforts through player tracking systems, slot clubs and preferred
player clubs and utilizes mass advertising, direct mail and special promotions
to attract customers within each of its gaming markets.
Unless the context otherwise requires, "Company" and "Argosy" shall mean
Argosy Gaming Company and its subsidiaries. The Company's principal executive
offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone
number is (618) 474-7500.
CURRENT OPERATIONS
ALTON BELLE CASINO, ALTON, ILLINOIS
The Company commenced operations in Alton, Illinois in September 1991 as the
first gaming facility to open in the St. Louis market and in the State of
Illinois. The Alton Belle Casino provides casino style gaming on the Mississippi
River at Alton, Illinois, approximately 20 miles northeast of downtown St.
Louis.
The Alton Belle Casino features 22,800 square feet of gaming space with
approximately 650 slot machines and 39 table games for a total of approximately
950 gaming positions. The Alton Belle Casino can board up to approximately 1,500
passengers including a typical crew and casino staff. The Alton Belle Casino
also currently includes a 37,000-square foot, three-level floating entertainment
pavilion that features sports and entertainment lounges, a 120-seat buffet, a
90-seat fine dining restaurant, conference facilities and a food court.
Additionally, the Company is the only gaming operator in the St. Louis market
that offers its customers off-track betting facilities. Parking is available at
an adjacent city-owned surface parking facility and at two sites in the city of
Alton, to and from which the Company provides valet parking as well as free
shuttle service.
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ARGOSY CASINO, RIVERSIDE, MISSOURI
The Argosy Casino began operations in Riverside, Missouri on June 22, 1994
as the first gaming facility to open in the Kansas City market. The Argosy
Casino's riverboat is styled as a turn-of-the-century paddle wheel steamboat and
features approximately 35,000 square feet of gaming space with approximately 950
slot machines and 60 table games for a total of approximately 1,435 gaming
positions.
The Company has constructed a land-based landing and entertainment pavilion,
which opened on January 15, 1996 at a cost of approximately $45 million. The
85,000-square foot, land-based entertainment pavilion features a Mediterranean
theme and includes over 14,000 square feet of banquet and conference facilities,
a 78-seat specialty restaurant, a sports and entertainment lounge and a 350-seat
buffet restaurant. The facility also features 624-space parking garage and a
1,262-space surface parking area located adjacent to the new pavilion.
The Company leases a portion of its site from the City of Riverside,
Missouri, pursuant to a five-year land lease agreement with a minimum aggregate
rent of $5 million for the entire five-year lease period, payable in advance. In
addition to minimum rent, during the initial five-year lease term, percentage
rent will be payable in an amount equal to 3% of adjusted gross receipts over
$100 million annually. The Company will have the option to extend the lease
agreement for three successive five-year terms. In all extension periods, there
will be no minimum rent, and percentage rent will be payable as follow: (i) 3%
on the first $50 million of adjusted gross receipts; (ii) 4% on adjusted gross
receipts between $50 million and $100 million; and (iii) 5% on adjusted gross
receipts in excess of $100 million.
BELLE OF BATON ROUGE, BATON ROUGE, LOUISIANA
The Belle of Baton Rouge began operations in Baton Rouge, Louisiana in
September, 1994 as the first riverboat gaming facility in the Baton Rouge
market. The Belle of Baton Rouge is a three-level, ante-bellum themed riverboat
casino that contains 28,000 square feet of gaming space with approximately 775
slot machines and 43 table games, for a total of 1,125 gaming positions. The
riverboat casino is complemented by the Company's adjacent, land-based
entertainment development known as Catfish Town. The first phase of Catfish Town
opened during 1995 and features a 250-seat entertainment lounge and sports bar,
a 50-seat premium steakhouse, a 250-seat buffet/coffee shop and conference
facilities. The second phase of Catfish Town, an approximately 50,000-square
foot entertainment facility, opened in April 1996. This phase of the development
features a climate-controlled, five-story glass atrium that hosts a variety of
entertainment functions, including banquets, parties, festivals, concerts and
live entertainment events. The third phase of the Catfish Town project will
feature the build-out of approximately 150,000 square feet of leasable retail
space adjacent to the atrium which is expected to feature a variety of
entertainment-related tenants, including specialty restaurants and specialty
retail stores, entertainment venues, nightclubs and a microbrewery. A 733-space
parking garage and a leased 271-space surface parking lot are located adjacent
to Catfish Town.
The Company has entered into a letter of intent with Southern Hospitality
Corporation ("SHC") for the ownership and construction of a 300-room hotel at
Catfish Town. Pursuant to the terms of the agreement, the Company will have a
49% interest and SHC will have a 51% interest in a joint venture which will own,
construct and operate the convention hotel. The Company will contribute the
required land, building improvements, and the use of certain atrium areas in
return for its equity interest. The Company is not, however, required to
contribute any cash to fund the entity. SHC has agreed to contribute up to $7.0
million in equity. The agreement is subject to numerous conditions precedent
including, but not limited to, SHC obtaining separate non-recourse project
financing.
LAWRENCEBURG CASINO, LAWRENCEBURG, INDIANA
In June 1995, Indiana Gaming Company, L.P., a joint-venture subsidiary of
the Company ("Indiana Partnership"), was awarded the right to develop and
operate a riverboat casino and entertainment complex
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in Lawrenceburg, Indiana, which is located approximately 15 miles west of
Cincinnati, Ohio. The Company is the sole general partner of, and holds a 57.5%
general partnership interest in, the Indiana Partnership. Conseco Entertainment
L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited
partnership interest and certain other investors, including H. Steven Norton,
Chief Operating Officer of the Company, who brought the opportunity to the
Company concurrent with his initial employment, hold the remaining 13.5% limited
partnership interest in the Indiana Partnership.
On December 10, 1996 the Indiana Partnership commenced operations at a
temporary site with a leased vessel with approximately 20,500 square feet of
gaming space. The vessel, which has a capacity of 1,600 passengers, features
approximately 870 slot machines and 52 table games for a total of approximately
1,275 gaming positions. In addition, the Partnership leases, from the Company,
an approximately 24,000 square foot floating entertainment and support facility
which features ticketing and holding areas, a food court, two bars and a gift
kiosk. Parking for the temporary facility is provided at a 1,400 space satellite
lot. The Indiana Partnership provides free shuttle service from the parking lot
to the temporary site.
The Indiana Partnership operates pursuant to a partnership agreement entered
into among the partners as of April 11, 1994, as amended and restated as of
February 21, 1996. Under the provisions of this agreement, the Company manages
the development, construction and operation of the Lawrenceburg Casino project
and receives a management fee of 7.5% of EBITDA (as defined in the partnership
agreement). Conseco receives a financial advisory fee of 5% of EBITDA.
The Indiana Partnership is building what it believes to be one of the
largest riverboat casinos in the United States, featuring approximately 74,300
square feet of gaming space on three levels. The permanent riverboat casino is
expected to initially have approximately 2,800 gaming positions and accommodate
approximately 4,400 passengers and crew members. In addition to the new
riverboat casino, it is anticipated that the permanent facility will include a
300-room hotel, a 1,750-space parking garage, 2,000 additional surface parking
spaces and a 120,000-square foot land-based entertainment pavilion and support
facility featuring specialty restaurants, meeting and banquet rooms and an
entertainment lounge. The Company estimates that the total cost to open the
temporary facility and to construct the proposed permanent riverboat casino,
land-based facilities and 300-room hotel will be approximately $225 million.
Funding for the permanent casino is being provided by the Company and Conseco,
57.5% of which will be funded by the Company and 42.5% of which will be funded
by Conseco. Any project costs in excess of $225 million must be funded solely by
the Company.
Under Indiana gaming laws the Indiana Partnership's permanent facility must
be completed by December 10, 1997 as the Indiana Partnership may only operate at
its temporary site for one year. The Company anticipates that the permanent
vessel will be completed in the third quarter of 1997; however, numerous factors
could result in the failure of the permanent land based facility to be fully
completed by December 10, 1997, such as: construction delays, flooding along the
Ohio River which has already occurred and which may reoccur this spring, failure
to maintain permits previously issued by the U.S. Army Corps of Engineers, the
discovery of historically significant artifacts which would cause a stoppage or
slowdown in the construction or a work stoppage or strike at the site. The
Company is unable to determine the consequences resulting from the failure to
fully complete the permanent facility by December 10, 1997 due to the absence of
specifity in Indiana gaming law as to what is required and the fact that there
is no precedent for such event. The failure to fully complete the permanent
facility by December 10, 1997 could have a material adverse effect on the
financial condition and results of operations of the Company.
BELLE OF SIOUX CITY, SIOUX CITY, IOWA
The Company became the manager of the Belle of Sioux City on October 4, 1994
and on December 1, 1994 began operating the Belle of Sioux City through a
partnership in which the Company is a 70% general partner and Sioux City
Riverboat Corp., Inc. is a 30% limited partner. The Company receives a
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management fee of 4.5% of the facility's adjusted gross gaming revenues (as
defined in the management agreement).
The Company has leased to the partnership a 27,000-square foot, three-level
historic themed riverboat casino with room for 1,400 passengers and crew. The
Belle of Sioux City features approximately 12,500 square feet of gaming space
with approximately 400 slot machines and 28 table games, for a total of
approximately 620 gaming positions. The casino facility is complemented by an
adjacent barge facility, which features buffet dining, a bar and a gift shop,
and 274 surface parking spaces.
POTENTIAL FUTURE PROJECTS
OSCEOLA, IOWA
In December 1996 the Company filed an application to develop a riverboat
casino in Osceola, Iowa ("Osceola Project"). The proposed casino operation is
subject to numerous conditions including approval and licensing by the Iowa
Racing and Gaming Commission ("IRGC"). The Company currently estimates that the
cost of developing the Osceola Project would range from $60-$70 million if the
Osceola project is approved by the IRGC and the Company decides to pursue the
development of the project.
COMPETITION
The Company's Alton Casino faces competition from four other riverboat
casino facilities currently operating in the St. Louis area and expects a
significant increase in the level of competition in the future. The most recent
casino complex to open includes two independently owned facilities, each of
which operate two dockside vessels. This casino complex, which increased gaming
capacity in St. Louis by approximately 50%, opened in March of 1997. The
Company's Riverside Casino faces competition from four casino companies in the
Kansas City area that offer dockside gaming, two of which offer two gaming
vessels each. The Company's Baton Rouge Casino faces competition from one casino
located in downtown Baton Rouge, a nearby native American casino and multiple
casinos throughout Louisiana. Currently, the Company faces competition in Sioux
City, Iowa, from two land-based Native American casinos, slot machines at a
pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in
the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in January 1996.
The Indiana Partnership faces competition from one other riverboat casino in the
Cincinnati market, which opened in October 1996. There could be further
unanticipated competition in any market which the Company operates as a result
of legislative changes or other events. The Company expects each market in which
it participates, both current and prospective, to be highly competitive.
EMPLOYEES
As of December 31, 1996, the Company had approximately 3,460 full-time
employees. Approximately 1,260 employees are represented by the Seafarers
International Union of North America. The collective bargaining agreement with
that union expires in June, 2001. Twelve employees are represented by the
International Brotherhood of Electrical Workers. The Company has not experienced
any work stoppages and believes its relations with its employees are generally
satisfactory.
LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT
GENERAL
On June 30, 1995, the Indiana Partnership, received a preliminary
certificate of suitability from the Indiana Gaming Commission to develop and
operate the Lawrenceburg Casino project. The Company is the sole general partner
of, and holds a 57.5% general partnership interest in, Indiana Partnership.
Conseco holds a 29% limited partnership interest and certain other investors,
including H. Steven Norton,
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Chief Operating Officer of the Company, who brought the opportunity to the
Company concurrent with his initial employment, hold the remaining 13.5% limited
partnership interests in the Indiana Partnership.
The Indiana Partnership operates pursuant to a partnership agreement entered
into among the partners as of April 11, 1994, as amended and restated as of
February 21, 1996. The Indiana Gaming Company manages the partnership pursuant
to a management agreement and as general partner, subject only to certain
actions or major decisions requiring the consent of a majority in interest of
the limited partners. Under the provisions of the partnership agreement and the
management agreement, the Company will manage the development, construction and
operation of the Lawrenceburg Casino project and will receive a management fee
of 7.5% of EBITDA (as defined in the partnership agreement) and Conseco will
receive a financial advisory fee of 5% of EBITDA. The Company estimates the
total cost to open the temporary gaming facility and to construct the proposed
permanent riverboat casino, land-based facilities and 300-room hotel will be
approximately $225 million.
PROJECT FUNDING
It is currently anticipated that the budgeted $225 million total project
cost will be funded as follows: (i) $52.5 million by capital contributions by
the partners of which $16.75 million constitutes common equity and $35.75
million constitutes preferred equity. The Company has contributed 57.5% of the
common equity, in the amount of approximately $9.6 million, and has contributed
57.5% of the preferred equity, in the amount of approximately $20.6 million. The
remainder of the common and preferred equity has been contributed by Conseco.
The remainder of the cost of the Lawrenceburg Casino is expected to be funded by
third party financing and capital loans from the Company and Conseco. Any
capital loans are to be funded 57.5% by the Company and 42.5% by Conseco,
pursuant to agreements under which Conseco will fund both its and such other
limited partners' share of such capital loans. Conseco is obligated to fund
42.5% of any capital loans until project costs exceed the $225 million total
project cost. At December 31, 1996 approximately $56,529 of capital loans have
been made to the Indiana Partnership by the Company and Conseco.
For project costs in excess of $210 million, the Company and Conseco will
make capital loans of up to $15 million in the aggregate, 57.5% of which will be
funded by the Company and 42.5% by of which will be funded Conseco; provided
that Conseco will receive an interest rate 700 basis points higher than the
Company on the last $10 million contributed. Any project costs over $225 million
will be funded solely by the Company without a return or compensation.
PARTNER DISTRIBUTIONS
The Lawrenceburg Casino partnership agreement sets forth the manner in which
cash flow of the Indiana Partnership will be distributed. Pursuant to the
agreement, principal on capital loans will be repaid on an eight-year amortizing
schedule and cash flow (after repayment of principal of, and interest on,
capital loans) will be distributed by the general partner not less frequently
than quarterly: (i) first, to the partners pro rata for tax payments in an
amount equal to their taxable net income for such period; (ii) second, to the
partners as a prepayment of principal on capital loans to be applied in the
inverse order of maturity, up to 75% of the remaining cash flow; (iii) third, in
payment of a preferred return of 14% on any preferred equity contributed by the
partners; (iv) fourth, as a return of the preferred equity contributed by the
partners; (v) fifth, as a return of common equity contributed by the partners;
and (vi) sixth, to the partners in accordance with their respective percentage
interests. The partnership agreement provides that the net cash proceeds from a
sale or refinancing are distributed by the general partner in the same order as
cash flow except that the proceeds will be used to repay 100% of outstanding
capital loans by the partners.
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GENERAL PARTNER REMOVAL
The Lawrenceburg Casino partnership agreement provides that the Company's
wholly-owned subsidiary, The Indiana Gaming Company, can be removed as general
partner of the partnership by the limited partners under certain limited
circumstances, including: (i) a material breach (after notice and expiration of
applicable cure periods) of certain material provisions of the partnership
agreement dealing with such things as distributions to partners or the failure
to obtain the required consent of the limited partners for certain major
decisions; (ii) conviction of embezzlement or fraud; (iii) certain bankruptcy
events; (iv) reduction in the Indiana Gaming Company's partnership interest to
less than 40% due to sales or dilution for failure to pay required capital; (v)
a final unappealable judgment against The Indiana Gaming Company in excess of
$25 million which is uninsured and remains unsatisfied, unreleased or unstayed
for 180 days; (vi) certain acts constituting "gross mismanagement"; (vii)
failure of The Indiana Gaming Company to fund project costs in excess of $215
million (after expiration of applicable notice and cure periods); and (viii)
foreclosure by Trustee under the Notes on The Indiana Gaming Company's pledge of
its partnership interest the Indiana Partnership. Upon removal as general
partner, the general partnership interest of The Indiana Gaming Company becomes
a "special limited partner" interest with rights to partner distributions but
only limited voting rights on partnership matters. Also, if the reason for the
removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii)
above the limited partners may acquire all, but not less than all, of The
Indiana Gaming Company's interest for the fair market value thereof determined
by an appraisal process.
LIMITED PARTNERS' SALE RIGHTS
The Lawrenceburg Casino partnership agreement provides that: (i) after the
third anniversary date of commencement of operations at the Lawrenceburg Casino,
each limited partner has the right to sell its interest to the other partners
(pro rata in accordance with their respective percentage interests) or (ii)
after a deadlock by the parties with respect to significant items in any annual
operating budget of the partnership for budget year 1999 and thereafter, any
partner has a right to sell its interest to the other partners (the limited
partner pursuant to clause (i) and the partner desiring to sell pursuant to
clause (ii) is hereinafter referred to as a "Selling Partner" and the
non-selling partners are hereinafter referred to as the "Non-Selling Partners").
The partnership agreement provides that after the Selling Partner gives notice
of its intent to sell the Selling Partner and Non-Selling Partners shall have 60
days to attempt in good faith to agree to a purchase price. If within such
period of time no such agreement is reached, then the Selling Partner's interest
shall be appraised pursuant to an appraisal process to determine the fair market
value thereof. After the fair market value of the Selling Partner's interest is
determined by the appraisal process, the Non-Selling Partners have 60 days to
reject such sale at that price, and if the Non-Selling Partners decline to
purchase the interest of the Selling Partner at the appraisal price then the
general partner is to solicit bids and sell all of the assets of the partnership
within twelve months to the highest bidder and the partnership will be dissolved
within a 12-month period. No assurances can be given that The Indiana Gaming
Company, if it is a Non-Selling Partner, will have or will be able to obtain
sufficient funds to acquire any Selling Partner's interest in the circumstances
provided for above and therefore the assets of the partnership would have to be
sold to the highest bidder as provided above. In addition, the partnership
agreement provides all partners with a right of first refusal on transfers of
partnership interests. A foreclosure by the Trustee on the Company's pledge of
its partnership interest shall be deemed a transfer giving rise to the right of
first refusal.
REGULATORY MATTERS
ILLINOIS
In February 1990, the State of Illinois pursuant to the Riverboat Gambling
Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act
authorizes riverboat gaming upon any navigable stream within or forming a
boundary of the State of Illinois other than Lake Michigan. The Riverboat Act
does
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not, however, authorize riverboat gaming or the docking of a riverboat
conducting gaming within a county having a population in excess of 3,000,000.
The Riverboat Act grants the Illinois Gaming Board specific powers and duties,
and all other powers which are necessary and proper to effectuate the Riverboat
Act. The Illinois Gaming Board's jurisdiction extends to every person,
association, corporation, partnership and trust involved in riverboat gaming
operations in the State of Illinois.
The Riverboat Act authorized a five member Illinois Gaming Board to issue up
to ten owner's licenses statewide. Each owner's license permits the operation of
up to two boats as a part of a single riverboat gaming operation with a combined
maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board). No
person, firm or corporation may be licensed as the owner of more than one
riverboat gaming operation in Illinois, although a licensed owner may hold up to
10% of a second riverboat gaming operation in Illinois. In addition to the ten
owner's licenses which may be authorized under the Riverboat Act, the Illinois
Gaming Board may issue special event licenses allowing persons who are not
otherwise licensed to conduct riverboat gaming and to conduct such gaming on a
specified date or series of dates. Riverboat gaming under such a license may
take place on a riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years (with a
fee of $25,000 for the first year and $5,000 for each of the following two
years) and must be renewed annually thereafter (with a fee of $5,000 for each
year). The Company's Illinois gaming license is subject to renewal in October,
1997. An owner's license is eligible for renewal upon payment of the applicable
fee and a determination by the Illinois Gaming Board that the licensee continues
to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board
also requires that officers, directors and employees of a gaming operation be
licensed. Licenses issued by the Illinois Gaming Board may not be transferred to
another person or entity. All licensees must maintain their suitability for
licensure and have a continuing duty to disclose any material changes in
information provided to the Illinois Gaming Board.
Pursuant to its rule making authority under the Illinois Riverboat Act, the
Illinois Gaming Board has adopted certain regulations that provide that any
beneficial owner of the legal or beneficial interests of a gaming company may be
required, and in the case of a beneficial owner of 5% or more of the legal or
beneficial interests (a "5% Holder") is required, to furnish a detailed personal
disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the
personal disclosure form as the basis for its investigation to determine such
holder's suitability as a stockholder of the company. In the case of a 5%
Holder, the Illinois Gaming Board conducts such an investigation. The Illinois
Gaming Board's decisions as to suitability are based on the same criteria used
for a finding of preliminary suitability for licensure including character,
reputation, experience and financial integrity of such holder. If the Illinois
Gaming Board determines that a holder is not suitable, the holder is entitled to
request a hearing; however, if no hearing is requested after such determination
or such finding is upheld after a hearing, the holder is required to divest his
shares of common stock of the company. After a holder is required to divest and
until divestiture, the licensee is unable to distribute profits to such
stockholder. The Illinois Gaming Board has adopted a regulation that provides
that a licensee can only make distributions to shareholders to the extent such
distributions would not impair the financial viability of the licensee. Factors
which would be considered by the Illinois Gaming Board include working capital
requirements, debt service requirements, requirements for repairs and
maintenance and capital expenditure requirements. Illinois Gaming Board approval
is required for certain changes, including, among other things, to the type of
entity, debt and equity offerings by a company, issuances of debt, riverboat
capacity or significant design changes, changes in the number of gaming
positions and pro forma budgets and financial statements.
Minimum and maximum wagers on games are set by the licensee. Wagering may
not be conducted with money or negotiable currency. No person under the age of
21 is permitted to wager in Illinois, and wagers may only be taken from a person
present on a licensed riverboat. With respect to electronic gaming devices, the
payout percentage may not be less than 80% nor more than 100%.
7
Under the Riverboat Act, vessels must have the capacity to hold a minimum of
500 persons if operating on the Mississippi River or the Illinois River south of
Marshall County, and a minimum of 400 persons on any other waterway. In
addition, all riverboats must be accessible to disabled persons, must be either
a replica of a 19th century Illinois riverboat or be a casino cruise ship design
and must comply with applicable federal and state laws, including but not
limited to U.S. Coast Guard regulations.
Gaming may only be conducted on a gaming excursion, which is limited to a
maximum period of four hours. A gaming excursion is deemed to have started upon
the commencement of gaming. For the purpose of orderly ingress of passengers to
a riverboat, gaming is deemed to commence when the first passenger boards a
riverboat for an excursion and may continue while other passengers are boarding
for a period not to exceed thirty minutes, at which time the gangplank or its
equivalent must be pulled up and further boarding is not permitted. For the
purpose of orderly egress of passengers from a riverboat at the end of an
excursion, gaming may continue for a period not to exceed thirty minutes after
the gangplank or its equivalent is lowered. During this thirty minute period of
egress, new passengers may not board a riverboat. These periods of time do not
extend the four-hour maximum. Special event extended cruises may be authorized
by the Illinois Gaming Board.
Although the Riverboat Act provides that no gambling may be conducted while
a riverboat is docked, an Illinois Gaming Board rule currently permits dockside
gaming during the 30-minute time periods prior to and following a cruise.
Furthermore, if the captain of the riverboat reasonably determines that for
reasons of safety, although seaworthy, the riverboat should not leave the dock
or should return immediately thereto due to inclement weather, mechanical or
structural problems, or river icing, then a gaming excursion may commence or
continue while the gang plank or its equipment is raised and remains raised, and
ingress is prohibited until completion of the excursion, in which case the
riverboat is not considered docked. If such a situation occurs, the holder of
the owner's license must promptly file a report with the administrator of the
Illinois Gaming Board detailing the basis for its decision not to cruise. Recent
pronouncements by the Illinois Gaming Board indicate that the explanations for
failure to cruise pursuant to the rule will be scrutinized and that any abuse of
the rule will result in disciplinary actions, which may include, among other
things, any of the following: cancellation of future cruises, penalties, fines,
suspension and/or revocation of a license.
The Riverboat Act imposes a 20% wagering tax on adjusted gross receipts from
gambling games. The tax imposed is to be paid by the licensed owner to the
Illinois Gaming Board on the day after the day when the wagers were made. A
number of bills have been recently introduced in the Illinois legislature
proposing various changes in the way riverboat gaming operations are taxed. Some
of these bills seek to replace the current flat tax on gaming receipts with a
graduated gaming tax that would impose a maximum tax on Illinois casinos far in
excess of the current 20% wagering tax on adjusted gaming receipts. The Governor
of Illinois has publicly supported such a graduated gaming tax and has proposed
a state budget which is in part predicated on additional revenues being
generated from an increase in gaming taxes. Other proposed bills seek to add a
supplemental tax, or raise the flat tax rate on gaming receipts by 5-10%.
Another proposed bill would allow a land based casino in southern Illinois. The
proposed bills are still pending and no assurance can be given that one or a
combination of these bills will not become law or that similar legislation will
not be introduced in the future. The Riverboat Act also requires that licensees
pay a $2.00 admission tax for each person admitted to a gaming cruise. In
addition, all use, occupancy and excise taxes that apply to food and beverages
and all taxes imposed on the sale or use of tangible property apply to sales
aboard riverboats. The Company also pays $.20 admission tax to the City of Alton
for each person admitted to the Alton Belle Casino.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming as it may deem necessary and proper and into alleged
violations of the Riverboat Act. Employees and agents of the Illinois Gaming
Board have access to and may inspect any facilities relating to riverboat gaming
operations at all times.
8
A holder of any license is subject to the imposition of fines, suspension or
revocation of such license, or other action for any act or failure to act by
himself or his agents or employees, that is injurious to the public health,
safety, morals, good order and general welfare of the people of the State of
Illinois, or that would discredit or tend to discredit the Illinois gaming
industry or the State of Illinois. Any riverboat operation not conducted in
compliance with the Riverboat Act may constitute an illegal gaming place and
consequently may be subject to criminal penalties, which penalties include
possible seizure, confiscation and destruction of illegal gaming devices and
seizure and sale of riverboats and dock facilities to pay any unsatisfied
judgment that may be recovered and any unsatisfied fine that may be levied. The
Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit
and in compliance with applicable laws of Illinois regarding administrative
procedures and may suspend an owner's license, without notice or hearing, upon a
determination that the safety or health of patrons or employees is jeopardized
by continuing a riverboat's operation. The suspension may remain in effect until
the Illinois Gaming Board determines that the cause for suspension has been
abated and it may revoke the owner's license upon a determination that the owner
has not made satisfactory progress toward abating the hazard.
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
INDIANA
In June 1993, the Indiana legislature adopted legislation permitting
riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and
Patoka Lake. The legislation granted authority to supervise gaming activities to
the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission").
The Indiana Gaming Commission is empowered to administer, regulate and enforce
the system of riverboat gaming established under Indiana's Riverboat Gambling
Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all
riverboat gaming operations in Indiana, as well as all persons on riverboats
where gaming operations are conducted. The Indiana Gaming Commission has broad
powers to regulate riverboat gaming operations and to approve the form of
ownership and financial structure of not only riverboat owner licensees, but
also their entity qualifiers, and intermediary and holding companies. Indiana is
a new gaming jurisdiction and the emerging regulatory framework is not yet
complete. The Indiana Gaming Commission has adopted certain final rules and has
published others in proposed or draft form which are proceeding through the
review and final adoption process. The Indiana Gaming Commission also has
indicated its intent to publish additional proposed rules in the future. The
Indiana Gaming Commission has broad rule making power and it is impossible to
predict what effect, if any, the rules might have on the operations of the
Lawrenceburg Casino. The following description reflects both adopted and
proposed rules. Further, the Indiana General Assembly has the power to
promulgate new laws and implement amendments to the Riverboat Gambling Act,
which can materially affect the operation or economic viability of the gaming
industry in Indiana.
No one may operate a riverboat gaming operation in Indiana without holding a
riverboat owner's license. The Indiana Gaming Commission has implemented strict
regulations with respect to the suitability of riverboat license owners, their
key personnel, and employees. The Indiana Gaming Commission utilizes a "class
based" licensing structure that subjects all individuals associated with a
riverboat licensee or a riverboat license applicant to varying degrees of
background investigations.
Under current Indiana law a maximum of 11 owner's licenses may be in effect
at any time with an aggregate of five licenses to be issued to owners whose home
port is a county which is contiguous to Lake Michigan, an aggregate of five
licenses to be issued to owners whose home port is a county which is contiguous
to the Ohio River and one license to be issued to an owner whose home port is a
county contiguous to Lake Patoka. For counties contiguous to the Ohio River, the
Indiana Gaming Commission may not issue a license unless an ordinance has been
passed permitting the docking of a riverboat by the specified local entity and
the voters of the county have approved riverboat gambling in the county.
9
A license holder is required to pay an initial license fee of $25,000,
(which covers the first 5 years of operation), a renewal fee of $5,000 per year
thereafter and post a bond to guaranty performance of the licensee's obligations
under the legislation. Gaming will be permitted only on riverboats which (i)
have a valid certificate of inspection from the U.S. Coast Guard for the
carrying of at least 500 passengers, (ii) are at least 150 feet in length, and
(iii) for riverboats operating on the Ohio River, replicate historic Indiana
steamboat passenger vessels of the 19th century. No person or entity may
simultaneously own an interest in more than two riverboat owner's licenses. A
person or entity may simultaneously own up to 100% in one riverboat owner's
license and no more than 10% in a second riverboat owner's license. A riverboat
owner's licensee must possess a level of skill, experience, or knowledge
necessary to conduct a riverboat gaming operation that will have a positive
economic impact on the host site, as well as the entire State of Indiana.
Additional representative, but not exclusive, qualification criteria with
respect to the holder of a riverboat owner's license include character,
reputation, financial integrity, the facilities or proposed facilities for the
conduct of riverboat gaming including related non-gaming projects such as hotel
development, and the good faith affirmative action plan to recruit, train and
upgrade minorities and women in all employment classifications. The Indiana
Gaming Commission shall require persons holding owner's licenses to adopt
policies concerning the preferential hiring of residents of the city in which
the riverboat docks for riverboat jobs. The Indiana Gaming Commission has broad
discretion in regard to the issuance, renewal, revocation and suspension of
licenses and approvals, and the Indiana Gaming Commission is empowered to
regulate a wide variety of gaming and non-gaming related activities, including
the licensing of suppliers to, and employees at, riverboat gaming operations,
and effectively to approve the form of ownership and financial structure of not
only riverboat owner and supplier licensees, but also their subsidiaries and
affiliates. A riverboat owner's licensee or any other person may not lease,
hypothecate, borrow money against or loan money against a riverboat owner's
license. An ownership interest in a riverboat owner's license may only be
transferred in accordance with the regulations promulgated under the Riverboat
Gambling Act. An applicant for the approval of the transfer of a riverboat
owner's license must comply with application procedures prescribed by the
Indiana Gaming Commission and present evidence that it meets or possesses the
standards, qualifications, and other criteria under Indiana gaming laws, and pay
an investigative fee in the amount of $50,000 with the application. If the
Indiana Gaming Commission denies the application to transfer an ownership
interest, it shall issue notice of denial to the applicant. Unless specifically
stated to the contrary, a notice of denial of an application for transfer shall
not constitute a finding that the applicant is not suitable for licensure. A
person who is served with notice of denial under this rule may request an
administrative hearing.
"Certificates of Suitability" are issued following selection by the Indiana
Gaming Commission. The "Certificate of Suitability" is valid for 180 days unless
extended by the Indiana Gaming Commission. During this period the prospective
riverboat licensee must among other things: obtain a permit to develop the
riverboat gaming operation from the United States Army Corps of Engineers;
obtain a valid certificate of inspection from the United States Coast Guard for
the vessel on which the riverboat gaming operation will be conducted; apply for
and receive the appropriate permits or certificates from the Indiana Alcoholic
Beverage Commission, fire marshall, and other appropriate local, state and
federal agencies which issue permits including, but not limited to, health
permits, building permits and zoning permits; closing the financing necessary to
complete the development of the gaming operation; post a bond in compliance with
the applicable law; obtain the insurance deemed necessary by the Indiana Gaming
Commission; receive licensure for electronic gaming devices and other gaming
equipment under applicable law; submit an emergency response plan in compliance
with applicable laws; and take any other action that the Indiana Gaming
Commission deems necessary for compliance under Indiana gaming laws. Further,
the Indiana Gaming Commission may place restrictions, conditions or requirements
on the permanent riverboat owner's license. An owner's initial license expires
five years after the effective date of the license, and unless the owner's
license is terminated, expires or is revoked, the owner's license may be renewed
annually by the Indiana Gaming Commission upon satisfaction of certain
conditions contained in the Riverboat Gambling Act.
10
Pursuant to rules promulgated by the Indiana Gaming Commission, any person
(other than an institutional investor) who individually, or in association with
others, acquires directly or indirectly the beneficial ownership of 5% or more
of any class of voting securities of a publicly-traded corporation that is a
riverboat licensee or 5% or more of the beneficial interest in a riverboat
licensee, directly or indirectly, through any class of the voting securities of
any holding or intermediary company of a riverboat licensee shall apply to the
Indiana Gaming Commission for finding of suitability within 45 days after
acquiring the securities. Each institutional investor who, individually or in
association with others, acquires, directly or indirectly, beneficial ownership
of 5% or more of any class of voting securities of a publicly-traded corporation
that is a riverboat licensee or 5% or more of the beneficial interest in a
riverboat licensee through any class of the voting securities of any holding or
intermediary company of a riverboat licensee shall notify the Indiana Gaming
Commission within 10 days after the institutional investor acquires the
securities and shall provide additional information and may be subject to a
finding of suitability as required by the Indiana Gaming Commission.
An institutional investor who would otherwise be subject to a suitability
finding shall, within 45 days, after acquiring the interests submit information
to the Indiana Gaming Commission including the following: a description of the
institutional investor's business and a statement as to why the institutional
investor satisfies the definitional requirements of an institutional investor
under Indiana gaming rule requirements; a certification made under oath that the
voting securities were acquired and are held for investment purposes only and
were acquired and are held in the ordinary course of business as an
institutional investor; the name, address, telephone number, social security
number or federal tax identification number of each person who has the power to
direct or control the institutional investor's exercise of its voting rights as
a holder of voting securities of the riverboat licensee; the name of each person
who beneficially owns 5% or more of the institutional investor's voting
securities or equivalent; a list of the institutional investor's affiliates; a
list of all securities of the riverboat licensee that are or were beneficially
owned by the institutional investor or its affiliates within the preceding one
year; a disclosure of all criminal and regulatory sanctions imposed during the
preceding ten years; a copy of any filing made under 16 U.S.C. 18(a); and any
other additional information the Indiana Gaming Commission may request to insure
compliance with Indiana gaming laws.
Each institutional investor who, individually or in association with others,
acquires, directly or indirectly, the beneficial ownership of 15% or more of any
class of voting securities of a publicly-traded corporation that owns a
riverboat owner's license or 15% or more of the beneficial interest in a
riverboat licensee directly or indirectly through any class of voting securities
of any holding company or intermediary company of a riverboat licensee shall
apply to the Indiana Gaming Commission for a finding of suitability within 45
days after acquiring the securities.
An institutional investor means any of the following: a retirement fund
administered by a public agency for the exclusive benefit of federal, state or
local public employees; an investment company registered under the Investment
Company Act of 1940; a collective investment trust organized by banks under Part
9 of the Rules of the Comptroller of the Currency; a closed end investment
trust; a chartered or licensed life insurance company or property and casualty
insurance company; a banking, chartered or licensed lending institution; an
investment adviser registered under the Investment Advisers Act of 1940; and any
other entity the Indiana Gaming Commission determines constitutes an
institutional investor. The Indiana Gaming Commission may in the future
promulgate regulations with respect to the qualification of other financial
backers, mortgagees, bond holders, holders of indentures or other financial
contributors.
The Riverboat Gambling Act imposes a tax on admissions to gaming excursions
at a rate of $3.00 for each person admitted to the gaming excursion. This
admission tax is imposed upon the license owner conducting the gaming excursion
on a per-person basis without regard to the actual fee paid by the person using
the ticket, with the exception that no tax shall be paid by admittees who are
actual and necessary officials, employees of the licensee or other persons
actually working on the riverboat. A tax is imposed on the adjusted gross
receipts received from gaming games under the Riverboat Gambling Act at a rate
of
11
twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted
gross receipts is defined as the total of all cash and property (including
checks received by a licensee), whether collected or not, received by a licensee
from gaming operations less the total of all cash paid out as winnings to
patrons including a provision for uncollectible gaming receivables as is further
set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from
time to time, impose other fees and assessments on riverboat owner licensees. In
addition, all use, excise and retail taxes apply to sales aboard riverboats.
In general, riverboat excursions are limited to a duration of at least two
and no more than four hours, and no gaming may be conducted while the riverboat
is docked, with the exception of (i) the 30 minutes during passenger embarkation
and disembarkation and (ii) when weather, water or traffic prevent the riverboat
from cruising. Minimum and maximum wagers on games are set by the licensee, and
wagering may not be conducted with money or other negotiable currency. No person
under the age of 21 is permitted to be present on a riverboat, and wagers may
only be taken from a person present on a licensed riverboat.
No riverboat licensee or riverboat license applicant may enter into or
perform any contract or transaction in which it transfers or receives
consideration which is not commercially reasonable or which does not reflect the
fair market value of the goods or services rendered or received as determined at
the time the contract is executed. Any contract entered into by a riverboat
licensee or riverboat license applicant that exceeds the total dollar amount of
$50,000 shall be a written contract. A riverboat license applicant means an
applicant for a riverboat owner's license that has been issued a certificate of
suitability.
Pursuant to Indiana Gaming Commission rules, riverboat licensees and
riverboat license applicants must submit an internal control procedure regarding
purchasing transactions which must contain provisions regarding ethical
standards, compliance with state and federal laws, and prohibitions on the
acceptance of gifts and gratuities by purchasing and contracting personnel from
suppliers of goods or services. The rules also require any riverboat licensee or
applicant to submit any contract, transaction or series of transactions greater
than $500,000 in any 12-month period to the Indiana Gaming Commission within 10
days of execution, and to submit a summary of all contracts or transactions
greater than $50,000 in any 12-month period on a quarterly basis. The rules
provide that contracts submitted to the Indiana Gaming Commission are not
submitted for approval, but grant the Indiana Gaming Commission authority to
cancel or terminate any contract not in compliance with Indiana law and Indiana
Gaming Commission rules.
Indiana gaming laws provide that the opportunity for full minority and
women's business enterprise participation in the riverboat industry in Indiana
is essential to social and economic parity for minority and women business
persons. The Indiana Gaming Commission has the power to review compliance with
the goals of participation by minority and women business persons and impose
appropriate conditions on licensees to insure that goals for such business
enterprises are met.
Under the Riverboat Gambling Act, a riverboat licensee or a riverboat
license applicant shall designate certain minimum percentages of the value of
its contracts for goods and services to be expended with minority business
enterprises and womens' business enterprises such that 10% of the dollar value
of the riverboat licensee's or the riverboat license applicant's contracts be
expended with minority enterprises and 5% of the dollar value of the riverboat
licensee's or the riverboat license applicant's contracts be expended with
women's business enterprises. Expenditures with minority and women business
enterprises are not mutually exclusive. Licensees are required to report the
dollar value and percentage of contracts awarded to minority business
enterprises and women's business enterprises annually. If the Indiana Gaming
Commission determines that a licensee has not met these requirements, it may
suspend, limit or revoke the owner's license or fine or impose appropriate
conditions on the licensee.
All licensees subject to the jurisdiction of the Indiana Gaming Commission
have a continuing duty to maintain suitability for licensure. The Indiana Gaming
Commission may initiate an investigation or disciplinary action or both against
a licensee about whom the commission has reason to believe is not
12
maintaining suitability for licensure, is not complying with licensure
conditions, and/or is not complying with Indiana gaming laws or regulations. The
Indiana Gaming Commission may suspend, revoke, restrict or place conditions on
the license of a licensee; require the removal of a licensee or an employee of a
licensee; impose a civil penalty or take any other action deemed necessary by
the Indiana Gaming Commission to insure compliance with Indiana gaming laws.
The rapid expansion of gaming in Indiana has prompted some legislators to
call for a moratorium on the legalization of new forms of gaming. Some
legislators support a five year moratorium, while others propose waiting until a
national survey on gaming has been completed. One bill, proposing a moratorium
on the legalization of new forms of gaming or the expansion of the scope of
existing gaming laws until the earlier of five years or the completion of the
national survey, passed the Indiana Senate in February of 1997 and is currently
being considered by the Indiana House of Representatives. There are other
legislative measures which are being considered, including but not limited to,
an increase in the admissions tax.
IOWA
In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and
Missouri Rivers and certain other waterways located in Iowa. The Excursion
Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa
Commission") jurisdiction over all gambling operations.
The legislation authorized the granting of licenses to conduct riverboat
gaming to not-for-profit corporations which, in turn, are permitted to enter
into operating agreements with persons who are licensed by the Iowa Commission
to operate riverboat casinos. The number of licenses which may be granted is not
limited by statute or regulation.
Gaming is permitted only on riverboats which recreate, as nearly as
practicable, Iowa's riverboat history and have a capacity for at least 250
persons with tickets. In addition the licensee must utilize Iowa resources,
goods and services in the operation of the riverboat. An excursion gambling boat
must operate at least one excursion each day for 100 days during the excursion
season, (from April 1 through October 31). Excursions consist of a minimum two
hours during the excursion season. While an excursion gambling boat is docked,
passengers may embark or disembark at any time during its business hours. If
during the excursion season it is determined that it would be unsafe to complete
any portion of an excursion, or if mechanical problems prevent the completion of
any portion of an excursion, the boat may be allowed to remain dockside.
A gaming license will be issued for not more than three years and is subject
to annual renewals thereafter. The Iowa Commission has broad discretion with
regard to such renewals. The annual license fee to operate an excursion gambling
boat shall be based on the passenger carrying capacity, including crew, for
which the excursion gambling boat is registered. The annual fee shall be five
dollars per person capacity. Licenses issued by the Iowa Commission may not be
transferred to another person or entity. The Company must submit detailed
financial and operating reports to the Iowa Commission.
Iowa statute stipulates that a referendum must be held in 2002 to reaffirm
gaming in each county that has gaming and further stipulates that similar
referenda be held every eight years thereafter. Minimum and maximum wagers on
games are set by the licensee. Wagering may only be conducted with chips,
wagering debit cards or coins. Wagers may only be made by persons 21 years of
age and older. A licensee shall not accept a credit card to purchase coins,
tokens or other forms of credit to be wagered on gambling games.
The legislation imposes a graduated tax based on adjusted gross receipts at
a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any
amount over $3 million. The tax is to be paid by the licensee within 10 days
after the close of business of the day when the wagers were made. The
legislation also permits the Iowa Commission to impose an admission fee for each
person embarking on an excursion
13
vessel, and the city or county in which gaming is conducted is permitted to
impose an admission fee of not greater than 50 cents.
Pursuant to its rule making authority, the Iowa Commission requires
officers, directors and certain key employees of the Company to be licensed by
the Iowa Commission. In addition, anyone having a material relationship or
involvement with the Company may be required to be found suitable or to be
licensed, in which case those persons would be required to pay the costs and
fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove
a change in position by such officers or key employees and the power to require
the Company to suspend or dismiss officers, directors or other key employees or
sever relationships with other persons who refuse to file appropriate
applications or whom the Iowa Commission finds unsuitable to act in such
capacities. Any contract in excess of $50,000 must be submitted to and approved
by the Iowa Commission.
The Iowa Commission may also require any individual who has a material
relationship with the Company to be investigated and licensed or found suitable.
Any person who acquires 5% or more of the Company's equity securities must be
approved by the Iowa Commission prior to such acquisition. The applicant
stockholder is required to pay all costs of such investigation.
In November 1996, two referenda seeking to allow riverboat gaming in Dallas
County, near DesMoines, and Muscatine County, on the Mississippi River, were
defeated. Following the vote, Iowa Governor Terry Branstad proposed that the
Iowa legislature impose a five-year moratorium on the expansion of gaming.
LOUISIANA
In July 1991, the Louisiana legislature adopted legislation permitting
certain types of gaming activity on certain rivers and waterways in Louisiana.
The legislation granted authority to supervise riverboat gaming activities to
the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement
Division of the Louisiana State Police (the "Louisiana Enforcement Division").
The Louisiana Riverboat Gaming Commission was authorized to hear and determine
all appeals relative to the granting, suspension, revocation, condition or
renewal of all licenses, permits and applications. In addition, the Louisiana
Riverboat Gaming Commission was to establish rules providing for and
determining, among other things, authorized routes, duration of excursions and
the stops a riverboat may make, minimum levels of insurance, construction of
riverboats, periodic inspections and procedures for negotiable instrument
transactions involving patrons. The Louisiana Enforcement Division was
authorized, among other things, to investigate applicants and issue licenses,
investigate violations of the statute, conduct continuing reviews of gaming
activities and exercise other broad oversight powers.
In an April 1996 special session of the Louisiana legislature, Louisiana
lawmakers passed a measure which established the Louisiana Gaming Control Board
and provides that such board shall be the successor to all prior authorities,
and the sole and exclusive authority, with regard to the regulation and
supervision of gaming operations and activities in Louisiana except for the
regulation of horse racing and offtrack betting and the conducting of charitable
gaming operations. Effective May 1, 1996, the powers, duties, functions, and
responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana
Enforcement Division, including those with respect to riverboat gaming, are
transferred to the Louisiana Gaming Control Board. The Department of Public
Safety and Corrections, Office of State Police, retains certain enforcement
powers and responsibilities relative to investigations, audits, and cruising
procedures.
The transfer of a license or permit or an interest in a license or permit is
prohibited. The sale, purchase, assignment, transfer, pledge or other
hypothecation, lease, disposition or acquisition (a "Transfer") by any person of
securities which represents 5% or more of the total outstanding shares issued by
a corporation that holds a license is subject to Louisiana Gaming Control Board
disapproval. A security issued by a corporation that holds a license must
disclose these restrictions. Prior Louisiana Gaming Control Board approval is
required for the Transfer of any ownership interest of 5% or more in any
14
licensee or for the Transfer of any "economic interest" of 5% or more in any
licensee or Affiliated Gaming Person. No such prior approval is required for the
transfer of any ownership interest of 5% or more in any corporate licensee. An
"economic interest" is defined for purposes of a Transfer as any interest
whereby a person receives or is entitled to receive, by agreement or otherwise,
a profit, gain, thing of value, loss, credit, security interest, ownership
interest or other benefit.
A licensee must notify the Louisiana Gaming Control Board in writing within
five (5) days of the completion of the following transactions:
1. Withdrawal of capital in excess of five percent (5%) of the licensee's net
gaming proceeds for the preceding twelve month period;
2. The granting of a loan or any other extension of credit in excess of five
percent (5%) of the licensee's net gaming proceeds for the preceding twelve
month period;
3. Any advance or other distribution of any type of asset in excess of five
percent (5%) of the licensee's net gaming proceeds for the preceding twelve
month period;
No prior approval of any such withdrawal, loan, advance or distribution is
required, but such transaction is ineffective if subsequently disapproved by the
Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board
may issue an emergency order for not more than 10 days prohibiting payment of
profits, income or accruals by, or investments in, a licensee.
Riverboat gaming licensees and their Affiliated Gaming Persons are required
to notify the Louisiana Gaming Control Board within 30 days after any such
person applies for, receives or accepts a loan, or makes use of any cash,
property, credit, loan or line of credit, or guarantees, or grants other form of
security for a loan (a "Loan") unless such transaction involves publicly
registered debt and securities (in which event such person shall file the
registration statement and other materials with the Louisiana Gaming Control
Board), unless more stringent conditions are imposed by the Louisiana Gaming
Control Board, or the amount of the Loan is below certain specified thresholds.
The Louisiana Gaming Control Board is required to investigate the reported Loan,
and to either approve or disapprove the transaction. If disapproved, the Loan
must be rescinded by the Licensee or Affiliated Gaming Person.
Fees for conducting gaming activities on a riverboat include (i) $50,000 per
riverboat for the first year of operation and $100,000 per year per riverboat
thereafter; (ii) a state franchise fee of 15% of net gaming proceeds; (iii) a
state license fee of 3.5% of net gaming proceeds; and (iv) a local fee of up to
$2.50 per passenger.
In April 1996, the Louisiana legislature approved legislation mandating
local option elections to determine whether to prohibit or continue to permit
three individual types of gaming in Louisiana on a parish-by-parish basis. The
referendum was brought before the Louisiana voters at the time of the November
1996 presidential election. Voters elected to permit riverboat gaming in all
parishes where it is presently conducted and to allow land-based casino gaming
in Orleans Parish. Voters in 31 parishes elected to permit video draw poker
devices, but in 33 parishes, including East Baton Rouge Parish, voters elected
to prohibit the devices. Current operators of video poker devices in East Baton
Rouge Parish (and the other parishes where voters elected to prohibit video
poker) will be allowed to operate only until the end of their current license
plus two extensions. Typically video poker licenses have a maximum one year
duration.
MISSOURI
Gaming was originally authorized in the State of Missouri on November 3,
1992, although no governmental action was taken to enforce or implement the
original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law which
replaced the original law and established the Missouri Gaming Commission, which
is responsible for the licensing and regulation of riverboat gaming in Missouri.
The
15
number of licenses which may be granted is not limited by statute or regulation.
The Missouri Gaming Law grants specific powers and duties to the Missouri Gaming
Commission to supervise riverboat gaming and implement the Missouri Gaming Law
and take any other action as may be reasonable or appropriate to enforce the
Missouri Gaming Law. The Missouri Gaming Commission has discretion to approve
permanently moored ("dockside") riverboat casinos if it finds that the best
interest of Missouri and the safety of the public indicate the need for
continuous docking of an excursion gambling boat.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities in Missouri are subject to extensive state and local
regulation. If a company is granted a gaming license in Missouri, such company,
any subsidiaries it may form and its officers, directors, significant
shareholders and employees will be subject to regulations. The initial license
and first subsequent license renewal of an excursion gambling boat operator
shall be for a period of one year. Thereafter, license renewal periods shall be
two years. However, the Missouri Gaming Commission may reopen license hearings
at any time. In addition to the owners license and operators license for the
riverboat, every individual participating in gaming operations in any capacity
is required to have an occupational license from the Missouri Gaming Commission.
Applicants and licensees are responsible to keep the application and any
requested materials current at all times, and this responsibility shall continue
throughout any period of licensure granted by the Missouri Gaming Commission. In
addition, Missouri has extensive licensing disclosure requirements.
The Missouri Gaming Commission may revoke or suspend gaming licenses and
impose other penalties for violation of the Missouri Gaming Law and the rules
and regulations which may be promulgated thereunder. Penalties include, but are
not limited to, forfeiture of all gaming equipment used in the conduct of
unauthorized gambling games and fines of up to three times a licensee's highest
daily gross receipts derived from wagering on the gambling games, whether
authorized or unauthorized, conducted during the preceding twelve months. In
addition, the Missouri Gaming Commission requires 60 days notice of, and may
disapprove or require delay pending further investigation of, transactions in
excess of the greater of $500,000 or 30% of licensee's net worth, up to
$1,000,000, which transactions involve or relate to the gaming licensee.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer per excursion
that licensees must pay to the Missouri Gaming Commission, a minimum payout
requirement of 80% for slot machines, a 20% tax on adjusted gross receipts,
prohibitions against providing credit to gaming customers (except for the use of
credit cards and cashing checks) and a requirement that each licensee reimburse
the Missouri Gaming Commission for all costs of any Missouri Gaming Commission
staff necessary to protect the public on the licensee's riverboat. Licensees
must also submit to the Commission on a quarterly basis an audit of compliance
and of the financial transactions and condition of the licensee's total
operations for the calendar quarter and pay the associated auditing fees. The
Missouri Gaming Law provides for a loss limit of $500 per person per excursion.
Although the Missouri Gaming Law provides no limit on the amount of riverboat
space that may be used for gaming, the Missouri Gaming Commission is empowered
to impose such space limitations through the adoption of rules and regulations.
Additionally, United States Coast Guard safety regulations could affect the
amount of riverboat space that may be devoted to gaming. The Missouri Gaming Law
also includes requirements as to the form of riverboats, which must resemble
Missouri's riverboat history to the extent practicable and include certain
non-gaming amenities.
The licensee may receive wagers only from a person present on a licensed
excursion gambling boat. Wagering shall not be conducted with money or other
negotiable currency. A person under 21 years of age shall not make a wager on an
excursion gambling boat and shall not be allowed in the area of the excursion
boat where gambling is being conducted.
With respect to the availability of dockside gaming, which may be more
profitable than cruise gaming, the Missouri Gaming Commission is empowered to
determine on a site by site basis where such gaming is in the best interest of
Missouri and the safety of the public and shall be permitted.
16
Pursuant to its rule making authority, the Missouri Gaming Commission has
adopted certain regulations which provide, among other things, that: (i)
riverboat excursions are limited to a duration of four hours, and gaming may be
conducted at any time during the excursion; (ii) no gaming licensee or
occupational licensee may pledge, hypothecate or transfer in any way any
license, or any interest in a license, issued by the Missouri Gaming Commission;
(iii) without first notifying the Missouri Gaming Commission at least 60 days
prior to such consummation of any of the following transactions (and during such
period the Missouri Gaming Commission may disapprove the transaction or require
the transaction to be delayed pending further investigation) (a) a gaming
licensee or a holding company affiliated with a gaming licensee may not make a
public issuance of debt, (b) a publicly held gaming licensee or a publicly held
holding company may not make any issuance of an ownership interest equaling 5%
or greater of the gaming licensee or holding company or (c) a person or entity
may not pledge or hypothecate an ownership interest in a gaming licensee that is
not a publicly held company or a holding company that is not a publicly held
company provided that no such ownership interest may be transferred voluntarily
or involuntarily pursuant to any pledge without separate notice to the Missouri
Gaming Commission as required by the regulations; (iv) not later than 7 days
after the consummation of any transfer of ownership interest in a publicly held
gaming licensee, if such transfer would result in an entity or group of entities
acting in concert owning, directly or indirectly, a total amount of ownership
interest equaling 5% or greater of the ownership interest in the gaming
licensee, the transferee must report such consummation to the Missouri Gaming
Commission; (v) no withdrawals of capital, loans, advances or distribution of
any type of assets in excess of 5% of accumulated earnings of a licensee to
anyone with an ownership interest in the licensee may occur without prior
Missouri Gaming Commission approval; and (vi) the Missouri Gaming Commission may
take action against a licensee or other person who has been disciplined in
another jurisdiction for gaming related activity.
The Missouri Gaming Commission is authorized to enter the premises of
excursion gambling boats, facilities, or other places of business of a licensee
in Missouri to determine compliance with the Missouri Gaming Law and to
investigate alleged violations of the Missouri Gaming Law or Missouri Gaming
Commission rules, orders or final decisions. A holder of any license shall be
subject to imposition of penalties, suspension or revocation of such license, or
other action for any act or failure to act by himself or his agents or employees
that is injurious to the public health, safety, morals, good order and general
welfare of the people of the state of Missouri, or that would discredit the
Missouri gaming industry or the state of Missouri. The Missouri Gaming
Commission may waive any licensing requirement or procedure for any type of
license if it determines that the waiver is in the best interests of the public.
In addition, a supplier's license is required of persons who sell or lease
gambling equipment, gambling supplies or both to any licensee. A licensee
licensed to conduct gambling games shall acquire all gambling games or
implements of gambling from a licensed supplier.
On August 29, 1996, certain residents of St. Louis County (the "St. Louis
Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and
injunctive relief generally against the Missouri Gaming Commission and
specifically against the granting of licenses by the Missouri Gaming Commission
to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP
("Players") with respect to their casino development in Maryland Heights,
Missouri. The suit alleged that (i) the Missouri legislature lacks the
constitutional authority to authorize the Missouri Gaming Commission to license
casinos except on excursion gambling boats and floating facilities "upon" the
Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly
construed a statute to permit it to grant gaming licenses to excursion gambling
boats or floating facilities placed within artificial spaces and (iii) the
Missouri Gaming Commission is not authorized to regulate gaming operations
conducted upon floating facilities. The St. Louis Plaintiffs asserted that the
enclosed basin being constructed by Harrah's and Players, on which they would
float their casino barge facilities and which is not contiguous to the Missouri
River, exceeds a Missouri constitutional limitation authorizing gaming only
"upon" the Missouri and Mississippi Rivers. The St. Louis Plaintiffs also sought
to declare unconstitutional those portions of Missouri law and actions of the
Missouri Gaming Commission that permit casino gaming in artificially
17
constructed basins. Finally, the St. Louis Plaintiffs asserted that although the
Missouri constitution grants the Missouri legislature the authority to authorize
casino gaming on excursion gambling boats and floating facilities, when the
Missouri legislature enacted its gaming law, it only authorized gaming on
excursion gambling boats. Therefore, because the Harrah's/Players facility is
within an enclosed basin that prevents excursions upon the Missouri River and
will be conducted upon barge facilities that lack an engine or other means of
propulsion, the Missouri Gaming Commission lacks the statutory authority to
license the project. In December 1996, the Missouri court dismissed the St.
Louis Plaintiffs' claim. The St. Louis Plaintiffs' appeal is currently pending
in the Missouri Supreme Court.
Although the St. Louis Plaintiffs' action relates specifically to the
Harrah's/Players Maryland Heights casino project, if their claim is successful,
it could have a material adverse effect on other Missouri casino operators,
particularly those that conduct operations on floating barges from artificially
constructed basins. The Company, however, conducts its gaming operations at the
Argosy Casino in Riverside on a docked, excursion riverboat from a constructed
harbor that is open to the Missouri River. The Company believes that, if
necessary, it could modify its operations in Riverside so as to be in compliance
with even the strictest construction of the St. Louis Plaintiffs' interpretation
of Missouri gaming law. The Company is unable at this time to determine what
effect, if any, this action would have on its business, results of operations,
competitive position in the Kansas City and St. Louis markets or the merits of
the St. Louis Plaintiffs' action.
LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS
KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally
prohibited form of lottery. In order to amend the Kansas constitution,
two-thirds of the members of each house of the Kansas legislature and a majority
of Kansas voters would have to approve a proposed amendment. Resolutions seeking
to amend the Kansas constitution to authorize limited forms of gaming have been
proposed. Although Kansas Governor Graves has stated that he is in favor of the
legalization of slot machines at racing locations, in 1996 the legislature
rejected attempts to legalize slot machines. Bills which would allow specified
racetracks, including the Woodlands Racetrack in Kansas City, to install instant
bingo dispensers that resemble slot machines are currently pending in the Kansas
legislature.
The State of Kansas has approved Class III Indian compacts with four
separate tribes authorizing the tribes to conduct table and keno games, but not
slot machines, on their respective reservation lands. The reservations on which
these tribes propose to offer gaming in Kansas are located from approximately
120 to 150 miles from downtown Kansas City.
KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally
prohibited form of lottery. In order to amend the Kentucky constitution,
three-fifths of the members of each house of the Kentucky legislature and a
majority of Kentucky voters would have to approve a proposed amendment. Several
Kentucky racetracks have publicly lobbied for the right to conduct casino games.
OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited
form of lottery. In order to amend the Ohio constitution, three-fifths of the
members of each house of the Ohio legislature and a majority of Ohio voters
would have to approve the proposed amendment.
A voter petition drive placed a casino gaming referendum on the November
1996 ballot. The referendum would have legalized gaming and required the Ohio
legislature to pass laws to facilitate the development and maintenance of an
industry competitive with gaming in other areas of the country. This referendum
was rejected by Ohio voters and casino gaming remains illegal in Ohio.
NEBRASKA. A number of efforts to expand gaming in Nebraska failed during
1996. After an effort to present a statewide referendum on legalizing casino
gaming failed in the Nebraska legislature, three separate voter petition drives
also failed.
18
FEDERAL AND NON-GAMING REGULATIONS
The Company and its subsidiaries are subject to certain federal, state and
local safety and health laws, regulations and ordinances that apply to
businesses generally, such as the Clean Air Act, Clean Water Act, Occupational
Safety and Health Act, Resource Conservation Recovery Act and Comprehensive
Environmental Response, Compensation and Liability Act. The Company has not
made, and does not anticipate making, material expenditures with respect to such
environmental laws and regulations. However, the coverage and attendant
compliance costs associated with such laws, regulations and ordinances may
result in additional costs to the Company. For example, in 1990 the U.S.
Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms
under various oil spill response laws. The Department of Transportation has
proposed regulations requiring owners and operators of certain vessels to
establish through the U.S. Coast Guard evidence of financial responsibility in
the amount of $5.5 million for clean-up of oil pollution. This requirement would
be satisfied by either proof of adequate insurance (including self-insurance) or
the posting of a surety bond or guaranty.
All vessels operated by the Company must comply with U.S. Coast Guard
requirements as to safety and must hold a Certificate of Seaworthiness. These
requirements set limits on the operation of the vessels and require individual
licensing of all personnel involved with the operation of the vessel. Loss of
the Certificate of Seaworthiness of a vessel would preclude its use as a
riverboat. Every five years, vessels must be dry docked for an inspection of the
outside of the hull resulting in a loss of service for a period of time. The
Belle of Sioux City riverboat was removed from service on April 13, 1996 for
such a hull inspection. The riverboat arrived at an approved dry docking
facility on April 16, 1996, passed its inspection and returned to service on May
9, 1996. No interruption in gaming operations occurred in Sioux City as a result
of the hull inspection process, as the Company temporarily transferred gaming
operations to the original Alton Belle prior to removing the Belle of Sioux City
from service.
All shipboard employees of the Company employed on U.S. Coast Guard
regulated vessels, including those who have nothing to do with the actual
operation of the vessel, such as dealers, waiters and security personnel, may be
subject to the Jones Act which, among other things, exempts these employees from
state limits on workers' compensation awards.
The Company is subject to the provisions of the Americans With Disabilities
Act but does not anticipate incurring significant expenses to bring its
facilities or procedures into compliance with such Act.
The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires
banks, other financial institutions and casinos to monitor receipts and
disbursements of currency in excess of $10,000 and report them to the United
States Department of the Treasury (the "Treasury"). In management's opinion, the
BSA may have resulted in a reduction in the volume of play by high level
wagerers. The Treasury has proposed tentative amendments to the BSA which would
apply solely to casinos and their reporting of currency transactions. The most
significant proposed change in the BSA is a reduction in the threshold at which
customer identification data must be obtained and documented by the casino, from
$10,000 to $3,000 (which may include the aggregation of smaller denomination
transactions). Additionally, the amendments would substantially increase the
record-keeping requirements imposed upon casinos relating to customer data,
currency and non-currency transactions. Management believes the proposed
amendments, if enacted in their current form, could result in a further
reduction in the volume of play by upper-and middle-level wagerers while adding
operating costs associated with the more extensive record-keeping requirements.
However, the effect on the Company's operations is not expected to be material.
The permanent riverboat casino site in Lawrenceburg, Indiana is located in
potential wetlands or other protected areas. Although the Company does not
believe that the existence of wetlands or other protected areas will prohibit or
have a significant adverse impact on the Company's ability to develop any of its
current sites, there can be no assurance that such a claim or other claims
relating to such matters may not arise in the future, which may have a material
adverse effect on the costs of opening a casino at such sites or result in a
material delay in opening a gaming facility at such sites.
19
ITEM 2. PROPERTIES
The following is a list of the Company's principal properties as of December
31, 1996. Substantially all of the properties of the Company are subject to the
lien of the Company's senior lenders under its $235 million First Mortgage Note
Indenture dated June 5, 1996.
LEASE
INTEREST FUNCTION EXPIRATION
--------- --------------------------------------------- ---------------
ALTON, ILLINOIS
Office Building....................... Leased Executive Offices July 1997
Alton Belle II........................ Owned Riverboat Casino
Argosy I.............................. Owned Riverboat Casino
Support Barges........................ Owned Landing, ticketing and office facilities
RIVERSIDE, MISSOURI
Real Property......................... Owned Permanent Landing Site
Real Property......................... Leased Landing rights
Argosy IV............................. Owned Riverboat Casino
Support Barges........................ Owned Employee, ticketing and staging facilities
BATON ROUGE, LOUISIANA
Real Property......................... Owned Vessel Access
Argosy III............................ Owned Riverboat Casino
Support Barge......................... Owned Staging Barge
LAWRENCEBURG, INDIANA(1)
Real Property......................... Owned Permanent Landing Site
SIOUX CITY, IOWA
Argosy V.............................. Owned Riverboat Casino
Support Barge......................... Owned Staging Barge
OTHER
Spirit of America..................... Owned Temporary Lawrenceburg
Staging Vessel
Casino St. Charles.................... Leased Temporary Lawrenceburg May 1997
Riverboat Casino
- ------------------------
(1) Owned by a partnership pursuant to which the Company, through a wholly-owned
subsidiary, has a 57.5% partnership interest and serves as general partner.
20
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings arising in the
ordinary course of business. The Company does not believe that the results of
such legal proceedings, even if the outcome were unfavorable to the Company,
would have a material adverse impact on either its financial condition or
results of operations.
MARION COUNTY, INDIANA GRAND JURY DOCUMENT SUBPOENA
On or after March 15, 1996, the Company, its partners in the Lawrenceburg
casino project and certain other individuals and entities were served with
document request subpoenas issued by the Office of the Prosecuting Attorney of
Marion County, Indiana in connection with a grand jury investigation entitled:
STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law
requires that at the time a target of an investigation is determined, that
entity or person must be so advised by the Office of the Prosecuting Attorney.
On March 23, 1996 the Company was advised by the Marion County prosecutor that
no target subpoenas had been issued by the grand jury in its investigation as of
that date. However, there can be no assurance that targets will not be
identified as further information and documents are obtained and considered by
the grand jury. Due to the confidential nature of grand jury proceedings, the
Company is not aware of the specific subject matter or matters of the
investigation. The Company believes it has fully complied with its subpoena, and
has been informed by its partners that they have done the same.
The subpoenas requested information regarding the current or prior ownership
interest in the Company and the partners of the Indiana Partnership by the
individuals or entities described below. The subpoenas also requested that the
Company and its partners produce a broad category of documents including
documents regarding employment and other agreements, gifts, payments and
correspondence between the Company and any of its partners on the one hand and
several business entities and individuals, including an Indiana state
legislator, certain Indiana lobbyists, and certain Lawrenceburg, Indiana city
officials and businessmen on the other hand. The Company has learned that this
legislator has served as an employee of a subsidiary of Conseco, Inc., the
parent company of the 29% limited partner in the Indiana Partnership since
September 1995. Additionally, the Company has learned that such state legislator
has served since September 1993 as a consultant to a major Indiana engineering
firm that is engaged in many state and local government funded construction
projects. That engineering firm also serves as lead engineer for the
Lawrenceburg casino project. On May 24, 1996, the Indiana House Legislative
Ethics Committee voted to reprimand, but take no further action against, this
legislator for failing to properly report the foregoing employment and
consulting arrangements on his 1993, 1994 and 1995 statements of economic
interests. On June 27, 1996, the legislator announced his resignation as
chairman of the Indiana House Ways and Means Committee.
The Company believes that neither it nor any entity controlled by or person
employed by the Company has engaged, and has been informed by representatives of
its partners that they have not engaged, in any unlawful conduct in the pursuit
by or granting to the Indiana Partnership of the Lawrenceburg gaming license.
Because the grand jury proceedings were unlikely to be concluded quickly, on
March 25, 1996, a former U.S. Attorney and his law firm were retained to
conduct, as special independent counsel (the "special independent counsel"), an
internal investigation into the activities and actions of the Company and the
entities controlled by any person employed by the Company with respect to (i)
the hiring by Conseco, Inc. and the Indiana engineering firm of the state
legislator, (ii) the endorsement of the Indiana Partnership by the City of
Lawrenceburg and the financial affairs of certain Lawrenceburg officials with
respect to such endorsement and the awarding of the certificate of suitability
by the Indiana Gaming Commission, and (iii) their lobbying efforts in
furtherance of the Indiana legislature's enactment of legislation authorizing
gaming and limiting gaming licenses to one per county. A special committee of
independent directors of the Company was appointed to supervise and coordinate
the special independent counsel's investigation. The special independent counsel
did not investigate Conseco, Inc. The Company was advised that Conseco, Inc.
also retained independent counsel and such
21
counsel conducted its own internal investigation of matters that may be the
subject of the grand jury proceedings and such investigation found no wrongdoing
by Conseco, Inc. or any person or entity it controls, or is controlled by.
From March 25 to April 15, 1996, the special independent counsel conducted
its investigation and issued an interim report in which it concluded that it
found no evidence that the Company or any entity controlled by or person
employed by the Company had any involvement in, or knowledge of, the
relationship between the state legislator and Conseco, Inc. or the Indiana
engineering firm, or attempted to improperly influence any City of Lawrenceburg
official, state legislator or Indiana Gaming Commission member or staff member
in connection with the endorsement of the partnership by the City of
Lawrenceburg and the awarding of the certificate of suitability to the Indiana
Partnership with regard to lobbying, including the lobbying with respect to one
gaming license per county legislation. The special independent counsel found no
evidence that the Company or any entity controlled by or person employed by the
Company attempted to unduly influence any legislator in any way. However, no
investigation was made of any lobbyist's records, activities or expenditures,
nor were any outside lobbyists interviewed. The special independent counsel also
audited the Company's compliance with the lobbying disclosure statute in Indiana
and found only technical errors in the Company's lobbying disclosure statements.
No evidence was found that these technical errors were intentional or designed
to hide any lobbying activity. In conducting its investigation, the special
independent counsel, among other things, reviewed numerous boxes of documents
produced by the executive and Lawrenceburg offices of the Company and
extensively interviewed the nine Company officers and employees most closely
related to the Lawrenceburg Casino project, as well as the principal of R.J.
Investments, Inc., a 4% limited partner of the Indiana Partnership.
No assurance can be given, however, that the nature and scope of the
investigation conducted by the special independent counsel for the Company and
Conseco, was sufficient to uncover conduct that might be considered unlawful. In
the event that the Company, any entity controlled by the Company, any person
employed by the Company, the Indiana Partnership or any of its partners is found
by the Marion County prosecutor to have engaged in unlawful conduct, there is no
assurance what effect such action would have on the Indiana Partnership's gaming
license.
In the event that a partner is determined by the Indiana Gaming Commission
to be unsuitable for ownership of a gaming license, the terms of the Indiana
Partnership's partnership agreement provide that the Indiana Partnership shall
redeem 100% of such unsuitable partner's interest for an amount equal to 90% of
the "appraised value" of that partner's interest, determined in accordance with
the terms of the partnership agreement. The purchase price is payable in five
annual installments, only from available cash flow or sale or financing proceeds
of the partnership, and bears interest at "prime." If such event were to occur
with respect to Conseco prior to the completion of the Lawrenceburg casino
project, the Company would have to fund any remaining construction costs of the
Lawrenceburg Casino project which were to have been funded by Conseco. No
assurance can be given that the Company would be able to obtain funds sufficient
for this purpose. Also, there can be no assurance that the Indiana Gaming
Commission would not take other actions such as suspending, revoking or failing
to renew the Indiana Partnership's gaming license. There can be no assurance
that the grand jury investigation will not lead to events having a material
adverse effect on the Company.
DISPUTE WITH FORMER SHAREHOLDERS OF JAZZ ENTERPRISES, INC.
On March 15, 1996, a judgment for approximately $2.2 million plus continuing
interest, attorney's fees and court costs was rendered against Jazz in the cause
of action entitled MARTHA MYATT BOWLUS ET. AL. V. JAZZ ENTERPRISES, INC. filed
in the Nineteenth Judicial District Court, Parish of East Baton Rouge, State of
Louisiana ("Bowlus Lawsuit"). The plaintiffs sued Jazz to recover amounts due
under a promissory note issued by Jazz and secured by a mortgage on certain
property owned by Jazz located several miles south of Catfish Town. The delay
for filing for a new trial in the Bowlus Lawsuit has elapsed and under Louisiana
law a suspensive appeal from a judgment must be filed within 30 days thereafter
and any such appeal
22
requires the posting of an appeal bond in an amount at least equal to the amount
of the judgment. The judgment rendered in the Bowlus Lawsuit has been recorded
in the mortgage records of East Baton Rouge Parish, and therefore the judgment
now constitutes a judicial mortgage on Jazz's immovable property located in East
Baton Rouge Parish.
Pursuant to the definitive acquisition documents, any and all amounts due by
Jazz under the Bowlus Lawsuit are the obligations of the Former Jazz
Shareholders. Prior to March 31, 1996, the Company requested, in writing, that
the Former Jazz Shareholders satisfy the obligations and satisfy the judgment.
Thereafter, Jazz was advised that the Former Jazz Shareholders hoped to settle
the Bowlus Lawsuit prior to the expiration of the suspensive appeal delay and if
not so settled, they intended to suspensively appeal the judgment. Since the
former Jazz Shareholders were unable to post an adequate suspensive appeal bond
to suspend the effect of the adverse judgment against Jazz, the Company paid the
amount due under the judgment by funding and paying $2,292,033.81 ("Bowlus
Settlement") to the plaintiffs on Monday, July 8, 1996 in full satisfaction of
the judgment rendered in the Bowlus Lawsuit. By letter dated July 25, 1996, the
Company advised the Former Jazz Shareholders that it had paid the judgment
rendered in Bowlus Lawsuit by payment of the Bowlus Settlement to the plaintiffs
and demanded that the Former Jazz Shareholders repay to the Company the Bowlus
Settlement plus accumulated interest and all attorneys' fees incurred by the
Company in settling the Bowlus Lawsuit. Due to the Former Jazz Shareholders'
failure to repay Argosy for the Bowlus Settlement, the Company withheld
scheduled payments of $337,500 each to the former Jazz Shareholders representing
the March 31, 1996, the June 30, 1996, September 30, 1996 and December 31, 1996
quarterly installments of the deferred purchase price. Pursuant to the terms of
the purchase agreement, the Company intends to withhold all future payments to
the former Jazz Shareholders as an offset against the Bowlus Settlement plus
accumulated interest and all attorneys' fees incurred by the Company in settling
the Bowlus Lawsuit. The Bowlus Lawsuit is still pending on appeal, and the
Bowlus plaintiffs are seeking to have the lower court's award for attorneys'
fees increased, and Jazz (through the Former Jazz Shareholders) is seeking to
have the judgment (which Argosy paid) reversed or reduced. The Company believes
that withholding such payment, as well as withholding future payments, until the
Former Jazz Shareholders satisfy the Bowlus Lawsuit is within the Company's
rights as provided for in the definitive acquisition documents.
In response to the Company's withholding of the March 31, 1996 payment, Mr.
Steve Urie et al. has filed an action in District Court of East Baton Rouge
seeking payment of the withheld amount and has threatened, among other things,
to file a class action on behalf of the shareholders of the Company against the
Company and its directors and officers for mismanagement. The Company believes
such threatened claims are without merit and would vigorously pursue the defense
of any lawsuit filed by the Former Jazz Shareholders. This suit seeking recovery
of withheld quarterly installments has since been voluntarily dismissed, without
prejudice, by Mr. Urie et. al.
CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT
On November 29, 1996, Schilling Casino Corporation d/b/a Empire Casino &
Resort ("Empire"), an unsuccessful competing applicant for the riverboat owner's
license in Lawrenceburg, Indiana that was awarded to the Indiana Partnership by
the Indiana Gaming Commission (the "Commission"), filed with the Commission a
purported "Request for Hearing" (the "Request") on the denial of Empire's
application for the Lawrenceburg license. Empire's Request, which has been
referred to an Administrative Law Judge (the "ALJ"), did not seek a stay of the
award of the license to the Indiana Partnership or of the Indiana Partnership's
commencement of regular gaming operations from its temporary gaming facility at
Lawrenceburg, which commenced December 13, 1996. The Company and the Indiana
Partnership were granted leave to intervene in the administrative proceedings on
the Empire Request.
The grounds asserted in the Empire Request include claims that (i) the
application process followed by the Commission did not afford Empire due process
and violated Indiana laws; (ii) the Indiana Partnership failed to comply with
conditions in the certificate and failed to open the temporary gaming
23
facility in a timely fashion, (iii) the Indiana Partnership made
misrepresentations to the Commission during the licensing hearings; (iv) the
Commission could not lawfully have extended the certificate beyond June 30, 1996
(one year after the date of its initial award) without reconsidering all other
applications; and (v) the endorsement of the Indiana Partnership by the City of
Lawrenceburg was without legal authority and was given improper weight by the
Commission.
The Company and the Indiana Partnership have filed with the ALJ a motion for
summary judgment and to dismiss Empire's Request; the Commission has filed with
the ALJ a motion for partial summary judgement, on Empire's Request; and Empire
has filed with the ALJ its "discovery plan" describing discovery it wishes to
pursue in the matter, as to which the Company and the Indiana Partnership have
filed a motion for protective order. Responsive and reply briefing by the
parties has been completed, and the ALJ has set a hearing for April 30, 1997 on
the pending motions and the Empire discovery plan.
The Company and the Indiana Partnership believe the Request is without
merit, and are contesting and intend to continue to contest the Request
vigorously. The Commission is also opposing the Empire Request. No assurance can
be given, however, as to (i) the ultimate recommendation the ALJ will make to
the Commission on the Request; (ii) the ultimate action the Commission will take
in response to that recommendation; or (iii) that Empire will not continue to
take steps to seek revocation of the license awarded to the Indiana Partnership,
including seeking judicial review of any ultimate administrative ruling by the
Commission denying the Empire Request.
CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL.
In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House")
filed a cause of action in the U.S. District Court of the Middle District of
Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz
Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of
Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and
Argosy obtained the gaming license for Baton Rouge based upon false and
fraudulent pretenses and declarations and financial misrepresentations. The
complaint alleges tortious conduct as well as violations of RICO and seeks
damages of $130,900.00 plus court costs and attorneys' fees. The plaintiff was
an applicant for a gaming license in Baton Rouge whose application was denied by
the Louisiana Enforcement Division. The Company believes the allegations of the
plaintiff are without merit and in tends to vigorously defend such cause of
action.
On June 7, 1995, the Company consummated its purchase of all of the
outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company
intends to seek indemnification from the Former Jazz Shareholders for any
liability the Company, Argosy Louisiana or Jazz suffers as a result of such
cause of action. As part of the consideration payable by the Company to the
Former Jazz Shareholders for the acquisition of Jazz, the Company agreed at the
time of such acquisition to annual deferred purchase price payments of
$1,350,000 for each of the first ten years after closing and $500,000 for each
of the next ten years. Payments are to be made quarterly by the Company. The
definitive acquisition documents provide the Company with off-set rights against
such deferred purchase price payments for indemnification claims of the Company
against the Former Jazz Shareholders and for liabilities that the Former Jazz
Shareholders contractually agreed to retain. There can be no assurance that the
Former Jazz Shareholders will have assets sufficient to satisfy any claim in
excess of the Company's off-set rights.
The defendants filed a Motion to Dismiss, or alternatively to abstain and
stay the action, pending resolution of certain Louisiana state court claims
filed by Capitol House. The trial court decided in favor of the defendants and
dismissed the suit without prejudice to the rights of plaintiff to revive the
suit after the conclusion of the pending state court matters. The plaintiff
appealed this dismissal to the U.S.Fifth Circuit Court of Appeals. While the
appeal was pending, several of the Louisiana state court claims were resolved.
On March 11, 1997, the U.S. Fifth Circuit Court of Appeals vacated the trial
court's dismissal and remanded the case to the district court for further
proceedings. The case is now back in the district court
24
and will proceed. The defendants intend to go forward with the previously filed
motion to dismiss. No date has yet been set for hearing on the motion.
H. STEVEN NORTON V. JOHN T. CONNORS, ET AL.
In September, 1993, H. Steven Norton, who was then and is now the President
of the Company, filed a cause of action against John T. Connors, a significant
shareholder of the Company and a former officer of J. Connors Group Inc., a
predecessor entity of the Company ("JCG"), seeking $50 million in damages. Mr.
Norton alleged that Mr. Connors failed to fulfill his promise made in the summer
of 1991 to establish a partnership with Mr. Norton in which each would have an
equal 50% interest in JCG, which had a 25% partnership interest in the Company's
predecessor entity that owned the Alton Belle casino. As a result of the
reorganization effected immediately prior to its initial public offering, the
Company succeeded to all the rights, properties and assets, and assumed all the
liabilities, of all of its predecessor entities, including JCG. Subsequent to
filing the lawsuit, Mr. Connors advised the Company that his dealings with Mr.
Norton, which are the subject of the litigation, were in his capacity as an
officer of JCG, and that the Company should assume the defense and reimburse Mr.
Connors for the approximately $130,000 spent to date on legal fees, and that any
liability resulting from the litigation was assumed by the Company as a result
of the Company's reorganization. The Company responded to Mr. Connors that it
believed that his actions and dealings with Mr. Norton were solely in his
individual capacity as a shareholder of JCG, and the Company declined to assume
the defense or reimburse him for previously incurred legal fees, and the Company
denied that it has any liability with respect to such matter. If, however, JCG
were to have been found liable to Mr. Norton as a result of the actions of Mr.
Connors, then the Company could under certain circumstances be liable to Mr.
Norton for any damages awarded against JCG.
In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the
lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit
against Mr. Connors and is again seeking $50 million in damages. The Company
believes that Mr. Connors will again seek to cause the Company to indemnify and
reimburse him from liability thereunder. Therefore, there can be no assurance
that the lawsuit will not lead to events having a material adverse effect on the
Company.
GAMING INDUSTRY CLASS ACTIONS
The Company was named, along with two gaming equipment suppliers, 41 of the
country's largest gaming operators and four gaming distributors (the "Gaming
Industry Defendants") in three class action lawsuits which were filed in Las
Vegas, Nevada. The suits alleged that the Gaming Industry Defendants violated
the Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a
course of fraudulent and misleading conduct intended to induce people to play
their gaming machines based upon a false belief concerning how those gaming
machines actually operate, as well as the extent to which there is actually an
opportunity to win on any given play. The suits sought unspecified compensatory
and punitive damages. On January 14, 1997, the Court consolidated all three
actions under the case name WILLIAM H. POULOS, ETC. VS. CAESARS WORLD, INC., ET
AL. The Gaming Industry Defendants are in the process of filing numerous motions
to challenge the sufficiency of the plaintiffs' consolidated amended complaint.
The Company is unable to determine what effect, if any, the suit would have on
its business or operations.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Proxy Statement, page 15, section entitled
Market for Registrants Common Equity and Related Stockholder Matters.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from the Annual Report Page 19, entitled
"Financial Highlights."
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from the Annual Report, pages 21-29 entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Argosy Gaming Company are
included in this report:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY GAMING COMPANY
Incorporated by reference from the Annual Report, pages 30-47, sections
entitled "Consolidated Balance Sheets", "Consolidated Statements of Operations",
"Consolidated Statements of Cash Flows", "Consolidated Statements of
Stockholders' Equity", "Notes to Consolidated Financial Statements" and "Report
of Independent Auditors".
FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE
NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X.
FINANCIAL STATEMENTS OF ALTON GAMING COMPANY
Report of Independent Auditors 28
Balance Sheets 29
Statements of Income 30
Statements of Stockholder's Equity 31
Statements of Cash Flows 32
Notes to Financial Statements 33
FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY
Report of Independent Auditors 37
Balance Sheets 38
Statements of Operations 39
Statements of Stockholder's Equity 40
Statements of Cash Flows 41
Notes to Financial Statements 42
26
CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC.
Report of Independent Auditors 46
Consolidated Balance Sheets 47
Consolidated Statements of Operations 48
Consolidated Statements of Stockholder's Equity 49
Consolidated Statements of Cash Flows 50
Notes to Consolidated Financial Statements 51
FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM
Report of Independent Auditors 57
Balance Sheets 58
Statements of Operations 59
Statements of Partners' Equity 60
Statements of Cash Flows 61
Notes to Financial Statements 62
FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC.
Report of Independent Auditors 66
Balance Sheets 68
Statements of Operations 69
Statements of Stockholder's Equity 70
Statements of Cash Flows 71
Notes to Financial Statements 72
CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY
Report of Independent Auditors 77
Consolidated Balance Sheets 78
Consolidated Statements of Operations 79
Consolidated Statements of Stockholder's Equity 80
Consolidated Statements of Cash Flows 81
Notes to Consolidated Financial Statements 82
FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P.
Report of Independent Auditors 87
Balance Sheets 88
Statements of Operations 89
Statements of Partners' Equity 90
Statements of Cash Flows 91
Notes to Financial Statements 92
The following consolidated financial schedules of Argosy Gaming company are
included in response to Item 14(a):
I: Condensed Financial Information of Registrant S-1.
All other schedules specified under Regulation S-X for Argosy Gaming Company
have been omitted because they are either non-applicable, not required or
because the information required is included in the financial statements or
notes thereto.
27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alton Gaming Company
We have audited the accompanying balance sheets of Alton Gaming Company as
of December 31, 1996 and 1995, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alton Gaming Company at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 6, 1997
28
ALTON GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
CURRENT ASSETS:
Cash...................................................................................... $ 3,563 $ 3,873
Accounts receivable, net of allowance for doubtful accounts of $311 and $83,
respectively............................................................................ 330 430
Deferred income taxes..................................................................... 631 687
Other current assets...................................................................... 521 916
--------- ---------
Total current assets.................................................................. 5,045 5,906
--------- ---------
Due from affiliates....................................................................... 10,592 10,929
Net property and equipment................................................................ 30,112 32,929
Other assets.............................................................................. 7 173
--------- ---------
Total assets.......................................................................... $ 45,756 $ 49,937
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 1,547 $ 1,172
Accrued payroll and related expenses...................................................... 1,011 2,337
Slot club liability....................................................................... 956 1,319
Other accrued liabilities................................................................. 1,164 1,522
Accrued insurance......................................................................... 1,168 624
Income taxes payable to affiliate......................................................... 5,570
--------- ---------
Total current liabilities............................................................. 5,846 12,544
--------- ---------
OTHER LONG-TERM OBLIGATIONS--RELATED PARTY.................................................. 171 158
DEFERRED INCOME TAXES....................................................................... 3,494 2,953
STOCKHOLDER'S EQUITY:
Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1
Capital in excess of par.................................................................. 256 256
Retained earnings......................................................................... 35,988 34,025
--------- ---------
Total stockholder's equity............................................................ 36,245 34,282
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 45,756 $ 49,937
--------- ---------
--------- ---------
See accompanying notes to financial statements.
29
ALTON GAMING COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
REVENUES:
Casino........................................................................ $ 72,369 $ 81,413 $ 88,886
Admissions.................................................................... 7,115
Food, beverage and other...................................................... 7,817 7,849 7,334
--------- --------- ----------
80,186 89,262 103,335
Less promotional allowances................................................... (2,253) (3,269) (7,055)
--------- --------- ----------
Net revenues.................................................................... 77,933 85,993 96,280
--------- --------- ----------
COSTS AND EXPENSES:
Casino........................................................................ 36,082 36,185 39,993
Food, beverage and other...................................................... 7,473 6,820 7,914
Other operating expenses...................................................... 5,706 5,437 5,246
Selling, general and administrative........................................... 12,226 10,818 10,399
Depreciation and amortization................................................. 4,206 4,288 3,911
Allocation of corporate costs--related party.................................. 4,193 3,742 4,444
--------- --------- ----------
69,886 67,290 71,907
--------- --------- ----------
Income from operations.......................................................... 8,047 18,703 24,373
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income............................................................... 50 87 77
Interest expense.............................................................. (51) (178) (305)
--------- --------- ----------
(1) (91) (228)
--------- --------- ----------
Income before income taxes...................................................... 8,046 18,612 24,145
Income tax expense.............................................................. 3,198 7,399 9,658
--------- --------- ----------
Net income...................................................................... $ 4,848 $ 11,213 $ 14,487
--------- --------- ----------
--------- --------- ----------
See accompanying notes to financial statements.
30
ALTON GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
------- ------- ---------- -------- --------------
Balance, December 31, 1993.............. 1,000 $ 1 $ 256 $ 8,325 $ 8,582
Net income............................ 14,487 14,487
--
------- ----- -------- -------
Balance, December 31, 1994.............. 1,000 1 256 22,812 23,069
Net income............................ 11,213 11,213
--
------- ----- -------- -------
Balance, December 31, 1995.............. 1,000 1 256 34,025 34,282
Net income............................ 4,848 4,848
Dividends............................. (2,885) (2,885)
--
------- ----- -------- -------
Balance, December 31, 1996.............. 1,000 $ 1 $ 256 $ 35,988 $ 36,245
--
--
------- ----- -------- -------
------- ----- -------- -------
See accompanying notes to financial statements.
31
ALTON GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 4,848 $ 11,213 $ 14,487
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 4,206 4,288 3,911
Deferred income taxes........................................................ 597 1,612 176
Changes in operating assets and liabilities:
Accounts receivable........................................................ 138 16 (225)
Other current assets....................................................... 395 32 (536)
Other assets............................................................... 166 327
Accounts payable........................................................... 273 (8) (1,068)
Other accrued liabilities.................................................. (1,503) 1,799 171
Income taxes payable to affiliate.......................................... (5,570) (9,474) 9,482
--------- --------- ----------
Net cash provided by operating activities................................ 3,550 9,805 26,398
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (1,680) (1,566) (4,714)
--------- --------- ----------
Net cash used in investing activities.................................... (1,680) (1,566) (4,714)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on installment contracts............................................ (976)
Dividends paid............................................................... (2,885)
Payments on long-term debt-related party..................................... (431) (3,901)
Due from affiliate........................................................... 692 (6,548) (15,927)
Increase (decrease) in other long term obligations -- related party.......... 13 (294) (154)
--------- --------- ----------
Net cash used in financing activities.................................... (2,180) (7,273) (20,958)
--------- --------- ----------
Net (decrease) increase in cash.......................................... (310) 966 726
Cash, beginning of year...................................................... 3,873 2,907 2,181
--------- --------- ----------
Cash, end of year............................................................ $ 3,563 $ 3,873 $ 2,907
--------- --------- ----------
--------- --------- ----------
See accompanying notes to financial statements.
32
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Alton Gaming Company ("Company"), an Illinois
Corporation and wholly-owned subsidiary of Argosy Gaming Company ("Argosy"), is
engaged in the business of providing casino-style gaming and related
entertainment to the public through the operation of the Alton Belle casino in
Alton, Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Shore improvements................................ 5 to 30 years
Riverboat, dock and improvements.................. 5 to 20 years
Furniture, fixtures and equipment................. 5 to 10 years
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food, beverage and other
items provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. Prior to 1995,
admission revenue was recognized at the time the related service was performed.
Beginning in 1995, the Company stopped charging customers an admission fee and
therefore no longer recognizes any admissions revenue or related promotional
expenses. The estimated cost of providing promotional allowances has been
included in costs and expenses as follows:
1996 1995 1994
--------- --------- ---------
Admissions....................................................... $ $ $ 2,532
Food, beverage and other......................................... 1,238 1,662 2,313
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $3,225, $3,089 and $3,176 for the years ended December
31, 1996, 1995 and 1994, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
33
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Leasehold and shore improvements................................................ $ 1,194 $ 1,771
Riverboat, dock and improvements................................................ 29,801 29,097
Furniture, fixtures and equipment............................................... 13,627 12,649
---------- ----------
44,622 43,517
Less accumulated depreciation and amortization.................................. (14,510) (10,588)
---------- ----------
Net property and equipment...................................................... $ 30,112 $ 32,929
---------- ----------
---------- ----------
3. INCOME TAXES
Income tax expense for the years ended December 31, 1996, 1995 and 1994
consists of the following:
1996 1995 1994
--------- --------- ---------
Current:
Federal.................................................................. $ 2,273 $ 5,150 $ 8,376
State.................................................................... 328 637 1,106
--------- --------- ---------
2,601 5,787 9,482
--------- --------- ---------
Deferred:
Federal.................................................................. 526 1,419 128
State.................................................................... 71 193 48
--------- --------- ---------
597 1,612 176
--------- --------- ---------
Income tax expense..................................................... $ 3,198 $ 7,399 $ 9,658
--------- --------- ---------
--------- --------- ---------
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994, differs from that computed at the Federal Statutory tax rate as
follows:
1996 1995 1994
--------- --------- ---------
Federal statutory rate...................................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................................. 4.7 4.5 4.8
Other....................................................................... .3 .2
--- --- ---
39.7% 39.8% 40.0%
--- --- ---
--- --- ---
34
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Depreciation....................................................................... $ (3,524) $ (3,085)
Start-up costs..................................................................... 30 132
Retirement benefit payable......................................................... 140
Other.............................................................................. 631 547
--------- ---------
Net deferred tax liability......................................................... $ (2,863) $ (2,266)
--------- ---------
--------- ---------
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $148, $5 and $226 for interest for the years ended December
31, 1996, 1995 and 1994 respectively, and $8,170 and $15,261 for income taxes in
1996 and 1995 to Argosy. There were no income tax payments made in the year
ended 1994.
5. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1996, are as follows:
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
1997.................................................................................. $ 525
1998.................................................................................. 400
1999.................................................................................. 352
2000.................................................................................. 339
2001.................................................................................. 209
Thereafter............................................................................ 207
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $565,
$490 and $469 respectively.
6. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement with Argosy based on a
cost allocation model which was approved by the Illinois Gaming Board.
The Company participates in Argosy's property, general liability, workers
compensation and other insurance programs. The Company's estimated share of
these costs is allocated directly to the Company by Argosy in the amount of
$3,309, $2,154 and $702 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Interest expense to related parties amounted to $32, $178 and $292 for the
years ended December 31, 1996, 1995 and 1994 respectively.
In January 1996, the Company entered into a 5 year operating lease agreement
with Argosy for certain office space. The lease carries annual rentals of
approximately $126 throughout the lease term.
35
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
During 1994, the Company transferred the original Alton Belle along with
other barge facilities having a total cost of approximately $11,300 and
accumulated depreciation of approximately $3,300 to an affiliate. This amount is
included in due from affiliates in the accompanying balance sheets. No interest
is charged on this advance.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy sponsored 401(k) defined-contribution
plan which was established in 1994 and covers substantially all of the Company's
full-time employees. Participants can contribute a maximum of 10% of their
eligible salaries (as defined) subject to maximum limits, as determined by
provisions of the Internal Revenue Code, and the Company will match 100% of
participants' contributions up to 5% of their eligible salaries. Expense
recognized under the Plan was $461, $461 and $412 for the years ended December
31, 1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
A predecessor entity to the Company ("Predecessor"), as a result of a
certain shareholder loan transaction, could be subject to federal and certain
state income taxes (plus interest and penalties, if any) if it is determined
that it failed to satisfy all of the requirements of the S-Corporation
provisions of the Internal Revenue Code relating to the prohibition concerning a
second class of stock. An audit is currently being conducted by the Internal
Revenue Service ("IRS") of the Company's federal income tax returns for the 1992
and 1993 tax years, and the IRS has asserted the S-Corporation status as one of
the issues although the IRS has yet to make a formal claim of deficiency. If the
IRS successfully challenges the Predecessor's S-Corporation status, the Company
would be required to pay federal and certain state income taxes on the
Predecessor's taxable income from the commencement of its operations until
February 25, 1993 (plus interest and penalties, if any, thereon until the date
of payment). If the Predecessor was required to pay federal and certain state
income taxes on its taxable earnings through February 25, 1993, such payments
could amount to approximately $12,600, including interest through December 31,
1996, but excluding penalties, if any. While the Company believes the
Predecessor has legal authority for its position that it is not subject to
federal and certain state income taxes because it met the S-Corporation
requirements, no assurances can be given that the Predecessor's position will be
upheld. This contingent liability could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. No
provision has been made for this contingency in the accompanying financial
statements.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes") and retired an outstanding Credit Facility. The
assets of the Company are pledged as collateral, and the Company is a guarantor,
under the terms of the Mortgage Notes.
36
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Missouri Gaming Company
We have audited the accompanying balance sheets of The Missouri Gaming
Company as of December 31, 1996 and 1995, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Missouri Gaming Company
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 6, 1997
37
THE MISSOURI GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS:
Cash...................................................................................... $ 6,143 $ 4,131
Accounts receivable....................................................................... 220 129
Other current assets...................................................................... 1,343 1,848
--------- ---------
Total current assets.................................................................. 7,706 6,108
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 75,773 68,991
OTHER ASSETS:
Deposits.................................................................................. 88 288
Prepaid rent.............................................................................. 1,917 2,917
Deferred income taxes..................................................................... 294
Other..................................................................................... 1,267 1,507
--------- ---------
Total other assets.................................................................... 3,272 5,006
--------- ---------
TOTAL ASSETS................................................................................ $ 86,751 $ 80,105
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 3,505 $ 7,159
Accrued payroll and related expenses...................................................... 1,299 1,104
Other accrued liabilities................................................................. 2,732 2,115
Income taxes payable to affiliate......................................................... 4,435 6,022
Installment contracts payable............................................................. 94 756
Deferred income taxes..................................................................... 119
--------- ---------
Total current liabilities............................................................. 12,184 17,156
--------- ---------
DUE TO AFFILIATES........................................................................... 56,345 45,570
DEFERRED INCOME TAXES....................................................................... 907
STOCKHOLDER'S EQUITY:
Common stock--$.01 par value, 1,000 shares authorized, issued and outstanding.............
Capital in excess of par.................................................................. 5,000 5,000
Retained earnings......................................................................... 12,315 12,379
--------- ---------
Total stockholder's equity............................................................ 17,315 17,379
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 86,751 $ 80,105
--------- ---------
--------- ---------
See accompanying notes to financial statements.
38
THE MISSOURI GAMING COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
REVENUES:
Casino....................................................................... $ 82,247 $ 86,443 $ 29,588
Admissions................................................................... 1,983 15,300 5,104
Food, beverage and other..................................................... 11,065 5,203 2,532
---------- ---------- ---------
95,295 106,946 37,224
Less promotional allowances.................................................. (6,822) (12,888) (1,873)
---------- ---------- ---------
Net revenues................................................................. 88,473 94,058 35,351
---------- ---------- ---------
COSTS AND EXPENSES:
Casino....................................................................... 43,733 41,883 17,330
Food, beverage and other..................................................... 9,552 4,934 2,421
Other operating expenses..................................................... 5,263 4,199 2,163
Selling, general and administrative.......................................... 13,399 13,590 4,451
Depreciation and amortization................................................ 6,724 7,395 3,978
Preopening................................................................... 392 2,538
Lease termination............................................................ 3,508
---------- ---------- ---------
82,571 72,001 32,881
---------- ---------- ---------
Income from operations......................................................... 5,902 22,057 2,470
---------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 40 8
Interest expense............................................................. (6,048) (3,626) (47)
---------- ---------- ---------
(6,008) (3,626) (39)
---------- ---------- ---------
Income (Loss) before income taxes.............................................. (106) 18,431 2,431
Income tax benefit (expense)................................................... 42 (6,875) (1,064)
---------- ---------- ---------
Net (loss) income.............................................................. $ (64) $ 11,556 $ 1,367
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to financial statements.
39
THE MISSOURI GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
----------- ----------- ----------- ----------- ------------
Balance, December 31, 1993............................... 1,000 $ $ $5,000 $ (544) $ 4,456
Net income............................................. 1,367 1,367
----- ----------- ----------- ----------- ------------
Balance, December 31, 1994............................... 1,000 5,000 823 5,823
Net income............................................. 11,556 11,556
----- ----------- ----------- ----------- ------------
Balance, December 31, 1995............................... 1,000 5,000 12,379 17,379
Net loss............................................... (64) (64)
----- ----------- ----------- ----------- ------------
Balance, December 31, 1996............................... 1,000 $ $ 5,000 $ 12,315 $ 17,315
----- ----------- ----------- ----------- ------------
----- ----------- ----------- ----------- ------------
See accompanying notes to financial statements
40
THE MISSOURI GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................. $ (64) $ 11,556 $ 1,367
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization of fixed assets............................... 6,484 7,109 3,820
Amortization of other assets................................................ 240 286 158
Deferred income taxes....................................................... 1,320 734 (1,028)
Lease termination costs..................................................... 1,941
Changes in operating assets and liabilities:
Accounts receivable....................................................... (91) (92) (29)
Other current assets...................................................... 505 182 (2,017)
Accounts payable.......................................................... 947 5,232 1,927
Accrued liabilities....................................................... 812 601 2,604
Income taxes payable to affiliate......................................... (1,587) 4,230 1,792
Other assets.............................................................. 1,000 1,217 (5,868)
---------- ---------- ----------
Net cash provided by operating activities................................. 11,507 31,055 2,726
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................................... (19,192) (31,496) (39,222)
---------- ---------- ----------
Net cash used in investing activities..................................... (19,192) (31,496) (39,222)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on installment contracts........................................... (797) (5,277) (664)
Due from affiliate.......................................................... 10,294 4,762 35,273
Decrease in deposits........................................................ 200 6,960
---------- ---------- ----------
Net cash provided by (used in) financing activities....................... 9,697 (515) 41,569
---------- ---------- ----------
Net increase (decrease) in cash............................................. 2,012 (956) 5,073
Cash, beginning of year..................................................... 4,131 5,087 14
---------- ---------- ----------
Cash, end of year........................................................... $ 6,143 $ 4,131 $ 5,087
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
41
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Missouri Gaming Company ("Company") (a Missouri company and a wholly
owned subsidiary of Argosy Gaming Company, ("Argosy")) was incorporated in
Missouri in March 1993. The Company was formed to develop and operate a
riverboat casino and related facilities in Riverside, Missouri. The Company
commenced operations on June 22, 1994, with the opening of the Argosy Casino
Riverside, at a temporary facility. The Company offered games of skill from
opening until December 9, 1994, when games of chance were legalized in Missouri.
From the period of incorporation until June 22, 1994, the Company was engaged
principally in organizational and preopening activities. All operating costs
incurred during this period have been charged to expense as preopening costs.
The Company began construction of a permanent facility during 1995. The
permanent facility was opened to the public on January 15, 1996 and serves as a
dining and entertainment outlet to the riverboat casino.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash and all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings and shore improvements.................. 5 to 30 years
Riverboat, dock and improvements.................. 5 to 20 years
Furniture, fixtures and equipment................. 5 to 10 years
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Company recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of admissions, food and beverage which was provided to customers without
charge, has been included in revenues, and a corresponding amount has been
deducted as promotional allowances. The estimated cost of providing promotional
allowances has been included in operating costs and expenses as follows:
1996 1995 1994
--------- --------- ---------
Admissions................................................................... $ 315 $ 4,601 $ 938
Food, beverage and other..................................................... 1,902 522 65
42
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
ADMISSIONS REVENUE
Admissions revenue is recognized at the time the related service is
performed. The Company ceased charging customers an admission fee in the first
quarter of 1996 and, therefore, no longer recognizes any admission revenue.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1996, 1995 and 1994 was $3,214, $2,619 and $1,043,
respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated income
tax returns of Argosy. The Company computes federal and state income taxes on a
separate return basis. Taxes due are settled between the Company and Argosy in
accordance with the terms of a tax sharing arrangement.
RECLASSIFICATIONS
Certain amounts in prior years' financial statements have been reclassified
to conform to the 1996 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------
1996 1995
--------- ----------
Land and improvements............................................................ $ 14,815 $ 2,815
Buildings and improvements....................................................... 28,113 25
Riverboat, dock and improvements................................................. 23,740 30,827
Furniture, fixtures and equipment................................................ 18,680 13,305
Construction in progress......................................................... 32,329
--------- ----------
85,348 79,301
Accumulated depreciation and amortization........................................ (9,575) (10,310)
--------- ----------
Net property and equipment....................................................... $ 75,773 $ 68,991
--------- ----------
--------- ----------
3. RIVERSIDE AGREEMENT
The Company entered into a Lease and Development Agreement ("Agreement")
with the City of Riverside, Missouri. The Agreement, as amended, required the
Company to pay $1,600 for the construction of a city park and for the
development of a golf course. These payments were capitalized and are being
amortized over ten years using the straight-line method. The unamortized portion
of these payments is included in other assets in the accompanying balance
sheets.
Under the terms of the Agreement, the Company leases its site from the City
of Riverside. The $5,000 minimum rent due for the initial five-year term of the
lease was paid in advance as required by the Agreement. In addition to minimum
rent, during the initial five-year lease term, percentage rent is payable at 3%
of adjusted gross receipts ("AGR"), as defined, over $100 million annually. The
Company has the
43
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
option to extend the Agreement for three successive five-year terms. In all
extension periods, there will be no minimum rent and percentage rent will be
payable as follows: (i) 3% on the first $50 million of AGR; (ii) 4% on AGR
between $50 million and $100 million; and (iii) 5% on AGR in excess of $100
million.
The Agreement requires the Company to maintain a net worth of $5,000 at all
times, unless approved by the City of Riverside.
4. INCOME TAXES
Income tax benefit (expense) for years ended December 31, 1996, 1995 and
1994 consists of the following:
1996 1995 1994
--------- --------- ---------
Current:
Federal............................................................... $ 1,200 $ (5,419) $ (1,856)
State................................................................. 162 (722) (236)
--------- --------- ---------
1,362 (6,141) (2,092)
--------- --------- ---------
Deferred:
Federal............................................................... (1,162) (646) 905
State................................................................. (158) (88) 123
--------- --------- ---------
(1,320) (734) 1,028
--------- --------- ---------
Income tax benefit (expense)............................................ $ 42 $ (6,875) $ (1,064)
--------- --------- ---------
--------- --------- ---------
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 differs from that computed at the Federal Statutory corporate tax rate
as follows:
1996 1995 1994
----------- ----------- -----------
Federal Statutory rate................................................... (35.0)% 35.0% 35.0%
State income taxes, net of Federal benefit............................... (4.8) 4.4 4.6
Nondeductible contributions.............................................. 3.0
Other.................................................................... (2.4) .4
----------- --- ---
(39.8)% 37.0% 43.0%
----------- --- ---
----------- --- ---
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Start-up costs....................................................................... $ 565 $ 792
Depreciation......................................................................... (1,472) (351)
Other, net........................................................................... (119) (147)
--------- ---------
Net deferred tax (liability) asset................................................... $ (1,026) $ 294
--------- ---------
--------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment of $135, $1,681 and $5,016 in 1996, 1995 and
1994, respectively which was financed through installment contracts.
44
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company paid $8,043, $273 and $4 for interest and $225, $1,911 and $300
for taxes in 1996, 1995 and 1994 respectively.
6. RELATED PARTY TRANSACTIONS
The Company participates in Argosy's property, general liability, worker's
compensation and other insurance programs. The Company's estimated share of
these costs is allocated directly to the Company by Argosy in the amount of
$2,853, $2,584 and $878 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company has outstanding long-term debt with Argosy in the amounts of
$56,345 and $45,570 at December 31, 1996 and 1995, respectively. These amounts
represent funds received in connection with the construction of the permanent
facility. The Company accrues interest on the long-term debt at a rate of 12%
annually. There are no stated repayment terms on the long-term debt and payments
are made from available cash flow.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a maximum of 10% of their
eligible salaries (as defined) subject to maximum limits, as determined by
provisions of the Internal Revenue Code and the Company will match 100% of
participants' contributions up to 5% of their eligible salaries. Expense
recognized by the Company under the Plan was $441, $490 and $89 for the years
ended December 31, 1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space, warehouse space, gaming equipment and other
equipment under various operating leases. Minimum rents due under such leases
are approximately $157 in 1997, $62 in 1998, and $14 in 1999. Rent expense for
the years ended December 31, 1996, 1995 and 1994 was $1,874, $3,447 and $1,023,
respectively.
The Company is restricted from making certain distributions to Argosy and
other affiliates unless approved by state gaming authorities.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes"). Substantially all of the assets of the Company are
pledged as collateral, and the Company is a guarantor under terms of the
Mortgage Notes.
9. LEASE TERMINATION
In the second quarter of 1996 the Company determined that it no longer had a
use for the temporary restaurant and entertainment barge. Accordingly, the
Company expensed the remaining lease costs and any termination costs associated
with the lease.
45
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Argosy of Louisiana, Inc.
We have audited the accompanying consolidated balance sheets of Argosy of
Louisiana, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Argosy of
Louisiana, Inc. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 6, 1997
46
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,051 $ 5,201
Accounts receivable, net of allowance for doubtful accounts of $856 and $226
respectively............................................................................ 611 796
Deferred income taxes..................................................................... 427 179
Income taxes receivable from related party................................................ 879 696
Prepaid assets............................................................................ 686
Other current assets...................................................................... 859 190
--------- ---------
Total current assets.................................................................... 5,827 7,748
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 49,021 64,715
OTHER ASSETS:
Deposits.................................................................................. 13 82
Deferred lease acquisition cost, net...................................................... 1,915 2,051
Deferred licensing cost, net.............................................................. 278 741
--------- ---------
Total other assets...................................................................... 2,206 2,874
--------- ---------
TOTAL ASSETS................................................................................ $ 57,054 $ 75,337
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 1,127 $ 1,318
Accrued payroll and related expenses...................................................... 749 611
Other accrued liabilities................................................................. 2,168 1,140
Accrued gaming taxes...................................................................... 580 560
Notes payable and current maturities of long-term debt-related party...................... 5,578 390
--------- ---------
Total current liabilities............................................................... 10,202 4,019
--------- ---------
LONG-TERM DEBT-RELATED PARTY................................................................ 42,812 64,222
DEFERRED INCOME TAXES....................................................................... 1,160 1,974
MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................................... 3,174 3,319
STOCKHOLDER'S EQUITY:
Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1
Retained earnings......................................................................... (295) 1,802
--------- ---------
(294) 1,803
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 57,054 $ 75,337
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
47
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 51,007 $ 48,427 $ 19,952
Food, beverage and other....................................................... 7,641 4,945 1,024
--------- --------- ---------
58,648 53,372 20,976
Less promotional allowances.................................................... (5,228) (3,566) (660)
--------- --------- ---------
Net revenues..................................................................... 53,420 49,806 20,316
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 26,923 25,547 8,248
Food, beverage and other....................................................... 4,894 3,772 979
Other operating expenses....................................................... 4,757 4,013 3,584
Selling, general and administrative............................................ 10,939 10,164 1,954
Depreciation and amortization.................................................. 6,379 5,430 1,151
Preopening costs............................................................... 1,906
Referendum expenses............................................................ 1,347
--------- --------- ---------
55,239 48,926 17,822
--------- --------- ---------
(Loss) income from operations.................................................... (1,819) 880 2,494
--------- --------- ---------
INTEREST EXPENSE (INCOME) NET:
Interest to related party...................................................... 1,603
Interest....................................................................... (119) 92 204
--------- --------- ---------
(Loss) income before income taxes and minority interest.......................... (3,303) 788 2,290
Income tax benefit (expense)..................................................... 1,061 (333) (818)
Minority interest................................................................ 145 36 (84)
--------- --------- ---------
Net (loss) income................................................................ $ (2,097) $ 491 $ 1,388
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
48
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
RETAINED
COMMON EARNINGS
SHARES STOCK (DEFICIT) TOTAL
-------- -------- ----------- ---------
Balance, December 31, 1993.............. 1,000 $ 1 $ (77) $ (76)
Net income............................ 1,388 1,388
-------- --- ----------- ---------
Balance, December 31, 1994.............. 1,000 1 1,311 1,312
Net income............................ 491 491
-------- --- ----------- ---------
Balance, December 31, 1995.............. 1,000 1 1,802 1,803
Net income............................ (2,097) (2,097)
-------- --- ----------- ---------
Balance, December 31, 1996.............. 1,000 $ 1 $ (295) $ (294)
-------- --- ----------- ---------
-------- --- ----------- ---------
See accompanying notes to consolidated financial statements.
49
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................................. $ (2,097) $ 491 $ 1,388
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation.................................................................... 5,780 4,951 1,151
Amortization.................................................................... 599 479
Preopening costs................................................................ 1,906
Minority interest............................................................... (145) (36) 84
Deferred income taxes........................................................... (1,062) 1,143 652
Changes in operating assets and liabilities:
Accounts receivable........................................................... 185 (593) (202)
Other current assets.......................................................... (166) (645) (231)
Accounts payable.............................................................. (191) 282 1,036
Accrued payroll and related expenses.......................................... 138 (392) 1,002
Other accrued liabilities..................................................... 1,048 (469) 1,527
--------- --------- ---------
Net cash provided by operating activities................................... 4,089 5,211 8,313
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (713) (13,914) (2,076)
--------- --------- ---------
Net cash used in investing activities....................................... (713) (13,914) (2,076)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in notes payable and long term debt........................... 8,160 4,546
Payments on notes payable and long-term debt...................................... (5,595) (3,048) (1,909)
Notes receivable--affiliate....................................................... 2,801 (2,801)
Decrease (increase) in other assets............................................... 69 (82)
--------- --------- ---------
Net cash (used in) provided by financing activities......................... (5,526) 7,831 (164)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (2,150) (872) 6,073
Cash and cash equivalents, beginning of year...................................... 5,201 6,073
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 3,051 $ 5,201 $ 6,073
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
50
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Argosy of Louisiana, Inc. (collectively with its controlled partnership
Catfish Queen Partnership in Commendam ("Partnership") "the Company") was formed
on July 29, 1993. The Company entered a partnership agreement with Jazz
Enterprises, Inc. ("Jazz") to form the Partnership to provide riverboat gaming
and related entertainment in Baton Rouge, Louisiana. The Company, a wholly owned
subsidiary of Argosy Gaming Company (Argosy), is the 90% general partner of the
Partnership, along with the 10% partner in commendam Jazz, which became a wholly
owned subsidiary of Argosy in 1995. On September 21, 1994, Jazz contributed its
Certificate of Preliminary Approval and certain leases with a fair value of
$3,271 to the Company. On September 21, 1994, the Company's riverboat casino,
Belle of Baton Rouge, commenced operations.
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. These
consolidated financial statements include the accounts of the Company and the
Partnership. All significant intercompany accounts and transactions have been
eliminated.
CASH AND CASH EQUIVALENTS
The Company considers cash and all liquid investments with an original
maturity of three months or less to be cash equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1996 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed on the
straight-line method over the estimated useful lives or lease period as follows:
Riverboat, dock and improvements.................. 15 to 20 years
Furniture, fixtures and equipment................. 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS
Deferred lease acquisition costs result from the contribution of certain
leases by Jazz to the Partnership. This cost is amortized on the straight-line
method over 20 years. Accumulated amortization was $243 and $108 at December 31,
1996 and 1995, respectively.
51
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DEFERRED LICENSING COSTS
Deferred licensing costs result from the contribution of the State of
Louisiana Certificate of Preliminary Approval by Jazz to the Partnership. This
cost is amortized on the straight-line method over three years. Accumulated
amortization was $834 and $371 at December 31, 1996 and 1995, respectively.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Company recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of food, beverages and other items which were provided to customers
without charge has been included in revenues, and a corresponding amount has
been deducted as promotional allowances.
The estimated cost of providing promotional allowances for food and
beverages was $2,534, $2,166 and $402 in 1996, 1995 and 1994, respectively, and
has been included in food and beverage costs and expenses.
PREOPENING COSTS
Preopening costs, which consist primarily of labor, training and marketing
costs incurred prior to the commencement of gaming operations, were expensed as
incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$1,527, $1,580 and $221 in 1996, 1995 and 1994 respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated tax
returns of Argosy. The Company computes federal and state taxes on a separate
return basis. Taxes due are settled between the Company and Argosy in accordance
with the terms of a tax sharing arrangement.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
52
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------
1996 1995
---------- ---------
Leasehold and shore improvements....................................... $ 6,948 $ 20,446
Riverboat, docks and improvements...................................... 36,051 33,923
Furniture, fixtures and equipment...................................... 17,136 16,450
Construction in progress............................................... 317
---------- ---------
60,452 70,819
Less accumulated depreciation and amortization......................... (11,431) (6,104)
---------- ---------
Net property and equipment............................................. $ 49,021 $ 64,715
---------- ---------
---------- ---------
3. LONG-TERM DEBT-RELATED PARTY
Notes payable and long term debt consists of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
8% unsecured note payable to related party in quarterly installments of $930,815, including
interest, through July 2001............................................................... $ 17,527
Noninterest-bearing unsecured note payable to Argosy due 1998............................... 1,844
Noninterest-bearing advances from related party, no stated maturity......................... 29,019 64,222
Other....................................................................................... 390
--------- ---------
48,390 64,612
Less current maturities..................................................................... (5,578) (390)
--------- ---------
$ 42,812 $ 64,222
--------- ---------
--------- ---------
During 1996, the right to a note payable from the Partnership to the Company
was assigned to Argosy.
The carrying value of long term debt approximates fair value at December 31,
1996 and 1995. Maturities of long term debt, including scheduled payments under
the notes payable to Argosy which were due prior to December 31, 1996 and which
have not yet been paid are as follows:
1997............................................................... $ 5,578
1998............................................................... 4,689
1999............................................................... 3,082
2000............................................................... 3,337
2001............................................................... 2,685
Thereafter......................................................... 29,019
53
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
Income tax benefit (expense) consists of the following:
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Current:
Federal........................................................ $ $ 718 $ (88)
State.......................................................... 92 (26)
--------- --------- ---------
Total current.................................................... 810 (114)
--------- --------- ---------
Deferred:
Federal........................................................ 934 (1,000) (615)
State.......................................................... 127 (143) (89)
--------- --------- ---------
Total deferred................................................... 1,061 (1,143) (704)
--------- --------- ---------
Income tax benefit (expense)..................................... $ 1,061 $ (333) $ (818)
--------- --------- ---------
--------- --------- ---------
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Tax over book depreciation............................................... $ (4,688) $ (2,495)
Net operating loss carryforward.......................................... 3,131
Pre-opening.............................................................. 397 521
Other, net............................................................... 427 179
--------- ---------
Net deferred tax liabilities............................................. $ (733) $ (1,795)
--------- ---------
--------- ---------
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Tax at U.S. statutory rates.................................. (35.0)% 35.0% 35.0%
State income tax, net of federal tax benefit................. (3.9) 5.7 4.8
Nondeductible referendum expenses............................ 16.4
Prior year taxes............................................. (4.6)
Targeted jobs tax credits, net............................... (3.3) (3.1)
Other, net................................................... (5.0) 4.9 (1.0)
----- --- ---
(32.1)% 42.3% 35.7%
----- --- ---
----- --- ---
5. RELATED PARTY TRANSACTIONS
The Company leases, for a minimum of five years with six five-year renewal
options, a docking site, office and warehouse space from Jazz. Rent under terms
of the lease ranges from 6% to 10% of adjusted gross receipts.
54
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz,
the partners agreed that all rents from November 1, 1994 through the closing of
the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to
the closing of the Jazz purchase, the Partnership resumed its obligations under
the lease with Jazz.
Rent expense was approximately $3,539, $2,202 and $724 in 1996, 1995 and
1994, respectively. Approximately $3,091, $1,800 and $408 in 1996, 1995 and
1994, respectively resulted from the above mentioned lease with Jazz.
The Company participates in Argosy's property, general liability, workers
compensation and other insurance programs. The Company's share of these costs
was approximately $1,989, $2,183 and $1,100 in 1996, 1995 and 1994 respectively.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
6. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401 (k) defined contribution plan which covers substantially all of its
full-time employees. Participants can contribute a maximum of 10% of their
eligible salaries (as defined) subject to maximum limits, as determined by
provisions of the Internal Revenue Code, and the Company has matched 100% of
participants' contributions up to 5% of their eligible salaries. Expense
recognized by the Company under the Plan was approximately $320, $503 and $7 in
1996, 1995 and 1994, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION
In 1995, the Company entered into capital lease obligations totaling $376
for the acquisition of property and equipment.
During 1994, the Company acquired gaming equipment totaling $4,971 which was
financed by equipment vendors.
During 1994, other assets totaling $3,271 were contributed to the Company by
Jazz.
The Company paid interest of $2,811, $143 and $111 in 1996, 1995 and 1994,
respectively.
During 1994, Argosy transferred property and equipment to the Company with a
fair value of $41,297, subject to an unsecured note payable to Argosy.
Additionally, preopening costs of $2,035 were also financed through Argosy.
During 1996, Argosy transferred property and equipment to the Company with a
fair value of $1,844, subject to an unsecured note payable.
During 1996, the Company transferred property and equipment to Jazz with a
fair value of $12,471 and recorded a receivable from Jazz in the same amount.
The rights to this receivable was assigned to Argosy and reduced the amounts due
to Argosy from non-interest bearing advances.
8. COMMITMENTS
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to pay to the City-Parish $2.50
per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional
55
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
passenger fee which is now $2.50 per passenger until actual construction of a
hotel commences by Jazz or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1996, the Company has paid all admission
payments due under the above agreements.
The Company leases certain premises under noncancelable operating leases
that expire in 1997. Future minimum lease payments under the noncancelable
operating leases with initial terms of one year or more are $205 in 1997.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes"). The assets of the Company are pledged as
collateral, and the Company is a guarantor, under the terms of Mortgage Notes.
56
REPORT OF INDEPENDENT AUDITORS
The Partners
Catfish Queen Partnership in Commendam
We have audited the accompanying balance sheets of Catfish Queen Partnership
in Commendam as of December 31, 1996 and 1995, and the related statements of
operations, partners equity and cash flows each for the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Catfish Queen Partnership in
Commendam at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 6, 1997
57
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,051 $ 5,201
Accounts receivable, net of allowance for doubtful accounts of $856 and $226.............. 611 796
Inventories............................................................................... 203 189
Prepaid insurance......................................................................... 494
Other current assets...................................................................... 320 193
--------- ---------
Total current assets.................................................................... 4,185 6,873
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 48,704 51,192
OTHER ASSETS:
Deposits.................................................................................. 13 82
Deferred lease acquisition cost, net...................................................... 1,915 2,051
Deferred licensing cost, net.............................................................. 278 741
--------- ---------
Total other assets...................................................................... 2,206 2,874
--------- ---------
TOTAL ASSETS................................................................................ $ 55,095 $ 60,939
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 1,127 $ 1,294
Accrued payroll and related expenses...................................................... 749 611
Other accrued liabilities................................................................. 2,748 1,859
Accrued interest--related party........................................................... 1,195
Notes payable and current maturities of long-term debt.................................... 5,578 7,889
--------- ---------
Total current liabilities............................................................... 10,202 12,848
--------- ---------
LONG-TERM DEBT.............................................................................. 13,793 14,576
PARTNERS' EQUITY............................................................................ 31,100 33,515
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 55,095 $ 60,939
--------- ---------
--------- ---------
See accompanying notes to financial statements.
58
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 51,007 $ 48,427 $ 19,952
Food, beverage and other....................................................... 7,641 4,945 1,024
--------- --------- ---------
58,648 53,372 20,976
Less promotional allowances.................................................... (5,228) (3,566) (660)
--------- --------- ---------
Net revenues..................................................................... 53,420 49,806 20,316
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 26,923 25,547 8,248
Food, beverage and other....................................................... 4,894 3,772 979
Other operating expenses....................................................... 4,757 4,013 3,584
Selling, general and administrative............................................ 10,786 9,954 2,357
Depreciation and amortization.................................................. 5,644 5,430 1,151
Referendum expenses............................................................ 1,347
Preopening costs............................................................... 2,035
--------- --------- ---------
54,351 48,716 18,354
--------- --------- ---------
(Loss) income from operations.................................................... (931) 1,090 1,962
INTEREST EXPENSE (INCOME) (NET):
Related parties................................................................ 1,603 1,603 392
Other.......................................................................... (119) 92 162
--------- --------- ---------
1,484 1,695 554
--------- --------- ---------
Net (loss) income................................................................ $ (2,415) $ (605) $ 1,408
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
59
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
ARGOSY OF JAZZ TOTAL
LOUISIANA, ENTERPRISES, PARTNERS'
INC. INC. EQUITY
----------- ----------- ---------
Contribution of assets in excess of liabilities on September 21, 1994 (date of
commencement of operations)................................................. $ 29,441 $ 3,271 $ 32,712
Net income.................................................................. 1,267 141 1,408
----------- ----------- ---------
Partners' equity at December 31, 1994......................................... 30,708 3,412 34,120
Net loss.................................................................... (545) (60) (605)
----------- ----------- ---------
Partners' equity at December 31, 1995......................................... 30,163 3,352 33,515
Net loss.................................................................... (2,173) (242) (2,415)
----------- ----------- ---------
Partners' equity at December 31, 1996......................................... $ 27,990 $ 3,110 $ 31,100
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to financial statements.
60
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................................. $ (2,415) $ (605) $ 1,408
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation.................................................................... 5,045 4,951 1,151
Amortization.................................................................... 599 479
Preopening costs................................................................ 2,035
Changes in operating assets and liabilities:
Accounts receivable........................................................... 185 (593) (202)
Other current assets.......................................................... 353 (700) (175)
Accounts payable.............................................................. (167) 257 1,036
Accrued payroll and related expenses.......................................... 138 (376) 987
Accrued interest to related parties........................................... (1,195) 803 392
Other accrued liabilities..................................................... 889 299 1,560
--------- --------- ---------
Net cash provided by operating activities....................................... 3,432 4,515 8,192
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (713) (952) (2,076)
--------- --------- ---------
Net cash used in investing activities........................................... (713) (952) (2,076)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in advances from affiliates................................... (1,754) 1,754
Payments on notes payable and long-term debt...................................... (4,938) (2,487) (1,909)
(Increase) decrease in other assets............................................... 69 (82)
--------- --------- ---------
Net cash used in financing activities........................................... (4,869) (4,323) (155)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. (2,150) (760) 5,961
Cash and cash equivalents, beginning of period.................................... 5,201 5,961
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 3,051 $ 5,201 $ 5,961
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
61
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Catfish Queen Partnership in Commendam ("Partnership") was formed to provide
riverboat gaming and related entertainment in Baton Rouge, Louisiana. The
Partnership is comprised of a 90% general partner, Argosy of Louisiana, Inc.
("General Partner"), a wholly owned subsidiary of Argosy Gaming Company
("Argosy"), and a 10% partner in commendam, Jazz Enterprises, Inc. ("Jazz")
which became a wholly owned subsidiary of Argosy in 1995. On September 21, 1994,
the General Partner contributed the riverboat, all passenger ramps, walkways,
passenger moving systems, and certain tenant build-out and improvements with a
fair value of $29,441 to the Partnership and Jazz contributed its Certificate of
Preliminary Approval and certain leases with a fair value of $3,271 to the
Partnership. On September 21, 1994, the Partnership's riverboat casino, Belle of
Baton Rouge, commenced operations.
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
Net income (loss) is allocated to the partners based on their respective
ownership interests.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers cash and all liquid investments with an original
maturity of three months or less to be cash equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1996 and 1995.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation and amortization
is computed on the straight-line method over the estimated useful lives or lease
period as follows:
Riverboat, dock and improvements.................. 15 to 20 years
Furniture, fixtures and equipment................. 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS
Deferred lease acquisition cost results from the contribution of certain
leases by Jazz to the Partnership. This cost is amortized on the straight-line
method over 20 years. Accumulated amortization was $243 and $108 at December 31,
1996 and 1995, respectively.
62
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DEFERRED LICENSING COSTS
Deferred licensing cost results from the contribution by Jazz of the State
of Louisiana Certificate of Preliminary Approval to the Partnership. This cost
is amortized on the straight-line method over three years. Accumulated
amortization was $834 and $371 at December 31, 1996 and 1995, respectively.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Partnership recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of food, beverage and other items which were provided to customers without
charge has been included in revenues, and a corresponding amount has been
deducted as promotional allowances.
The estimated cost of providing promotional allowances for food and
beverages and other items was $2,534, $2,166 and $402 in 1996, 1995 and 1994,
respectively, and has been included in food and beverage costs and expenses.
PREOPENING COSTS
Preopening costs, which consist primarily of labor, training and marketing
costs incurred prior to the commencement of gaming operations, were expensed as
incurred.
ADVERTISING COSTS
The Partnership expenses advertising costs as incurred. Advertising expense
was $1,527, $1,580 and $221 in 1996, 1995 and 1994 respectively.
INCOME TAXES
No provision (credit) for federal or state income taxes is recorded in the
financial statements, as income taxes are the responsibility of the individual
partners.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
2. PROPERTY EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Leasehold and shore improvements................................................ $ 6,948 $ 6,933
Riverboat, docks and improvements............................................... 36,051 33,924
Furniture, fixtures and equipment............................................... 17,136 16,437
---------- ----------
60,135 57,294
Less accumulated depreciation and amortization.................................. (11,431) (6,102)
---------- ----------
Net property and equipment...................................................... $ 48,704 $ 51,192
---------- ----------
---------- ----------
63
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT
Notes payable and long term debt consists of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
8% unsecured note payable to related party in quarterly installments of $930,815,
including interest, through July 2001........................................... $ 17,527 $ 20,039
Noninterest-bearing unsecured note payable to related party in monthly
installments of $84,799......................................................... 2,035
Noninterest-bearing unsecured note payable to Argosy due 1998..................... 1,844
Other............................................................................. 391
--------- ---------
19,371 22,465
Less current maturities........................................................... (5,578) (7,889)
--------- ---------
$ 13,793 $ 14,576
--------- ---------
--------- ---------
The carrying value of long term debt approximates fair value at December 31,
1996 and 1995. Maturities of long term debt, including scheduled payments under
the notes payable to Argosy which were due prior to December 31, 1996 and which
have not yet been paid are as follows:
1997................................................ $ 5,578
1998................................................ 4,689
1999................................................ 3,082
2000................................................ 3,337
2001................................................ 2,685
4. RELATED PARTY TRANSACTIONS
The Partnership leases, for a minimum of five years with six five-year
renewal options, a docking site, office and warehouse space from Jazz. Rent
under terms of the lease ranges from 6% to 10% of adjusted gross receipts.
Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz,
the partners agreed that all rents from November 1, 1994 through the closing of
the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to
the closing of the Jazz purchase, the Partnership resumed its obligations under
the lease with Jazz.
Rent expense was approximately $3,539, $2,202 and $724 in 1996, 1995 and
1994, respectively. Approximately $3,091, $1,800 and $408 in 1996, 1995 and
1994, respectively, resulted from the above mentioned lease with Jazz.
The Partnership participates in Argosy's property, general liability,
workers compensation and other insurance programs. The Partnership's share of
these costs was approximately $1,989, $2,183 and $1,100 in 1996, 1995 and 1994
respectively.
Indirect costs incurred by Argosy, on behalf of the Partnership, are not
allocated as they are immaterial.
64
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. EMPLOYEES BENEFIT PLAN
The Partnership participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants can contribute a maximum of 10% of their
eligible salaries (as defined) subject to maximum limits, as determined by
provisions of the Internal Revenue Code, and the Partnership will match 100% of
participants' contributions up to 5% of their eligible salaries. Expense
recognized by the Partnership under the Plan was approximately $320, $503 and $7
in 1996, 1995 and 1994, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
In 1995, the Partnership entered into capital lease obligations totaling
$376 for the acquisition of property and equipment. Amounts due to the General
Partner decreased by $562 as a result of the transfer of certain fixed assets to
the General Partner in 1995.
During 1994, the Partnership acquired gaming equipment totaling $4,971 which
was financed by equipment vendors.
The Partnership paid interest of $2,811, $943 and $111 in 1996, 1995 and
1994, respectively.
During 1994, the General Partner transferred property and equipment to the
Partnership with a fair value of $20,039, subject to an unsecured note payable
of $20,039 to the General Partner. In 1996, the General Partner assigned its
rights to this note to Argosy. Additionally, preopening costs of $2,035 were
financed by the General Partner.
During 1994, property and equipment totaling $29,441 and other assets
totaling $3,271 were contributed to the Partnership by the General Partner and
Jazz, respectively.
During 1996, Argosy transferred property and equipment with a fair value of
$1,844, subject to an unsecured note payable to Argosy.
7. COMMITMENTS
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to pay to the City-Parish $2.50
per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional
passenger fee which is now $2.50 per passenger until actual construction of a
hotel commences by Jazz or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1996, the Partnership has paid all
admission payments due under the above agreements.
The Partnership leases certain premises under noncancelable operating leases
that expire in 1997. Future minimum lease payments under the noncancelable
operating leases with initial terms of one year or more are $205 in 1997.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes"). The assets of the Partnership are pledged as
collateral, and the Partnership is a guarantor, under the terms of Mortgage
Notes.
65
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
JAZZ ENTERPRISES, INC.
We have audited the accompanying balance sheets of Jazz Enterprises, Inc. as
of December 31, 1996 and 1995, and the related statements of operations,
stockholder's equity and cash flows for the year ended December 31, 1996 and for
the seven months ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jazz Enterprises, Inc. at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the year ended December 31, 1996 and the seven months ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 6, 1997
66
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
JAZZ ENTERPRISES, INC.
We have audited the accompanying statements of operations, stockholder's
equity, and cash flows for the years ended February 28, 1995 and 1994 of Jazz
Enterprises, Inc. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for each of
the two years in the period ended February 28, 1995 of Jazz Enterprises, Inc. in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Reno, Nevada
July 10, 1995
67
JAZZ ENTERPRISES, INC.
BALANCE SHEETS
(IN THOUSANDS)
COMPANY
---------------------
DECEMBER 31,
---------------------
1996 1995
---------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ $ 32
Other current assets..................................................................... 78 168
---------- ---------
Total current assets................................................................... 78 200
---------- ---------
NET PROPERTY AND EQUIPMENT................................................................. 57,297 22,250
GOODWILL, NET.............................................................................. 20,519 21,115
NOTE RECEIVABLE............................................................................ 1,892 1,892
OTHER ASSETS:
Deposits................................................................................. 196 196
Investment in partnership................................................................ 3,021 3,263
Other.................................................................................... 468
---------- ---------
Total other assets....................................................................... 3,685 3,459
---------- ---------
TOTAL ASSETS............................................................................... $ 83,471 $ 48,916
---------- ---------
---------- ---------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................................................. $ 3,478 $ 3,080
Notes payable and current maturities of long-term debt................................... 399
---------- ---------
Total current liabilities.............................................................. 3,478 3,479
---------- ---------
LONG-TERM DEBT............................................................................. 81,485 45,392
STOCKHOLDER'S EQUITY:
Common stock, no par value, 100,000 shares authorized, 200 shares issued and
outstanding............................................................................
Retained (deficit) earnings.............................................................. (1,492) 45
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................. $ 83,471 $ 48,916
---------- ---------
---------- ---------
See accompanying notes to financial statements.
68
JAZZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
COMPANY PREDECESSOR COMPANY
--------------------------- -------------------------------------------
SEVEN MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED MAY 30, YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, 1995 FEBRUARY 28, FEBRUARY 28,
1996 1995 (UNAUDITED) 1995 1994
------------ ------------- --------------- ------------ ------------
REVENUES:
Lease revenue.......................... $ 3,091 $ 1,786 $ $ 813 $
Rent revenue........................... 354 382 817 918
------------ ------ ----- ------------ ------------
3,445 2,168 1,630 918
------------ ------ ----- ------------ ------------
COSTS AND EXPENSES:
Operating expenses..................... 593 104 48 788 498
Selling, general and administrative.... 1,714 1,086
Depreciation and amortization.......... 1,382 405
Preopening costs....................... 100 597 5,642 2,283
------------ ------ ----- ------------ ------------
3,789 1,595 645 6,430 2,781
------------ ------ ----- ------------ ------------
(Loss) income from operations............ (344) 573 (645) (4,800) (1,863)
OTHER EXPENSE (INCOME):
Interest expense....................... 951 490 94 282
Equity in loss of unconsolidated
partnership.......................... 242 8
Interest income........................ (31) (83) (12)
Gain on sale of assets................. (60)
------------ ------ ----- ------------ ------------
(Loss) income before income taxes........ (1,537) 75 (708) (4,939) (1,851)
Income tax expense....................... (30) (65) (65) (38)
------------ ------ ----- ------------ ------------
Net (loss) income........................ $ (1,537) $ 45 $ (773) $ (5,004) $ (1,889)
------------ ------ ----- ------------ ------------
------------ ------ ----- ------------ ------------
See accompanying notes to financial statements.
69
JAZZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
PREDECESSOR COMPANY SHARES AMOUNT CAPITAL DEFICIT TOTAL
- ----------------------------------- -------- --------- ---------- ----------- -------
Balance at February 28, 1993....... 200 $ $ 100 $ (168) $ (68)
Net loss......................... (1,889) (1,889)
--
--- ---------- ----------- -------
Balance at February 28, 1994 200 100 (2,057) (1,957)
Capital contributions............ 2,448 2,448
Net loss......................... (5,004) (5,004)
--
--- ---------- ----------- -------
Balance at February 28, 1995....... 200 2,548 (7,061) (4,513)
Capital contributions
(unaudited).................... 646 646
Net loss (unaudited)............. (773) (773)
--
--- ---------- ----------- -------
Balance at May 30, 1995
(unaudited)...................... 200 $ $3,194 $(7,834) $(4,640)
--
--
--- ---------- ----------- -------
--- ---------- ----------- -------
RETAINED
COMMON (DEFICIT)
COMPANY SHARES STOCK EARNINGS TOTAL
- -- ------ ------ ----------- -------
Balance,
June
1,
1995... 200 $ $ $
Net
loss... 45 45
--
------ ----------- -------
Balance,
December
31,
1995... 200 45 45
Net
loss... (1,537) (1,537)
--
------ ----------- -------
Balance,
December
31,
1996... 200 $ $(1,492) $(1,492)
--
--
------ ----------- -------
------ ----------- -------
See accompanying notes to financial statements.
70
JAZZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
COMPANY PREDECESSOR COMPANY
--------------------------- -------------------------------------------
SEVEN MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED MAY 30, YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, 1995 FEBRUARY 28, FEBRUARY 28,
1996 1995 (UNAUDITED) 1995 1994
------------ ------------- --------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................. $ (1,537) $ 45 $ (773) $ (5,004) $ (1,889)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization................... 1,382 405 35 104 36
Write down associated with real estate owned.... 1,386
Gain on sale of assets.......................... (60)
Equity in losses of unconsolidated
partnership................................... 242 8 (700) (315)
Receivables..................................... (12) (36)
Other current assets............................ 90 (4)
Prepaid expenses................................ 9 (93) (78)
Other assets.................................... 35 (235)
Accounts payable and accrued liabilities........ 24 80 191 1,371 182
Increase in income taxes payable................ 65 27 38
------------ ------------- ------ ------------ ------------
Net cash provided by (used in) operating
activities................................ 201 534 (473) (2,946) (2,297)
------------ ------------- ------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Goodwill.......................................... (9,388)
Increase (decrease) in bank overdraft............. (234) 234
Proceeds from sale of assets...................... 101
Decrease (increase) in escrow deposit............. 255 (255)
Capital expenditures.............................. (22,988) (2,538) (85) (5,331) (13,143)
Loans and advances to related parties............. (31) (1,054) (807)
------------ ------------- ------ ------------ ------------
Net cash used in investing activities....... (22,988) (11,926) (350) (5,795) (14,205)
------------ ------------- ------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings-- related
party......................................... 7,879
Proceeds from issuance of long-term debt........ 52 15,348
Principal payments on long-term debt............ (2,191) (184) (400)
Advances from and (payments to) affiliate....... 25,414 11,608 180 935 (438)
Increase in other assets........................ (468)
Contributed capital............................. 647 1,869
Increase (decrease) in construction related
payable....................................... (2,132) 2,132
------------ ------------- ------ ------------ ------------
Net cash provided by financing activities..... 22,755 11,424 827 8,603 16,642
------------ ------------- ------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................. (32) 32 4 (138) 140
Cash and cash equivalents at beginning of
period.......................................... 32 2 140
------------ ------------- ------ ------------ ------------
Cash and cash equivalents at end of period........ $ $ 32 $ 6 $ 2 $ 140
------------ ------------- ------ ------------ ------------
------------ ------------- ------ ------------ ------------
See accompanying notes to financial statements.
71
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Jazz Enterprises, Inc., ("Jazz" or "the Company") a Louisiana corporation
was incorporated on June 10, 1992 for the purpose of developing a riverboat
gaming operation and an entertainment complex, known as "Catfish Town" in Baton
Rouge, Louisiana.
In July 1993, the Company entered into a partnership with Argosy of
Louisiana, Inc., (a wholly owned subsidiary of Argosy Gaming Company ("Argosy"))
("ALI") in which the Company owns 10% and ALI owns 90%, to operate a riverboat
casino in Baton Rouge, Louisiana, which opened September 30, 1994. The Company
contributed its Certificate of Preliminary Approval and certain leases to the
partnership.
On December 5, 1994, the stockholders of Jazz entered in an agreement to
sell 100% of the common stock of Jazz to Argosy. The transaction was consummated
on May 30, 1995 and was accounted for as a purchase, therefore establishing a
new basis of accounting. Terms of the transaction allowed Argosy to acquire
Jazz's 10% limited partnership interest in the Baton Rouge casino and all of
Jazz's interest in the Catfish Town real estate development.
Under terms of the purchase agreement, Argosy made initial cash payments to
Jazz totalling $8,500 and is required to make additional payments to the former
shareholders of Jazz of $1,350 annually for ten years, and payments of $500
annually for the following ten years. The net present value of these additional
payments was approximately $9,400 assuming a discount rate of 10.5%, and is
included in long-term debt at December 31, 1996 and 1995. In addition, Argosy
forgave loans to Jazz and its principals of approximately $20,700, assumed
certain construction obligations, ordinary course accounts payable and other
liabilities totalling approximately $7,300 and paid expenses of approximately
$900. Under terms of the Purchase Agreement substantially all other obligations
of Jazz existing at the time of the purchase remain the responsibility of the
former owners of Jazz.
In the accompanying financial statements, "Predecessor Company" refers to
Jazz prior to its purchase by Argosy and "Company" refers to Jazz subsequent to
its purchase by Argosy. The financial statements of the Predecessor Company are
not comparable to the financial statements of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company and Predecessor Company considers cash and all liquid
investments with an original maturity of three months or less to be cash
equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1995.
GOODWILL
Goodwill represents the cost in excess of fair value of net assets acquired,
and is amortized over 40 years. Accumulated amortization is $348 and $944 at
December 31, 1996 and 1995, respectively.
INVESTMENT IN PARTNERSHIP
The Company records its investment in the partnership under the equity
method as it believes that it has significant influence over the partnership
since the partnership's parent and Jazz are wholly-owned subsidiaries of Argosy.
72
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed on the
straight-line method over the shorter of the estimated useful lives or lease
period as follows:
Buildings and improvements........................ 31 years
Furniture, fixtures and equipment................. 5 to 7 years
RENTAL INCOME
Rental income is recognized over the life of the associated lease. Minimum
future rents to be received under operating leases are $341 in 1997 and $85 in
1998, respectively.
PREOPENING COSTS
Preopening costs, which consist primarily of labor, training and marketing
costs incurred by the Predecessor Company and the Company, are expensed as
incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$53, $0, $27, $66 and $93 for 1996, the seven months ended December 31, 1995,
the three months ended May 30, 1995 and the years ended February 28, 1995 and
1994, respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated tax
returns of Argosy. The Company computes federal and state taxes on a separate
return basis. Taxes due are settled between the Company and Argosy in accordance
with the terms of a tax sharing arrangement.
Income taxes for the Predecessor Company were recorded in accordance with
the liability method specified by Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes."
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to the 1996
presentation.
INTERIM FINANCIAL STATEMENTS
The financial statements of the Predecessor Company for the three months
ended May 30, 1995 are unaudited; however, in the opinion of management, all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the Predecessor Company's financial position and results of
operations for such periods have been included. The results for the three months
ended May 30, 1995 are not necessarily indicative of the results to be expected
for future periods.
73
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following: December 31,
1996 1995
--------- ---------
Land.................................................................... $ 8,187 $ 8,187
Buildings and improvements.............................................. 48,192
Furniture, fixtures and equipment....................................... 2,444 488
Construction in progress................................................ 50 13,632
--------- ---------
58,873 22,307
Less accumulated depreciation and amortization.......................... (1,576) (57)
--------- ---------
Net property and equipment.............................................. $ 57,297 $ 22,250
--------- ---------
--------- ---------
3. LONG-TERM DEBT
Notes payable and long term debt consists of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Notes payable to former owner, principal and interest due quarterly
through September 2015, discounted at 10.5%........................... $ 7,011 $ 9,202
Noninterest bearing advances from related party, no stated maturity..... 74,474 36,589
--------- ---------
81,485 45,791
Less current maturities................................................. (399)
--------- ---------
$ 81,485 $ 45,392
--------- ---------
--------- ---------
The carrying value of long term debt approximates fair value at December 31,
1996. Maturities of long term debt, are as follows:
1997............................................................... $ 0
1998............................................................... 259
1999............................................................... 531
2000............................................................... 589
2001............................................................... 653
Thereafter......................................................... 79,453
74
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
Income tax expense consists of the following:
COMPANY PREDECESSOR COMPANY
-------------------------------- -----------------------------------------------------
YEAR ENDED SEVEN MONTHS THREE MONTHS
DECEMBER 31, ENDED DECEMBER 31, ENDED MAY 31, FEBRUARY 28, FEBRUARY 28,
1996 1995 1995 (UNAUDITED) 1995 1994
------------ ------------------ ------------------- --------------- ---------------
Current:
Federal........................ $ $ 30 $ $ $
State.......................... 65 65 38
------------ ------- --- --- ---
Total current.................... 30 65 65 38
------------ ------- --- --- ---
Income tax expense............... $ $ 30 $ 65 $ 65 $ 38
------------ ------- --- --- ---
------------ ------- --- --- ---
The tax effects of significant temporary differences of the Company
representing deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows:
1996 1995
--------- ---------
Tax over book depreciation................................................. $ (440) $ (202)
Preopening................................................................. 833 833
Effects of NOL Carryforward................................................ 728 164
Other, net................................................................. 34 25
--------- ---------
1,155 820
Valuation allowance........................................................ (1,155) (820)
--------- ---------
Net deferred tax assets.................................................... $ $
--------- ---------
--------- ---------
The Company has recorded a valuation allowance against its net deferred tax
assets due to the uncertainty of realization. The Company has tax net operating
loss carryforwards of approximately $1,800 which expire from 2008 through 2011.
5. RELATED PARTY TRANSACTIONS
The Company leases, for a, minimum of five years with six five-year renewal
options, a docking site, office and warehouse space to the partnership. Rent
under terms of the lease ranges from 6% to 10% of adjusted gross receipts, as
defined. Approximately $3,091 and $1,786 in 1996 and for the seven months ended
December 31, 1995 respectively resulted from this lease with the partnership.
The Predecessor Company received lease fees of $413 for the period September 30
through October 31, 1994. As a result of the sale of 100% of the common stock of
the Predecessor Company to Argosy, the lease fees were suspended from November
1994 until the closing of the purchase. Subsequent to the closing of the sale of
the Company to Argosy, the partnership resumed its obligations under the lease
with the Company.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, the Company received property and equipment with a fair value
of $12,471 from Argosy and this amount increased the noninterest bearing
advances from related parties.
75
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The Company paid interest of $951 and $490 in 1996 and for the seven months
ended December 31, 1995, respectively.
During the years ended February 28, 1995 and 1994, the Predecessor Company
acquired equipment financed by vendors totaling $19 and $7, respectively.
In the year ended February 28, 1995, the Predecessor Company's stockholders
paid $578 to reduce amounts due to affiliates.
During the year ended February 28, 1995, construction costs and other
payables in the amount of $3,352 were paid on behalf of the Predecessor Company
by Argosy.
During the year ended February 28, 1995, land in the amount of $425 was
exchanged for notes payable by the Predecessor Company.
During the year ended February 28, 1995, the Predecessor Company paid cash
for interest and state income taxes in the amount of $6 and $38 respectively. No
interest or taxes were paid during the three months ended May 30, 1995 or the
year ended February 28, 1994.
7. COMMITMENTS
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and the Predecessor Company
entered into an agreement which required the Predecessor Company and the
partnership to pay to the City-Parish $2.50 per passenger. Additionally, the
Predecessor Company agreed to pay to the City-Parish an additional passenger fee
which is now $2.50 per passenger until actual construction of a hotel commences
by the Company or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1996, the partnership has paid all
admission payments due under the above agreements.
The Company leases certain premises under noncancelable operating leases.
Future minimum lease payments under the noncancelable operating leases with
initial terms of one year or more are as follows:
1997................................................................ 213
1998................................................................ 213
1999................................................................ 213
2000................................................................ 202
2001................................................................ 202
Thereafter.......................................................... 15,144
Rent expense for the year ended December 31, 1996, the seven months ended
December 31, 1995, the three months ended May 30, 1995, the year ended February
28, 1995 and the year ended February 28, 1994 was $283, $265, $48, $788 and
$498, respectively.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes"). The assets of the Company are pledged as
collateral, and the Company is a guarantor, under the terms of Mortgage Notes.
76
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Indiana Gaming Company
We have audited the accompanying consolidated balance sheets of The Indiana
Gaming Company as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Indiana
Gaming Company at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
February 6, 1997
77
THE INDIANA GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------
1996 1995
---------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 9,216 $ 2
Accounts receivable, net................................................................. 138
Prepaid insurance........................................................................ 107
Other current assets..................................................................... 1,706 92
---------- ---------
Total current assets................................................................... 11,060 201
---------- ---------
NET PROPERTY AND EQUIPMENT................................................................. 69,392 11,070
OTHER ASSETS:
Deposits................................................................................. 5 1,052
Cash and cash equivalents--restricted.................................................... 14,919
Intangible assets, net of accumulated amortization of $61 in 1996........................ 31,459 4,405
---------- ---------
Total other assets..................................................................... 46,383 5,457
---------- ---------
TOTAL ASSETS............................................................................... $ 126,835 $ 16,728
---------- ---------
---------- ---------
CURRENT LIABILITIES:
Accounts payable......................................................................... $ 3,115 $ 1,840
Accrued payroll and related expenses..................................................... 912 73
Accrued interest and dividends payable--related parties.................................. 2,198
Installment contracts payable............................................................ 3,252
Other accrued liabilities................................................................ 1,452 2
Current maturities of long-term debt--related parties.................................... 2,900
Current maturities of other long-term obligations........................................ 5,169
---------- ---------
Total current liabilities.............................................................. 18,998 1,910
---------- ---------
LONG-TERM DEBT--RELATED PARTIES............................................................ 86,612 15,225
OTHER LONG-TERM OBLIGATIONS................................................................ 15,000
MINORITY INTERESTS......................................................................... 14,490 1,709
STOCKHOLDER'S EQUITY
Common stock - $.01 par value, 1,000 shares authorized issued and outstanding Accumulated
deficit.................................................................................. (8,265) (2,121)
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................. $ 126,835 $ 16,728
---------- ---------
---------- ---------
See accompanying notes to consolidated financial statements.
78
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
REVENUES:
Casino........................................................................... $ 3,930 $ $
Admissions....................................................................... 776
Food, beverage and other......................................................... 167
---------- --------- ---------
4,873
Less promotional allowances...................................................... (462)
---------- --------- ---------
Net revenues....................................................................... 4,411
---------- --------- ---------
COSTS AND EXPENSES:
Casino........................................................................... 2,116
Food, beverage and other......................................................... 149
Other operating expenses......................................................... 711
Selling, general and administrative.............................................. 783
Depreciation and amortization.................................................... 378
Management fees--related parties................................................. 38
Preopening....................................................................... 11,036 2,143 839
---------- --------- ---------
15,211 2,143 839
---------- --------- ---------
Loss from operations............................................................... (10,800) (2,143) (839)
---------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income.................................................................. 127
Interest expense................................................................. (192)
---------- --------- ---------
(65)
---------- --------- ---------
Net loss before minority interests................................................. (10,865) (2,143) (839)
Minority interests................................................................. 4,721 906 357
---------- --------- ---------
Net loss........................................................................... $ (6,144) $ (1,237) $ (482)
---------- --------- ---------
---------- --------- ---------
See accompanying notes to consolidated financial statements.
79
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL
COMMON ACCUMULATED STOCKHOLDER'S
SHARES STOCK DEFICIT DEFICIT
----------- --------- ------------ ------------
Balance, December 31, 1993....................................... 1,000 $ $ (402) $ (402)
Net loss....................................................... (482) (482)
----- --------- ------------ ------------
Balance, December 31, 1994....................................... 1,000 (884) (884)
Net loss....................................................... (1,237) (1,237)
----- --------- ------------ ------------
Balance, December 31, 1995....................................... 1,000 (2,121) (2,121)
Net loss....................................................... (6,144) (6,144)
----- --------- ------------ ------------
Balance, December 31, 1996....................................... 1,000 $ $ (8,265) $ (8,265)
----- --------- ------------ ------------
----- --------- ------------ ------------
See accompanying notes to consolidated financial statements.
80
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss........................................................................ $ (6,144) $ (1,237) $ (482)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 453 20
Minority interests.......................................................... (4,721) (906) (357)
Changes in operating assets and liabilities:
Accounts receivable......................................................... (138) 238 (235)
Other current assets........................................................ (941) (201)
Accounts payable............................................................ 1,630 1,965 (1,327)
Accrued interest payable.................................................... 656
Accrued liabilities......................................................... 2,289 75
---------- ---------- ---------
Net cash used in operating activities......................................... (6,916) (46) (2,401)
---------- ---------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow................................................ (14,919)
Purchases of property and equipment........................................... (52,879) (7,566) (3,949)
Payments under development agreement and other infrastructure improvements.... (6,946) (4,405)
---------- ---------- ---------
Net cash used in investing activities......................................... (74,744) (11,971) (3,949)
---------- ---------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Increase in advances from affiliates.......................................... 50,438 10,535 4,565
Payments on installment contracts............................................. (1,805)
Proceeds from contributed capital............................................. 19,044 1,484 1,785
Proceeds from long-term debt.................................................. 23,197
---------- ---------- ---------
Net cash provided by financing activities....................................... 90,874 12,019 6,350
---------- ---------- ---------
Net increase in cash............................................................ 9,214 2
Cash, beginning of year......................................................... 2
---------- ---------- ---------
Cash, end of year............................................................... $ 9,216 $ 2 $
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to consolidated financial statements.
81
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The Indiana Gaming Company, a wholly owned subsidiary
of Argosy Gaming Company ("Argosy") (collectively with its controlled
partnership Indiana Gaming Company L.P. ("Partnership") "the Company") was
formed effective April 11, 1994 to provide riverboat gaming and related
entertainment in Lawrenceburg, Indiana. The Company is a 57 1/2% general partner
in the Partnership, together with, three limited partners including, Conseco
Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5%
limited partner and RJ Investments, Inc., a 4% limited partner. On December 10,
1996, the Company commenced operations at a temporary site and ceased being in
the development stage. The Company is constructing its permanent site which it
expects to open in December 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. All
significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS--The Company considers cash and all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Temporary site improvements....................... 1 year
Leasehold and shore improvements.................. 5-31 years
Furniture, fixtures and equipment................. 5-10 years
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
represents funds placed into an escrow account which may only be used to fund
progress payments related to the construction of the Company's permanent landing
facility.
LICENSE APPLICATION FEES--License application fees associated with obtaining
a gaming license have been capitalized and are a part of intangible assets at
December 31, 1996. These costs are being amortized over the life of the gaming
license, which is five years. Total amortization expense was $11 for the year
ended December 31, 1996.
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food, beverage and other
items provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
cost of providing promotional allowances has been included in costs and expenses
as follows:
1996
---------
Admissions............................................................................ $ 190
Food, beverage and other.............................................................. 4
82
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel
rent, training and marketing costs incurred prior to the commencement of gaming
operations, are expensed as incurred.
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $503, $112 and $5 for the years ended December 31, 1996,
1995 and 1994, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Land........................................................................................ $ 16,015 $ 6,591
Leasehold and shore improvements............................................................ 5,892
Furniture, fixtures and equipment........................................................... 9,367 114
Construction in progress.................................................................... 38,534 4,389
--------- ---------
69,808 11,094
Less accumulated depreciation and amortization.............................................. (416) (24)
--------- ---------
Net property and equipment.................................................................. $ 69,392 $ 11,070
--------- ---------
--------- ---------
3. LONG-TERM DEBT--RELATED PARTIES
Long-term debt consists of the following at December 31, 1996 and 1995:
1996 1995
--------- ---------
Capital loans payable to Argosy, noninterest bearing, no stated due date.................... $ 66,315 $ 15,225
Capital loans payable to partner interest at prime plus 6% (14.25% at December 31, 1996)
principal paid in quarterly installments over eight years................................. 23,197
--------- ---------
89,512 15,225
Less current maturities..................................................................... (2,900)
--------- ---------
$ 86,612 $ 15,225
--------- ---------
--------- ---------
Interest expense on the capital loans from the partner compounds quarterly
to the extent unpaid. Principal on the capital loans is amortized over eight
years with equal annual payments of principal. The Company is obligated to pay
contemporaneously with distributions of Cash Flow, as defined, current and
accrued interest and then principal on the Capital Loans to the Partner, pro
rata, in relation to their principal balance of the respective Capital Loans
then outstanding.
Interest expense to the partner amounted to $192 (net of $1,680 capitalized)
in the year ended December 31, 1996.
83
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
The tax effects of significant temporary differences representing deferred
tax assets at December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Preopening............................................................... $ (5,670) $ (1,545)
NOL carryforward......................................................... (104)
Other, net............................................................... (9)
--------- ---------
(5,783) (1,545)
Valuation allowance...................................................... 5,783 1,545
--------- ---------
$ $
--------- ---------
--------- ---------
The Company has recorded a valuation allowance against all of its deferred
tax assets due to the uncertainty of realization. The Company has a net
operating loss carryforward for income tax purposes of approximately $260 which
expires in 2011.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amount of $5,056 in 1996 which was
financed through installment contracts.
The Company paid $207 of interest for the year ended December 31, 1996. No
interest was paid in 1995 or 1994.
6. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1996, are
as follows:
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------
1997................................................................ $ 4,767
1998................................................................ 362
1999................................................................ 285
2000................................................................ 107
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$2,837, $148 and $11 respectively.
7. OTHER RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the Company, as the sole and exclusive manager of
all operations of the Partnership. The term of the Management Agreement is
twenty years, however, the term may be extended in the event that the term of
the Partnership is extended beyond the year 2014. The Partnership will pay to
the Company a Management Fee in the amount of 12.5% of the operating profit of
the Partnership, as defined. Under a separate financial advisory agreement the
Company has agreed to pay Conseco a financial advisory fee equal to 40% of the
management fee.
84
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Company has entered into lease agreements with Argosy for the temporary
riverboat casino and related landing facility. Aggregate monthly rentals are
approximately $500 for these facilities. Total expense recognized under the
subleases was $2,462 in 1996.
Argosy provides certain services for the Company, primarily, centralized
reservations and insurance. Reimbursement of these expenses has been recorded by
the Company as due to affiliates.
The Company has entered into leases with shareholders of a limited partner
for parking lots and outdoor advertising. Total expense recognized under these
leases was $133 in 1996.
8. EMPLOYEES BENEFIT PLAN
The Company participates in an Argosy sponsored 401(k) defined-contribution
plan which was established in 1994 and covers substantially all of the Company's
full-time employees. Participants can contribute a maximum of 10% of their
eligible salaries (as defined) subject to maximum limits, as determined by
provisions of the Internal Revenue Code, and the Company has matched 100% of
participants' contributions up to 5% of their eligible salaries. Expense
recognized under the Plan was $52, $5 and $0 for the years ended December 31,
1996, 1995 and 1994.
9. COMMITMENTS AND CONTINGENCIES
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with
the terms of the Development Agreement, the Company entered into a lease with
the City of Lawrenceburg for docking privileges for the riverboat casino. The
initial term of the lease is for six years and thereafter automatically extends
for up to nine renewal term periods of five years each, unless terminated by the
Company. Under the terms of the Development Agreement, the Company pays an
annual fee to the City of Lawrenceburg ranging from 5%-14% of Adjusted Gross
Receipts, as defined, with a minimum of $6 million per year.
The Company has agreed to pay the City of Lawrenceburg approximately $33,848
in reimbursements for infrastructure improvements and unrestricted grants. These
have been recorded as an intangible asset in the balance sheet at December 31,
1996. The reimbursement for infrastructure improvements and unrestricted city
grants are being amortized over the 28 year term, including extensions, of the
Development Agreement. Total amortization expense was $50 for the year ended
December 31, 1996.
Included in other long term obligations is $20,169 representing the
remaining grants and infrastructure payments due by the Company under the terms
of the Riverboat Gaming Development Agreement with the City of Lawrenceburg
("Development Agreement"). Upon the final completion of the permanent site
$8,000 is due. The remaining $12,169 is payable as follows: $5,169 ratably over
the first year subsequent to opening of the temporary site, $5,000 ratably over
the second year subsequent to the opening of the temporary site and $2,000
ratably over the third year subsequent to the opening of the temporary site.
COMPLETION OF PERMANENT FACILITY--Provisions of the partnership agreement
stipulate that capital contributions, including partner loans up to a total
project cost, as defined, of $225 million will be made 57 1/2% by the Company
and 42 1/2% by the limited partners with any excess project cost being the sole
responsibility of the Company.
85
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Company may only operate at its temporary site for one year. The
completion of the permanent facility is subject to the satisfaction of numerous
conditions including weather conditions and the receipt of numerous permits and
licenses. There can be no assurance that the permanent facility will be open
within one year of the opening of the temporary facility.
BONDING OBLIGATION--The Company is required, by Indiana Gaming Statute, to
post a bond in favor of the Indiana Gaming Commission to collateralize certain
obligations to the City of Lawrenceburg under the Development Agreement, and to
the State of Indiana. This bond is collateralized by certain real estate of the
Company.
PERMANENT RIVERBOAT CASINO--The Partnership has entered into an agreement
for the construction of its permanent riverboat facility. Total estimated costs
of this contract is approximately $39 million. As of December 31, 1996, the
Company had made approximately $23.3 million in progress payments.
TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the partnership
agreement, after the third anniversary date of commencement of operations each
limited partner has the right to sell its interest to the other partners (pro
rata in accordance with their respective percentage interests). In the event of
this occurrence, if the partners cannot agree on a selling price, the
Partnership will be sold in its entirety.
GUARANTY OF PARENT OBLIGATIONS--On June 5, 1996 Argosy issued $235 million
of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The Company has
pledged its interest in the Partnership, and its rights to certain payments from
the Partnership, as collateral, under terms of the Mortgage Notes. Additionally,
the Company is a guarantor of the Mortgage Notes.
86
REPORT OF INDEPENDENT AUDITORS
The Partners
Indiana Gaming Company, L.P.
We have audited the accompanying balance sheets of Indiana Gaming Company,
L.P. as of December 31, 1996 and 1995, and the related statements of operations,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indiana Gaming Company, L.P.
at December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Indianapolis, Indiana
February 6, 1997
87
INDIANA GAMING COMPANY, L.P.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
---------------------
1996 1995
---------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................ $ 9,216 $ 2
Accounts receivable, net................................................................. 138
Prepaid insurance........................................................................ 107
Other current assets..................................................................... 1,706 92
---------- ---------
Total current assets................................................................... 11,060 201
---------- ---------
NET PROPERTY AND EQUIPMENT................................................................. 68,349 10,949
OTHER ASSETS:
Deposits................................................................................. 5 1,052
Cash and cash equivalents--restricted.................................................... 14,919
Intangible assets, net of accumulated amortization of $61 in 1996........................ 31,459 4,405
---------- ---------
Total other assets..................................................................... 46,383 5,457
---------- ---------
TOTAL ASSETS............................................................................... $ 125,792 $ 16,607
---------- ---------
---------- ---------
CURRENT LIABILITIES:
Accounts payable......................................................................... $ 3,464 $ 1,840
Accrued payroll and related expenses..................................................... 912 73
Accrued interest and preferred equity return............................................. 5,240
Installment contracts payable............................................................ 3,252
Other accrued liabilities................................................................ 1,452 2
Due to affiliates........................................................................ 777 125
Current maturities of long-term debt-related parties..................................... 7,066
Current maturities of other long-term obligations........................................ 5,169
---------- ---------
Total current liabilities.............................................................. 27,332 2,040
---------- ---------
LONG-TERM DEBT-RELATED PARTIES............................................................. 49,463
OTHER LONG-TERM OBLIGATIONS................................................................ 15,000
PARTNERS' EQUITY:
General partner.......................................................................... 19,549 12,858
Limited partners......................................................................... 14,448 1,709
---------- ---------
Total partners' equity................................................................. 33,997 14,567
---------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY..................................................... $ 125,792 $ 16,607
---------- ---------
---------- ---------
See accompanying notes to financial statements.
88
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
REVENUES:
Casino........................................................................... $ 3,930 $ $
Admissions....................................................................... 776
Food, beverage and other......................................................... 167
---------- --------- ---------
4,873
Less promotional allowances...................................................... (462)
---------- --------- ---------
Net revenues....................................................................... 4,411
---------- --------- ---------
COSTS AND EXPENSES:
Casino........................................................................... 2,116
Food, beverage and other......................................................... 149
Other operating expenses......................................................... 711
Selling, general and administrative.............................................. 685
Depreciation and amortization.................................................... 378
Management fees--related parties................................................. 94
Preopening....................................................................... 10,979 2,131 839
---------- --------- ---------
15,112 2,131 839
---------- --------- ---------
Loss from operations............................................................... (10,701) (2,131) (839)
OTHER INCOME (EXPENSE):
Interest income.................................................................. 127
Interest expense................................................................. (534)
---------- --------- ---------
(407)
---------- --------- ---------
Net loss prior to preferred equity return.......................................... (11,108) (2,131) (839)
Preferred equity return............................................................ (3,726)
---------- --------- ---------
Net loss attributable to common equity partners.................................... $ (14,834) $ (2,131) $ (839)
---------- --------- ---------
---------- --------- ---------
See accompanying notes to financial statements.
89
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
COMMON EQUITY (DEFICIT) PREFERRED EQUITY
----------------------------------- ----------------------------------- TOTAL
GENERAL LIMITED GENERAL LIMITED PARTNERS'
PARTNER PARTNERS TOTAL PARTNER PARTNERS TOTAL EQUITY
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1993................. $ (402) $ (297) $ (699) $ $ $ $ (699)
Capital contributions.................... 4,565 1,785 6,350 6,350
Net loss................................. (482) (357) (839) (839)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1994................. 3,681 1,131 4,812 4,812
Capital contributions.................... 5,066 1,484 6,550 5,336 5,336 11,886
Net loss................................. (1,225) (906) (2,131) (2,131)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1995................. 7,522 1,709 9,231 5,336 5,336 14,567
Capital contributions.................... 3,850 3,850 15,220 15,194 30,414 34,264
Net loss prior to preferred equity
return................................. (6,387) (4,721) (11,108) (11,108)
Preferred equity return.................. (2,142) (1,584) (3,726) 2,184 1,542 3,726
Accrued preferred equity distribution.... (2,184) (1,542) (3,726) (3,726)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1996................. $ (1,007) $ (746) $ (1,753) $ 20,556 $ 15,194 $ 35,750 $ 33,997
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
See accompanying notes to financial statements.
90
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.................................................................... $ (14,834) $ (2,131) $ (839)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 453 20
Accrued preferred equity dividends........................................ 3,726
Changes in operating assets and liabilities:
Accounts receivable....................................................... (138) 238 (235)
Other current assets...................................................... (941) (201)
Accounts payable.......................................................... 1,977 1,965 (1,327)
Accrued interest payable.................................................. 1,514
Accrued liabilities....................................................... 2,289 75
---------- ---------- ----------
Net cash used in operating activities................................... (5,954) (34) (2,401)
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow.............................................. (14,919)
Purchases of property and equipment......................................... (51,955) (7,445) (3,949)
Payments under development agreement and other infrastructure
improvements.............................................................. (6,946) (4,405)
---------- ---------- ----------
Net cash used in investing activities................................... (73,820) (11,850) (3,949)
---------- ---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Payments on installment contracts........................................... (1,805)
Proceeds from contributed capital........................................... 34,264 11,886 6,350
Proceeds from long-term debt................................................ 56,529
---------- ---------- ----------
Net cash provided by financing activities............................... 88,988 11,886 6,350
---------- ---------- ----------
Net increase in cash.......................................................... 9,214 2
Cash, beginning of year....................................................... 2
---------- ---------- ----------
Cash, end of year............................................................. $ 9,216 $ 2 $
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
91
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Indiana Gaming Company, L.P. ("Partnership"), an
Indiana limited partnership, was formed effective April 11, 1994 to provide
riverboat gaming and related entertainment in Lawrenceburg, Indiana. The
Partnership is comprised of a 57.5% general partner, The Indiana Gaming Company
("General Partner"), a wholly owned subsidiary of Argosy Gaming Company,
("Argosy"), and three limited partners including, Conseco Entertainment, L.L.C.,
("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ
Investments, Inc., a 4% limited partner. Net income (loss) is allocated to the
partners based on their respective ownership interests. On December 10, 1996,
the Partnership commenced operations at a temporary site and ceased being in the
development stage. The Partnership is constructing its permanent site which it
expects to open in December 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Temporary site improvements....................... 1 year
Leasehold and shore improvements.................. 5-31 years
Furniture, fixtures and equipment................. 5-10 years
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
represents funds placed into an escrow account which may only be used to fund
progress payments related to the construction of the Partnership's permanent
landing facility.
LICENSE APPLICATION FEES--License application fees associated with obtaining
a gaming license have been capitalized and included in the balance sheet as a
part of intangible assets at December 31, 1996. These costs are being amortized
over the life of the gaming license, which is five years. Total amortization
expense was $11 for the year ended December 31, 1996.
REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food, beverage and other
items provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
cost of providing promotional allowances has been included in costs and expenses
as follows:
1996
---------
Admissions............................................................................ $ 190
Food, beverage and other.............................................................. 4
PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel
rent, training and marketing costs incurred prior to the commencement of gaming
operations, are expensed as incurred.
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred.
Advertising expense was $503, $112 and $5 for the years ended December 31, 1996,
1995 and 1994, respectively.
92
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES--No provision (credit) for federal or state income taxes is
recorded in the financial statements, as income taxes are the responsibility of
the individual partners.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Land.................................................................... $ 16,015 $ 6,591
Leasehold and shore improvements........................................ 5,892
Furniture, fixtures and equipment....................................... 9,367 114
Construction in progress................................................ 37,491 4,268
--------- ---------
68,765 10,973
Less accumulated depreciation and amortization.......................... (416) (24)
--------- ---------
Net property and equipment.............................................. $ 68,349 $ 10,949
--------- ---------
--------- ---------
3. LONG-TERM DEBT--RELATED PARTIES
Long-term debt consists of the following at December 31, 1996:
Capital loans payable to partners, interest at prime plus 6%
(14.25% at December 31, 1996), principal paid in quarterly
installments over eight years.................................... $ 56,529
Less current maturities............................................ (7,066)
---------
$ 49,463
---------
---------
Interest expense on the capital loans from the partners compounds quarterly
to the extent unpaid. Principal on the capital loans is amortized over eight
years with equal annual payments of principal. The Partnership is obligated to
pay contemporaneously with distributions of Cash Flow, as defined, current and
accrued interest, first, and then principal, on the Capital Loans to the
Partners, pro rata, in relation to the principal balances of their respective
Capital Loans then outstanding.
Interest expense to related parties amounted to $636 (net of $874
capitalized) in the year ended December 31, 1996.
4. PREFERRED EQUITY
Under the terms of the partnership agreement governing the Partnership,
preferred equity of $35,750 has been contributed to the Partnership. Of this
amount $20,556 was contributed by the General Partner and $15,194 was
contributed by Conseco.
The preferred equity carries a 14% dividend rate which is cumulative and is
compounded annually. The preferred equity return is to be paid from available
cash flow, as defined, in accordance with the terms of the partnership
agreement.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Partnership acquired equipment in the amount of $5,056 in 1996 which was
financed through installment contracts.
93
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Partnership paid $207 interest for the year ended December 31, 1996. No
interest was paid in 1995 or 1994.
6. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1996, are
as follows:
Years ending December 31,
1997.............................................................. $ 4,767
1998.............................................................. 362
1999.............................................................. 285
2000.............................................................. 107
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
$2,837, $148 and $11 respectively.
7. OTHER RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the General Partner, as the sole and exclusive
manager of all operations of the Partnership. The term of the Management
Agreement is twenty years, however, the term may be extended in the event that
the term of the Partnership is extended beyond the year 2014. The Partnership
will pay to the General Partner a Management Fee in the amount of 12.5% of the
operating profit of the Partnership, as defined. Under a separate financial
advisory agreement the General Partner has agreed to pay Conseco a financial
advisory fee equal to 40% of the Management Fee.
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Partnership has entered into lease agreements with Argosy for the
temporary riverboat casino and related landing facility. Aggregate monthly
rentals are approximately $500 for these facilities. Total expense recognized
under the subleases was $2,462 in 1996.
Argosy provides certain services for the Partnership, primarily, centralized
reservations and insurance. Reimbursement of these expenses has been recorded by
the Partnership as due to affiliates.
The Partnership has entered into leases with shareholders of a limited
partner for parking lots and outdoor advertising. Total expense recognized under
these leases was $133 in 1996.
8. EMPLOYEES BENEFIT PLAN
The Partnership participates in an Argosy sponsored 401(k)
defined-contribution plan which was established in 1994 and covers substantially
all of the Partnership's full-time employees. Participants can contribute a
maximum of 10% of their eligible salaries (as defined) subject to maximum
limits, as determined by provisions of the Internal Revenue Code, and the
Partnership has matched 100% of participants' contributions up to 5% of their
eligible salaries. Expense recognized under the Plan was $52, $5 and $0 for the
years ended December 31, 1996, 1995 and 1994.
94
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. COMMITMENTS AND CONTINGENCIES
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with
the terms of the Development Agreement, the Partnership entered into a lease
with the City of Lawrenceburg for docking privileges for its riverboat casino.
The initial term of the lease is for six years and thereafter automatically
extends for up to nine renewal term periods of five years each, unless
terminated by the Partnership. Under the terms of the Development Agreement, the
Partnership pays an annual fee to the City of Lawrenceburg ranging from 5%-14%
of Adjusted Gross Receipts, as defined, with a minimum of $6 million per year.
The Partnership has agreed to pay the City of Lawrenceburg $33,848 in
reimbursements for infrastructure improvements and unrestricted grants.
Subsequent to the commencement of operations at the temporary site, these have
been recorded as an intangible asset in the balance sheet at December 31, 1996.
The reimbursement for infrastructure improvements and unrestricted city grants
are being amortized over the 28 year term, including extensions, of the
Development Agreement. Total amortization expense was $50 for the year ended
December 31, 1996.
Included in other long term obligations is $20,169 representing the
remaining grants and infrastructure payments due by the Partnership under the
terms of the Riverboat Gaming Development Agreement with the City of
Lawrenceburg ("Development Agreement"). Upon the final completion of the
permanent site $8,000 is due. The remaining $12,169 is payable as follows:
$5,169 ratably over the first year subsequent to opening of the temporary site,
$5,000 ratably over the second year subsequent to the opening of the temporary
site and $2,000 ratably over the third year subsequent to the opening of the
temporary site.
COMPLETION OF PERMANENT FACILITY--Provisions of the partnership agreement
stipulate that capital contributions, including partner loans up to a total
project cost, as defined, of $225 million will be made 57 1/2% by the General
Partner and 42 1/2% by the limited partners with any excess project cost being
the sole responsibility of the General Partner.
The Partnership may only operate at its temporary site for one year. The
completion of the permanent facility is subject to the satisfaction of numerous
conditions including weather conditions and the receipt of numerous permits and
licenses. There can be no assurance that the permanent facility will be open
within one year of the opening of the temporary facility.
BONDING OBLIGATION--The Partnership is required, by Indiana Gaming Statute,
to post a bond in favor of the Indiana Gaming Commission to collateralize
certain obligations to the City of Lawrenceburg under the Development Agreement,
and to the State of Indiana. This bond is collateralized by certain real estate
of the Partnership.
PERMANENT RIVERBOAT CASINO--The Partnership has entered into an agreement
for the construction of its permanent riverboat facility. Total estimated costs
of this contract is approximately $39 million. As of December 31, 1996, the
Partnership had made approximately $23.3 million in progress payments.
TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership
Agreement, after the third anniversary date of commencement of operations each
limited partner has the right to sell its interest to the other partners (pro
rata in accordance with their respective percentage interests). In the event of
this occurrence, if the partners cannot agree on a selling price, the
Partnership will be sold in its entirety.
95
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
96
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth under the
captions "Election of Directors" and "Management" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth under the
caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is set forth under the
caption "Record Date, Required Vote, Outstanding Shares and Holdings of Certain
Stockholders--Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth under the
caption "Certain Transactions" in the Proxy Statement and is incorporated herein
by reference.
97
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. The following consolidated financial statements of the Company and
independent auditors' report thereon, included in the Annual Report, are
incorporated by reference in Item 8. The remaining information appearing in the
Annual Report is not deemed to be filed as part of this report, except as
expressly provided herein.
Consolidated Balance Sheets--December 31, 1996 and 1995.
Consolidated Statements of Operations--years ended December 31, 1996, 1995
and 1994.
Consolidated Statements of Stockholders' Equity--years ended December 31,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. The financial statement schedules of the Company have been omitted
because they are not required or not applicable or the required information is
shown in the financial statement or notes thereto.
3. The exhibits listed on the "Index to Exhibits" on page 99 are filed with
this Form 10-K or incorporated by reference as set forth below.
98
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company (previously filed with the Securities
and Exchange Commission ("SEC") as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-55878) and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
4.1 Form of the Company's 13 1/4% First Mortgage Notes due 2004 issued on June 5, 1996 in the aggregate
principal amount of $235,000,000 (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.2 Form of Guarantee issued on June 5, 1996 by Alton Gaming Company, Argosy of Louisiana, Inc., Catfish
Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises,
Inc., The Missouri Gaming Company and The St. Louis Gaming Company (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated
herein by reference).
4.3 Indenture dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as
Trustee, and the Guarantors named therein, for the Company's $235,000,000 of 13 1/4% First Mortgage
Notes due 2004 (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.4 Registration Rights Agreement dated as of June 5, 1996 by and among the Company, the Guarantors named
therein and the Initial Purchasers named therein (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by
reference).
4.5 Cash Collateral and Disbursement Agreement dated June 5, 1996 by and among the Company, First National
Bank of Commerce, as Trustee, and LaSalle National Trust, N.A., as disbursement agent (previously
filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No.
333-7299) and incorporated herein by reference).
4.6 Form of Security Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Grantor (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.7 Form of Subsidiary Security Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Grantor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Pledgor (previously filed with the SEC as an
99
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated
herein by reference).
4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National
Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle
Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The
Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the
Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996
by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance
Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-4 (File No. 333-7299) and incorporated herein by reference).
4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure
Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of
June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with
the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and
incorporated herein by reference).
4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the
Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated
herein by reference).
4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by
reference).
4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference).
9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie
Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-55878) and incorporated herein by reference).
10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference).
100
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling
Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997.
10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as
an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.8 Argosy Gaming Company Savings Plan (previously filed with the SEC as an Exhibit to the Company's Form
8-K dated March 10, 1994 and incorporated herein by reference).
10.9 Letter Agreement dated as of January 28, 1993 by and between L. Thomas Lakin and the Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.10 Letter Agreement dated as of January 28, 1993 by and between the Alton Riverboat Gambling Partnership
and H. Steven Norton (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference.)
10.11 Letter Agreement dated March 29, 1995 by and between Floyd C. Warmann and the Company (previously filed
with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 dated
March 31, 1995 and incorporated herein by reference).
10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and
the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company
and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the
Company's Form 8-K dated March 10, 1994 and incorporated herein by reference).
10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming
Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana
Gaming Company as amended by Amendment No. 1 to Management
101
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
Agreement dated February 21, 1996 (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana
Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the
Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company
L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming
Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development
Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of
December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference).
10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of
Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino--New York, Inc. and
The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K
dated March 31, 1995 and incorporated herein by reference).
10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as
obligee with USF&G, as surety.
13 Portions of the 1996 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of
Contents as incorporated by reference herein.
21 List of Subsidiaries
24.1 Consent of Ernst & Young LLP
24.2 Consent of Grant Thornton LLP
25 Powers of Attorney of directors
- ------------------------
(b) The following Reports on Form 8-K were filed by the Registrant with the
Securities and Exchange Commission during the quarter ended December 31,
1996:
None
(c) The Exhibits filed herewith, if any, are identified on Exhibit index
102
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 28th day of March, 1997.
ARGOSY GAMING COMPANY
By: /s/ GEORGE L. BRISTOL
-----------------------------------------
George L. Bristol
ACTING CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
NAME TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
/s/ GEORGE L. BRISTOL
- ---------------------------------------- Acting Chief Executive Officer March 28, 1997
George L. Bristol and Director
/s/ JOSEPH G. URAM Chief Financial Officer
- ---------------------------------------- (Principal Accounting March 28, 1997
Joseph G. Uram Officer)
/s/ EDWARD F. BRENNAN*
- ---------------------------------------- Director
Edward F. Brennan
/s/ FELIX LANCE CALLIS*
- ---------------------------------------- Director
Felix Lance Callis
/s/ WILLIAM F. CELLINI*
- ---------------------------------------- Director
William F. Cellini
/s/ JIMMY F. GALLAGHER*
- ---------------------------------------- Director
Jimmy F. Gallagher
/s/ JOHN BIGGS PRATT, SR.*
- ---------------------------------------- Director
John Biggs Pratt, Sr.
/s/ WILLIAM MCENERY*
- ---------------------------------------- Director
William McEnery
*By: /s/ GEORGE L. BRISTOL
-------------------------
George L. Bristol
Attorney-in-Fact
March 28, 1997
103
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1996 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 14,516 $ 886
Marketable securities................................................................... 126 1,952
Income taxes receivable................................................................. 11,111 2,197
Receivables............................................................................. 828 651
Other current assets.................................................................... 2,772 312
---------- ----------
Total current assets.............................................................. 29,353 5,998
Net property and equipment.............................................................. 15,475 9,629
Restricted cash......................................................................... 69,632
Investment in and advances to consolidated subsidiaries................................. 297,601 244,163
Other assets............................................................................ 12,422 5,878
Deferred taxes.......................................................................... 8,743
---------- ----------
Total assets........................................................................ $ 433,226 $ 265,668
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................................ $ 10,525 $ 6,648
Long-term debt............................................................................ 350,000 160,500
Deferred income taxes..................................................................... 980
Stockholders' equity:
Common stock, $.01 par; 60,000,000 shares authorized;--24,333,333 shares issued and
outstanding in 1996 and 1995............................................................ 243 243
Capital in excess of par.................................................................. 71,865 71,865
Retained earnings......................................................................... 593 25,432
---------- ----------
72,701 97,540
---------- ----------
Total liabilities and stockholders' equity.............................................. $ 433,226 $ 265,668
---------- ----------
---------- ----------
See accompanying notes to financial statements.
104
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
REVENUES
Management fees and other...................................................... $ 4,875 $ 4,071 $ 4,844
COSTS AND EXPENSES
General and administrative..................................................... 15,208 13,101 6,399
Development and preopening costs............................................... 835 1,060 3,122
---------- ---------- ---------
16,043 14,161 9,521
---------- ---------- ---------
Loss from operations........................................................... (11,168) (10,090) (4,677)
Net interest expense........................................................... (22,177) (8,964) (6,620)
Equity in net (loss) income of consolidated subsidiaries....................... (6,769) 18,042 16,413
---------- ---------- ---------
(Loss) income before income taxes and extraordinary expenses................... (40,114) (1,012) 5,116
Income tax benefit............................................................. 16,165 7,965 4,519
---------- ---------- ---------
Net (loss) income before extraordinary item.................................... (23,949) 6,953 9,635
---------- ---------- ---------
Extraordinary loss on extinguishment of debt (net of income tax benefit of
$594)........................................................................ (890)
---------- ---------- ---------
Net (loss) income.............................................................. $ (24,839) $ 6,953 $ 9,635
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to financial statements.
105
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------------------
1996 1995 1994
----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................... $ (24,839) $ 6,953 $ 9,635
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation............................................................ 1,671 1,437 479
Amortization............................................................ 1,761 1,568 382
Extraordinary item...................................................... 890
Deferred income taxes................................................... (8,596) 486 119
Changes in operating assets and liabilities:
Other current assets.................................................. (11,683) (825) (408)
Accounts payable and accrued liabilities.............................. 2,866 4,500 751
----------- ---------- -----------
Net cash (used in) provided by operating activities................. (37,930) 14,119 10,958
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities.......................................... 1,952 548 4,250
Purchases of marketable securities...................................... (126)
Investment in and advances to subsidiaries.............................. (52,719) (54,592) (125,660)
Restricted cash held by trustee......................................... (69,632)
Purchases of property and equipment..................................... (7,641) (5,509) (1,017)
Deposits................................................................ (58) (194) (160)
----------- ---------- -----------
Net cash used in investing activities................................. (128,224) (59,747) (122,587)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit............................................ 44,500 49,500 44,400
Retirement of line of credit............................................ (90,000) (4,000) (44,400)
Proceeds from sale of convertible subordinated notes.................... 115,000
Proceeds from the issuance of long term debt............................ 235,000
Increase in other assets................................................ (180) (25)
Increase in deferred finance costs...................................... (9,716) (2,441) (4,775)
----------- ---------- -----------
Net cash provided by financing activities............................. 179,784 42,879 110,200
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents........................ 13,630 (2,749) (1,429)
Cash and cash equivalents, beginning of year................................ 886 3,635 5,064
----------- ---------- -----------
Cash and cash equivalents, end of year...................................... $ 14,516 $ 886 $ 3,635
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes to financial statements.
106
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
BASIS OF PRESENTATION
The accompanying condensed financial information of Argosy Gaming Company
("Argosy") includes the accounts of Argosy, and on an equity basis, the
subsidiaries which it controls. The accompanying condensed financial information
should be read in conjunction with the consolidated financial statements of
Argosy.
107