Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 19
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
COMMISSION FILE NUMBER: 0-21122
------------------------
ARGOSY GAMING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 37-1304247
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
219 PIASA STREET, ALTON, ILLINOIS 62002
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (618) 474-7500
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH
EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- -------------------------------------------------------------------------------- ------------------
13 1/4% First Mortgage Notes due 2004 New York
12% Convertible Subordinated Notes due 2001 New York
Common Stock, par value $.01 per share New York
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 24, 1998, the aggregate market value of the registrant's Common
Stock held by non-affiliates was $53,725,260. The closing price of the Common
Stock on March 24, 1998 as reported on the New York Stock Exchange, was $3 3/4.
As of March 24, 1998, the number of shares outstanding of the registrant's
Common Stock, par value $.01 per share, was 24,498,333.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the registrant's Annual Report to Stockholders for the
fiscal year ended December 31, 1997, and of the registrant's Notice of Annual
Meeting of Stockholders and Proxy Statement for its Annual Meeting of
Stockholders to be held on April 23, 1998 as described in the Cross Reference
Sheet and a Table of Contents included herewith, is incorporated herein by
reference into Parts II and III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
PAGE REFERENCE
OR REFERENCE(1)
-------------------
PART I
ITEM 1. BUSINESS............................................................................ 1
ITEM 2. PROPERTIES.......................................................................... 18
ITEM 3. LEGAL PROCEEDINGS................................................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS(2)............ 24
ITEM 6. SELECTED FINANCIAL DATA(3).......................................................... 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS(4)..................................................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA(5)...................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE........................................................................ 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT(6)............................... 96
ITEM 11. EXECUTIVE COMPENSATION(7)........................................................... 96
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT(8)................... 96
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS(7)................................... 96
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................... 97
- ------------------------
(1) Certain information is incorporated by reference, as indicated below, from
the Annual Report to Stockholders for the fiscal year ended December 31,
1997 (the "Annual Report") and the registrant's Notice of Annual Meeting of
Stockholders and Proxy Statement for its Annual Meeting of Stockholders to
be held on April 23, 1998, (the "Proxy Statement").
(2) Proxy Statement section entitled "Market for Registrant's Common Equity and
Related Stockholder Matters."
(3) Annual report, inside front cover, section entitled "Financial Highlights."
(4) Annual report, pages 26-33, section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(5) Annual report, pages 34-51, sections entitled "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of Cash
Flows," "Consolidated Statements of Stockholders' Equity," "Notes to
Consolidated Financial Statements," and "Report of Independent Auditors."
(6) Proxy Statement sections entitled "Election of Directors" and "Management."
(7) Proxy Statement sections entitled "Executive Compensation" and "Certain
Transactions."
(8) Proxy Statement section entitled "Record Date, Required Vote, Outstanding
Shares and Holdings of Certain Stockholder--Security Ownership of Certain
Beneficial Owners and Management."
PART I
ITEM 1. BUSINESS
GENERAL
Argosy Gaming Company (the "Company") is a multi-jurisdictional developer,
owner and operator of riverboat casinos and related entertainment facilities in
the midwestern and southern United States. The Company, through its
subsidiaries, owns and operates riverboat casinos in Alton, Illinois, Riverside,
Missouri, Baton Rouge, Louisiana, Lawrenceburg, Indiana and Sioux City, Iowa.
Unless the context otherwise requires, "Company" and "Argosy" shall mean
Argosy Gaming Company and its subsidiaries. The Company's principal executive
offices are located at 219 Piasa Street, Alton, Illinois 62002. Its telephone
number is (618) 474-7500.
CURRENT OPERATIONS
ALTON BELLE CASINO--Alton, Illinois, is located on a leased site on the
Mississippi River approximately 20 miles northeast of downtown St. Louis, and
consists of 22,800 gaming square feet, 684 slot machines and 35 table games. The
facility also includes a 37,000 square foot, three-level floating entertainment
pavilion which features a sports/entertainment lounge, buffet and restaurant
facilities, conference facilities and the market's only off-track betting
parlor.
ARGOSY CASINO OF GREATER KANSAS CITY--Riverside, Missouri, is located on a
55-acre owned site approximately five miles from downtown Kansas City on the
Missouri River and consists of 35,863 gaming square feet, 965 slot machines and
54 table games. The riverboat casino is complemented by an 85,000 square foot
land-based entertainment facility featuring specialty and buffet restaurants, a
sports/entertainment lounge, and 14,000 square feet of banquet/conference
facilities.
BELLE OF BATON ROUGE--Baton Rouge, Louisiana, is located on a site on the
Mississippi River in downtown Baton Rouge and consists of 27,971 gaming square
feet, 776 slot machines and 43 table games. The riverboat casino is complemented
by Argosy's adjacent land-based entertainment development known as Catfish Town.
The Catfish Town development includes a 50,000 square foot festival atrium,
entertainment/sports lounge, buffet/coffee shop, conference facilities and
approximately 150,000 square feet of leasable retail space.
BELLE OF SIOUX CITY--Sioux City, Iowa, is located on a leased site in
downtown Sioux City on the Missouri River and consists of 12,500 gaming square
feet, 419 slot machines and 24 table games, a bar and gift shop. The casino is
complemented by adjacent barge facilities featuring buffet dining, meeting space
and administrative support offices.
LAWRENCEBURG CASINO--In June 1995, Indiana Gaming Company, L.P., a
joint-venture subsidiary of the Company ("Indiana Partnership"), was awarded the
right to develop and operate a riverboat casino and entertainment complex in
Lawrenceburg, Indiana, which is located approximately 15 miles west of
Cincinnati, Ohio. The Company is the sole general partner of, and holds a 57.5%
general partnership interest in the Indiana partnership. Conseco Entertainment
L.L.C. ("Conseco"), an indirect subsidiary of Conseco, Inc., holds a 29% limited
partnership interest and certain other investors, including H. Steven Norton, a
former employee of the Company, who brought the opportunity to the Company
concurrent with his initial employment, hold the remaining 13.5% limited
partnership interest in the Indiana Partnership. The Company manages the
development, construction and operation of the Lawrenceburg Casino project and
receives a management fee of 7.5% of EBITDA and Conseco receives a financial
advisory fee of 5% of EBITDA.
The Lawrenceburg casino opened December 10, 1996 and, through September 30,
1997, the Indiana Partnership operated at a temporary site utilizing a leased
vessel with approximately 20,500 square feet of
1
gaming space. The vessel, which had a capacity of 1,600 passengers, featured
approximately 870 slot machines and 52 table games for a total of approximately
1,275 gaming positions. In addition, the Indiana Partnership leased, from the
Company, an approximately 24,000 square foot floating entertainment and support
facility which featured ticketing and holding areas, a food court, two bars and
a gift kiosk. Parking for the temporary facility was provided at a 1,400 space
satellite lot. The Indiana Partnership provided free shuttle service for the
parking lot to the temporary site.
On October 1, 1997, the Indiana Partnership began operating its permanent
vessel at the temporary site. The vessel features approximately 74,300 square
feet of gaming space on three levels and has approximately 2,470 gaming
positions consisting of approximately 1,735 slots and 97 table games. The vessel
can accommodate approximately 4,400 passengers and crew members. On December 10,
1997, the Indiana Partnership moved the riverboat casino from the temporary site
to its permanent facility which includes a 1,750 space parking garage and a
120,000 square foot land-based entertainment pavilion and support facility
featuring a 350 seat buffet restaurant, two specialty restaurants, and an
entertainment lounge. The Company continues to utilize the satellite parking lot
for employee and overflow parking. The final component of the Lawrenceburg
property, a 300 room hotel is expected to open in the second quarter of 1998.
The partnership agreement governing the Indiana Partnership provides the
$225 million budgeted construction cost of the Lawrenceburg Casino development
would be funded 57.5% by the Company and 42.5% by Conseco. The Company believes
that the Lawrenceburg casino project will be completed within the budgeted
amount and that funds sufficient to meet its obligations are on hand in its
restricted cash account at December 31, 1997. For a further description of the
terms of the Indiana Partnership, see "Lawrenceburg Casino Partnership
Agreement".
CORPORATE STRATEGY
In 1997, the Company implemented a change in operating strategy in an
attempt to build strength and gain momentum as a leading riverboat casino
operator. This strategy includes assembling a new management team with
significant experience and expertise in gaming industry operations and
marketing, adopting new marketing strategies with an emphasis on direct
marketing, and prudently investing in gaming and gaming-related assets for its
properties.
Argosy's corporate strategy involves the following elements:
EXPERIENCED MANAGEMENT TEAM. Argosy's Board of Directors assembled a new,
experienced management team during 1997 to emphasize a renewed commitment to
Company-wide operations. In April 1997, the Board of Directors named James B.
Perry President and CEO of the Company. In June 1997, Mr. Perry recruited Vice
President of Operations, James A. Gulbrandsen, and Vice President of Sales and
Marketing, Virginia M. McDowell. In addition, general managers with significant
gaming industry experience were hired at three of Argosy's properties during the
third and fourth quarters of 1997.
EXPANDED SALES AND MARKETING EFFORTS. The Company adopted a new marketing
strategy designed to confront heightened competition in each of its markets with
stronger, coordinated marketing, increased promotions and targeted entertainment
events. During 1998, Argosy anticipates replacing or upgrading the player
tracking systems at each property. These enhancements will enable the Company to
provide targeted bonusing based upon customers' playing habits. In addition,
Argosy's marketing department will seek to strengthen brand recognition in
Alton, Baton Rouge and Sioux City by including the Argosy brand name in the
marketing and entertainment efforts of those properties.
Finally, the Company has analyzed the database at each property, and has
refocused its entertainment events, including concerts, private parties and
sporting events, to attract and reward the targeted Argosy consumer.
2
OPERATIONS. The Company's operating strategy is to provide a superior
customer experience to sophisticated gaming customers by offering a competitive
gaming product and by emphasizing prompt, friendly customer service.
CAPITAL IMPROVEMENTS. Argosy's management team has developed a capital plan
that emphasizes prudent capital investment to enhance the Company's operations.
Anticipated capital expenditures include replacing older, less competitive slot
machines with newer products and replacing or upgrading player tracking and
database systems in order to better implement the Company's enhanced marketing
plan. In addition, the Company anticipates improving its physical plant,
including parking, public areas, restaurants, etc., as necessary, to accommodate
customers' needs and improve current operating inefficiencies.
POTENTIAL FUTURE PROJECTS
BATON ROUGE DEVELOPMENT. Argosy has entered into a joint venture agreement
and a development agreement with a developer for the ownership and construction
of a 300-room convention hotel adjacent to the Company's Catfish Town Atrium
development. The hotel joint venture is negotiating with a major national hotel
chain to manage the hotel. The consummation of the hotel transaction is subject
to numerous conditions precedent including, without limitation, obtaining
separate non-recourse project financing. The proposed hotel would be the only
nationally franchised hotel in downtown Baton Rouge and would be located across
from the Baton Rouge Convention Center.
COMPETITION
The Company's Alton Casino faces competition from four other riverboat
casino facilities currently operating in the St. Louis area and expects the
level of competition to remain intense in the future. The most recent casino
complex to open includes two independently owned facilities, each of which
operate two dockside vessels. This casino complex, which increased gaming
capacity in St. Louis by approximately 55%, opened in March of 1997. The
Company's Riverside Casino faces competition from four casino companies in the
Kansas City area that offer dockside gaming, two of which offer two gaming
vessels each. The Company's Baton Rouge Casino faces competition from one casino
located in downtown Baton Rouge, a nearby native American casino and multiple
casinos throughout Louisiana. Currently, the Company faces competition in Sioux
City, Iowa, from two land-based Native American casinos, slot machines at a
pari-mutual race track in Council Bluffs, Iowa and from two riverboat casinos in
the Council Bluffs, Iowa/Omaha, Nebraska market, which opened in January 1996.
The Indiana Partnership faces competition from one other riverboat casino in the
Cincinnati market, which opened in October 1996. There could be further
unanticipated competition in any market which the Company operates as a result
of legislative changes or other events. The Company expects each market in which
it participates, both current and prospective, to be highly competitive.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,955 full-time and
473 part-time employees. Approximately 2,125 employees are represented by the
Seafarers International Union of North America. The Company has collective
bargaining agreements with that union which expire at various times between June
2001 and June 2003. Twelve employees are represented by the International
Brotherhood of Electrical Workers. In addition, approximately 75 employees have
recently voted to be represented by the United Plant Guard Workers of America
and 40 employees have recently voted to be represented by American Maritime
Officers Union. The Company is currently negotiating collective bargaining
agreements with each group.
The Company has not experienced any work stoppages and believes its
relations with its employees are generally satisfactory.
3
LAWRENCEBURG CASINO PARTNERSHIP AGREEMENT
GENERAL
The Indiana Partnership operates pursuant to a partnership agreement entered
into among the partners as of April 11, 1994, as amended and restated as of
February 21, 1996. The Indiana Gaming Company manages the partnership pursuant
to a management agreement and as general partner, subject only to certain
actions or major decisions requiring the consent of a majority in interest of
the limited partners. Under the provisions of the partnership agreement and the
management agreement, the Company manages the development, construction and
operation of the Lawrenceburg Casino project and receives a management fee of
7.5% of EBITDA (as defined in the partnership agreement) and Conseco receives a
financial advisory fee of 5% of EBITDA.
PROJECT FUNDING
The partnership agreement governing the Indiana Partnership provides that
the $225 million budgeted construction cost of the Lawrenceburg Casino
development would be funded 57.5% by the Company and 42.5% by Conseco. The
Indiana Partnership has been funded with $52.5 million of capital contributions
by the partners of which $16.75 million constitutes common equity and $35.75
million constitutes preferred equity. The Company has contributed approximately
$9.6 million of common equity, and approximately $20.6 million of preferred
equity. The remainder of the common and preferred equity has been contributed by
Conseco. The remainder of the cost of the Lawrenceburg Casino has been funded by
third party financing of $25.0 million and capital loans from the Company and
Conseco of approximately $147.5 million. The capital loans have been funded
57.5% by the Company and 42.5% by Conseco.
In addition to the $225 million budgeted construction cost of the
Lawrenceburg Casino described above, the Company has incurred approximately $15
million of pre-opening, administrative, training and other soft costs in
connection with opening the temporary and permanent Lawrenceburg Casinos.
Pursuant to the terms of the partnership agreement, the Company had the sole
obligation to fund these costs.
PARTNER DISTRIBUTIONS
The Lawrenceburg Casino partnership agreement sets forth the manner in which
cash flow of the Indiana Partnership is distributed. Pursuant to the agreement,
principal on capital loans is repaid on an eight-year amortizing schedule and
cash flow (after repayment of principal of, and interest on, capital loans) is
distributed by the general partner not less frequently than quarterly: (i)
first, to the partners pro rata for tax payments in an amount equal to their
taxable net income for such period; (ii) second, to the partners as a prepayment
of principal on capital loans to be applied in the inverse order of maturity, up
to 75% of the remaining cash flow; (iii) third, in payment of a preferred return
of 14% on any preferred equity contributed by the partners; (iv) fourth, as a
return of the preferred equity contributed by the partners; (v) fifth, as a
return of common equity contributed by the partners; and (vi) sixth, to the
partners in accordance with their respective percentage interests. The
partnership agreement provides that the net cash proceeds from a sale or
refinancing are distributed by the general partner in the same order as cash
flow except that the proceeds will be used to repay 100% of outstanding capital
loans by the partners.
GENERAL PARTNER REMOVAL
The Lawrenceburg Casino partnership agreement provides that the Company's
wholly-owned subsidiary, The Indiana Gaming Company, can be removed as general
partner of the partnership by the limited partners under certain limited
circumstances, including: (i) a material breach (after notice and expiration of
applicable cure periods) of certain material provisions of the partnership
agreement dealing with such things as distributions to partners or the failure
to obtain the required consent of the limited partners for certain major
decisions; (ii) conviction of embezzlement or fraud; (iii) certain bankruptcy
events; (iv) reduction in the Indiana Gaming Company's partnership interest to
less than 40% due to sales or
4
dilution for failure to pay required capital; (v) a final unappealable judgment
against The Indiana Gaming Company in excess of $25 million which is uninsured
and remains unsatisfied, unreleased or unstayed for 180 days; (vi) certain acts
constituting "gross mismanagement"; (vii) failure of The Indiana Gaming Company
to fund project costs in excess of $215 million (after expiration of applicable
notice and cure periods); and (viii) foreclosure by the Trustee under the
Company's loan agreement on The Indiana Gaming Company's pledge of its
partnership interest the Indiana Partnership. Upon removal as general partner,
the general partnership interest of The Indiana Gaming Company becomes a
"special limited partner" interest with rights to partner distributions but only
limited voting rights on partnership matters. Also, if the reason for the
removal is an event described in clause (i), (ii), (iii), (v), (vi) or (viii)
above the limited partners may acquire all, but not less than all, of The
Indiana Gaming Company's interest for the fair market value thereof determined
by an appraisal process.
LIMITED PARTNERS' SALE RIGHTS
The Lawrenceburg Casino partnership agreement provides that: (i) after the
third anniversary date of commencement of operations at the Lawrenceburg Casino,
each limited partner has the right to sell its interest to the other partners
(pro rata in accordance with their respective percentage interests) or (ii)
after a deadlock by the parties with respect to significant items in any annual
operating budget of the partnership for budget year 1999 and thereafter, any
partner has a right to sell its interest to the other partners (the limited
partner pursuant to clause (i) and the partner desiring to sell pursuant to
clause (ii) is hereinafter referred to as a "Selling Partner" and the
non-selling partners are hereinafter referred to as the "Non-Selling Partners").
The partnership agreement provides that after the Selling Partner gives notice
of its intent to sell, the Selling Partner and Non-Selling Partners shall have
60 days to attempt in good faith to agree to a purchase price. If within such
period of time no such agreement is reached, then the Selling Partner's interest
shall be appraised pursuant to an appraisal process to determine the fair market
value thereof. After the fair market value of the Selling Partner's interest is
determined by the appraisal process, the Non-Selling Partners have 60 days to
reject such sale at that price, and if the Non-Selling Partners decline to
purchase the interest of the Selling Partner at the appraisal price then the
general partner is to solicit bids and sell all of the assets of the partnership
within twelve months to the highest bidder and the partnership will be dissolved
within a 12-month period. No assurances can be given that The Indiana Gaming
Company, if it is a Non-Selling Partner, will have or will be able to obtain
sufficient funds to acquire any Selling Partner's interest in the circumstances
provided for above and therefore the assets of the partnership would have to be
sold to the highest bidder as provided above. In addition, the partnership
agreement provides all partners with a right of first refusal on transfers of
partnership interests. A foreclosure by the Trustee on the Company's pledge of
its partnership interest shall be deemed a transfer giving rise to the right of
first refusal.
REGULATORY MATTERS
ILLINOIS
In February 1990, the State of Illinois pursuant to the Riverboat Gambling
Act (the "Riverboat Act") legalized riverboat gaming. The Riverboat Act
authorizes riverboat gaming upon any navigable stream within or forming a
boundary of the State of Illinois other than Lake Michigan. The Riverboat Act
does not, however, authorize riverboat gaming or the docking of a riverboat
conducting gaming within a county having a population in excess of 3,000,000.
The Riverboat Act grants the Illinois Gaming Board specific powers and duties,
and all other powers which are necessary and proper to effectuate the Riverboat
Act. The Illinois Gaming Board's jurisdiction extends to every person,
association, corporation, partnership and trust involved in riverboat gaming
operations in the State of Illinois.
The Riverboat Act authorized a five member Illinois Gaming Board to issue up
to ten owner's licenses statewide. Each owner's license permits the operation of
up to two boats as a part of a single riverboat gaming operation with a combined
maximum of 1,200 gaming positions (as defined by the Illinois Gaming
5
Board). No person, firm or corporation may be licensed as the owner of more than
one riverboat gaming operation in Illinois, although a licensed owner may hold
up to 10% of a second riverboat gaming operation in Illinois. In addition to the
ten owner's licenses which may be authorized under the Riverboat Act, the
Illinois Gaming Board may issue special event licenses allowing persons who are
not otherwise licensed to conduct riverboat gaming and to conduct such gaming on
a specified date or series of dates. Riverboat gaming under such a license may
take place on a riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years (with a
fee of $25,000 for the first year and $5,000 for each of the following two
years) and must be renewed annually thereafter (with a fee of $5,000 for each
year). The Company's Illinois gaming license is subject to renewal in October,
1998. An owner's license is eligible for renewal upon payment of the applicable
fee and a determination by the Illinois Gaming Board that the licensee continues
to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board
also requires that officers, directors and employees of a gaming operation be
licensed. Licenses issued by the Illinois Gaming Board may not be transferred to
another person or entity. All licensees must maintain their suitability for
licensure and have a continuing duty to disclose any material changes in
information provided to the Illinois Gaming Board.
Pursuant to its rule making authority under the Illinois Riverboat Act, the
Illinois Gaming Board has adopted certain regulations that provide that any
beneficial owner of the legal or beneficial interests of a gaming company may be
required, and in the case of a beneficial owner of 5% or more of the legal or
beneficial interests (a "5% Holder") is required, to furnish a detailed personal
disclosure form to the Illinois Gaming Board. The Illinois Gaming Board uses the
personal disclosure form as the basis for its investigation to determine such
holder's suitability as a stockholder of the company. In the case of a 5%
Holder, the Illinois Gaming Board conducts such an investigation. The Illinois
Gaming Board's decisions as to suitability are based on the same criteria used
for a finding of preliminary suitability for licensure including character,
reputation, experience and financial integrity of such holder. If the Illinois
Gaming Board determines that a holder is not suitable, the holder is entitled to
request a hearing; however, if no hearing is requested after such determination
or such finding is upheld after a hearing, the holder is required to divest his
shares of common stock of the company. After a holder is required to divest and
until divestiture, the licensee is unable to distribute profits to such
stockholder. The Illinois Gaming Board has adopted a regulation that provides
that a licensee can only make distributions to shareholders to the extent such
distributions would not impair the financial viability of the licensee. Factors
which would be considered by the Illinois Gaming Board include working capital
requirements, debt service requirements, requirements for repairs and
maintenance and capital expenditure requirements. Illinois Gaming Board approval
is required for certain changes, including, among other things, to the type of
entity, debt and equity offerings by a company, issuances of debt, riverboat
capacity or significant design changes, changes in the number of gaming
positions and pro forma budgets and financial statements.
Minimum and maximum wagers on games are set by the licensee. Wagering may
not be conducted with money or negotiable currency. No person under the age of
21 is permitted to wager in Illinois, and wagers may only be taken from a person
present on a licensed riverboat. With respect to electronic gaming devices, the
payout percentage may not be less than 80% nor more than 100%.
Under the Riverboat Act, vessels must have the capacity to hold a minimum of
500 persons if operating on the Mississippi River or the Illinois River south of
Marshall County, and a minimum of 400 persons on any other waterway. In
addition, all riverboats must be accessible to disabled persons, must be either
a replica of a 19th century Illinois riverboat or be a casino cruise ship design
and must comply with applicable federal and state laws, including but not
limited to U.S. Coast Guard regulations.
Gaming may only be conducted on a gaming excursion, which is limited to a
maximum period of four hours. A gaming excursion is deemed to have started upon
the commencement of gaming. For the purpose of orderly ingress of passengers to
a riverboat, gaming is deemed to commence when the first passenger
6
boards a riverboat for an excursion and may continue while other passengers are
boarding for a period not to exceed thirty minutes, at which time the gangplank
or its equivalent must be pulled up and further boarding is not permitted. For
the purpose of orderly egress of passengers from a riverboat at the end of an
excursion, gaming may continue for a period not to exceed thirty minutes after
the gangplank or its equivalent is lowered. During this thirty minute period of
egress, new passengers may not board a riverboat. These periods of time do not
extend the four-hour maximum. Special event extended cruises may be authorized
by the Illinois Gaming Board.
Although the Riverboat Act provides that no gambling may be conducted while
a riverboat is docked, an Illinois Gaming Board rule currently permits dockside
gaming during the 30-minute time periods prior to and following a cruise.
Furthermore, if the captain of the riverboat reasonably determines that for
reasons of safety, although seaworthy, the riverboat should not leave the dock
or should return immediately thereto due to inclement weather, mechanical or
structural problems, or river icing, then a gaming excursion may commence or
continue while the gang plank or its equipment is raised and remains raised, and
ingress is prohibited until completion of the excursion, in which case the
riverboat is not considered docked. If such a situation occurs, the holder of
the owner's license must promptly file a report with the administrator of the
Illinois Gaming Board detailing the basis for its decision not to cruise. Recent
pronouncements by the Illinois Gaming Board indicate that the explanations for
failure to cruise pursuant to the rule will be scrutinized and that any abuse of
the rule will result in disciplinary actions, which may include, among other
things, any of the following: cancellation of future cruises, penalties, fines,
suspension and/or revocation of a license.
The Riverboat Act imposes a graduated wagering tax based on adjusted gross
receipts ("AGR") from gambling games at a rate of 15% on AGR up to $25 million,
20% on AGR between $25 million and $50 million, 25% on AGR between $50 million
and $75 million, 30% on AGR between $75 million and $100 million, and 35% on AGR
in excess of $100 million. The tax imposed is to be paid by the licensed owner
to the Illinois Gaming Board on the day after the day when the wagers were made.
The Riverboat Act also requires that licensees pay a $2.00 admission tax for
each person admitted to a gaming cruise. In addition, all use, occupancy and
excise taxes that apply to food and beverages and all taxes imposed on the sale
or use of tangible property apply to sales aboard riverboats. The Company also
pays $.25 admission tax to the City of Alton for each person admitted to the
Alton Belle Casino.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming as it may deem necessary and proper and into alleged
violations of the Riverboat Act. Employees and agents of the Illinois Gaming
Board have access to and may inspect any facilities relating to riverboat gaming
operations at all times.
A holder of any license is subject to the imposition of fines, suspension or
revocation of such license, or other action for any act or failure to act by
himself or his agents or employees, that is injurious to the public health,
safety, morals, good order and general welfare of the people of the State of
Illinois, or that would discredit or tend to discredit the Illinois gaming
industry or the State of Illinois. Any riverboat operation not conducted in
compliance with the Riverboat Act may constitute an illegal gaming place and
consequently may be subject to criminal penalties, which penalties include
possible seizure, confiscation and destruction of illegal gaming devices and
seizure and sale of riverboats and dock facilities to pay any unsatisfied
judgment that may be recovered and any unsatisfied fine that may be levied. The
Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit
and in compliance with applicable laws of Illinois regarding administrative
procedures and may suspend an owner's license, without notice or hearing, upon a
determination that the safety or health of patrons or employees is jeopardized
by continuing a riverboat's operation. The suspension may remain in effect until
the Illinois Gaming Board determines that the cause for suspension has been
abated and it may revoke the owner's license upon a determination that the owner
has not made satisfactory progress toward abating the hazard.
7
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
INDIANA
In June 1993, the Indiana legislature adopted legislation permitting
riverboat gambling in counties contiguous to Lake Michigan, the Ohio River and
Patoka Lake. The legislation granted authority to supervise gaming activities to
the seven-member Indiana Gaming Commission (the "Indiana Gaming Commission").
The Indiana Gaming Commission is empowered to administer, regulate and enforce
the system of riverboat gaming established under Indiana's Riverboat Gambling
Act (the "Riverboat Gambling Act") and has jurisdiction and supervision over all
riverboat gaming operations in Indiana, as well as all persons on riverboats
where gaming operations are conducted. The Indiana Gaming Commission has broad
powers to regulate riverboat gaming operations and to approve the form of
ownership and financial structure of not only riverboat owner licensees, but
also their entity qualifiers, and intermediary and holding companies. The
following description reflects both adopted and proposed rules. Further, the
Indiana General Assembly has the power to promulgate new laws and implement
amendments to the Riverboat Gambling Act, which can materially affect the
operation or economic viability of the gaming industry in Indiana.
No one may operate a riverboat gaming operation in Indiana without holding a
riverboat owner's license. The Indiana Gaming Commission has implemented strict
regulations with respect to the suitability of riverboat license owners, their
key personnel, and employees. The Indiana Gaming Commission utilizes a "class
based" licensing structure that subjects all individuals associated with a
riverboat licensee or a riverboat license applicant to varying degrees of
background investigations.
Under current Indiana law a maximum of 11 owner's licenses may be in effect
at any time with an aggregate of five licenses to be issued to owners whose home
port is a county which is contiguous to Lake Michigan, an aggregate of five
licenses to be issued to owners whose home port is a county which is contiguous
to the Ohio River and one license to be issued to an owner whose home port is a
county contiguous to Lake Patoka. For counties contiguous to the Ohio River, the
Indiana Gaming Commission may not issue a license unless an ordinance has been
passed permitting the docking of a riverboat by the specified local entity and
the voters of the county have approved riverboat gambling in the county.
A license holder is required to pay an initial license fee of $25,000,
(which covers the first 5 years of operation), a renewal fee of $5,000 per year
thereafter and post a bond to guaranty performance of the licensee's obligations
under the legislation. Gaming will be permitted only on riverboats which (i)
have a valid certificate of inspection from the U.S. Coast Guard for the
carrying of at least 500 passengers, (ii) are at least 150 feet in length, and
(iii) for riverboats operating on the Ohio River, replicate historic Indiana
steamboat passenger vessels of the 19th century. No person or entity may
simultaneously own an interest in more than two riverboat owner's licenses. A
person or entity may simultaneously own up to 100% in one riverboat owner's
license and no more than 10% in a second riverboat owner's license. A riverboat
owner licensee must possess a level of skill, experience, or knowledge necessary
to conduct a riverboat gaming operation that will have a positive economic
impact on the host site, as well as the entire State of Indiana. Additional
representative, but not exclusive, qualification criteria with respect to the
holder of a riverboat owner's license include character, reputation, financial
integrity, the facilities or proposed facilities for the conduct of riverboat
gaming including related non-gaming projects such as hotel development, and the
good faith affirmative action plan to recruit, train and upgrade minorities and
women in all employment classifications. The Indiana Gaming Commission shall
require persons holding owner's licenses to adopt policies concerning the
preferential hiring of residents of the city in which the riverboat docks for
riverboat jobs. The Indiana Gaming Commission has broad discretion in regard to
the issuance, renewal, revocation and suspension of licenses and approvals, and
the Indiana Gaming Commission is empowered to regulate a wide variety of gaming
and non-gaming related activities, including the licensing of suppliers to, and
employees at, riverboat gaming operations, and effectively to approve the form
of ownership and financial
8
structure of not only riverboat owner and supplier licensees, but also their
subsidiaries and affiliates. A riverboat owner's licensee or any other person
may not lease, hypothecate, borrow money against or loan money against a
riverboat owner's license. An ownership interest in a riverboat owner's license
may only be transferred in accordance with the regulations promulgated under the
Riverboat Gambling Act. An applicant for the approval of the transfer of a
riverboat owner's license must comply with application procedures prescribed by
the Indiana Gaming Commission and present evidence that it meets or possesses
the standards, qualifications, and other criteria under Indiana gaming laws, and
pay an investigative fee in the amount of $50,000 with the application. If the
Indiana Gaming Commission denies the application to transfer an ownership
interest, it shall issue notice of denial to the applicant. Unless specifically
stated to the contrary, a notice of denial of an application for transfer shall
not constitute a finding that the applicant is not suitable for licensure. A
person who is served with notice of denial under this rule may request an
administrative hearing.
"Certificates of Suitability" are issued following selection by the Indiana
Gaming Commission. The "Certificate of Suitability" is valid for 180 days unless
extended by the Indiana Gaming Commission. During this period the prospective
riverboat licensee must among other things: obtain a permit to develop the
riverboat gaming operation from the United States Army Corps of Engineers;
obtain a valid certificate of inspection from the United States Coast Guard for
the vessel on which the riverboat gaming operation will be conducted; apply for
and receive the appropriate permits or certificates from the Indiana Alcoholic
Beverage Commission, fire marshall, and other appropriate local, state and
federal agencies which issue permits including, but not limited to, health
permits, building permits and zoning permits; closing the financing necessary to
complete the development of the gaming operation; post a bond in compliance with
the applicable law; obtain the insurance deemed necessary by the Indiana Gaming
Commission; receive licensure for electronic gaming devices and other gaming
equipment under applicable law; submit an emergency response plan in compliance
with applicable laws; and take any other action that the Indiana Gaming
Commission deems necessary for compliance under Indiana gaming laws. Further,
the Indiana Gaming Commission may place restrictions, conditions or requirements
on the permanent riverboat owner's license. An owner's initial license expires
five years after the effective date of the license, and unless the owner's
license is terminated, expires or is revoked, the owner's license may be renewed
annually by the Indiana Gaming Commission upon satisfaction of certain
conditions contained in the Riverboat Gambling Act.
Pursuant to rules promulgated by the Indiana Gaming Commission, any person
(other than an institutional investor) who individually, or in association with
others, acquires directly or indirectly the beneficial ownership of 5% or more
of any class of voting securities of a publicly-traded corporation that is a
riverboat licensee or 5% or more of the beneficial interest in a riverboat
licensee, directly or indirectly, through any class of the voting securities of
any holding or intermediary company of a riverboat licensee shall apply to the
Indiana Gaming Commission for finding of suitability within 45 days after
acquiring the securities. Each institutional investor who, individually or in
association with others, acquires, directly or indirectly, beneficial ownership
of 5% or more of any class of voting securities of a publicly-traded corporation
that is a riverboat licensee or 5% or more of the beneficial interest in a
riverboat licensee through any class of the voting securities of any holding or
intermediary company of a riverboat licensee shall notify the Indiana Gaming
Commission within 10 days after the institutional investor acquires the
securities and shall provide additional information and may be subject to a
finding of suitability as required by the Indiana Gaming Commission.
An institutional investor who would otherwise be subject to a suitability
finding shall, within 45 days, after acquiring the interests submit information
to the Indiana Gaming Commission including the following: a description of the
institutional investor's business and a statement as to why the institutional
investor satisfies the definitional requirements of an institutional investor
under Indiana gaming rule requirements; a certification made under oath that the
voting securities were acquired and are held for investment purposes only and
were acquired and are held in the ordinary course of business as an
9
institutional investor; the name, address, telephone number, social security
number or federal tax identification number of each person who has the power to
direct or control the institutional investor's exercise of its voting rights as
a holder of voting securities of the riverboat licensee; the name of each person
who beneficially owns 5% or more of the institutional investor's voting
securities or equivalent; a list of the institutional investor's affiliates; a
list of all securities of the riverboat licensee that are or were beneficially
owned by the institutional investor or its affiliates within the preceding one
year; a disclosure of all criminal and regulatory sanctions imposed during the
preceding ten years; a copy of any filing made under 15 U.S.C. 18(a); and any
other additional information the Indiana Gaming Commission may request to insure
compliance with Indiana gaming laws.
Each institutional investor who, individually or in association with others,
acquires, directly or indirectly, the beneficial ownership of 15% or more of any
class of voting securities of a publicly-traded corporation that owns a
riverboat owner's license or 15% or more of the beneficial interest in a
riverboat licensee directly or indirectly through any class of voting securities
of any holding company or intermediary company of a riverboat licensee shall
apply to the Indiana Gaming Commission for a finding of suitability within 45
days after acquiring the securities.
An institutional investor means any of the following: a retirement fund
administered by a public agency for the exclusive benefit of federal, state or
local public employees; an investment company registered under the Investment
Company Act of 1940; a collective investment trust organized by banks under Part
9 of the Rules of the Comptroller of the Currency; a closed end investment
trust; a chartered or licensed life insurance company or property and casualty
insurance company; a banking, chartered or licensed lending institution; an
investment adviser registered under the Investment Advisers Act of 1940; and any
other entity the Indiana Gaming Commission determines constitutes an
institutional investor.
The Riverboat Gambling Act imposes a tax on admissions to gaming excursions
at a rate of $3.00 for each person admitted to the gaming excursion. This
admission tax is imposed upon the license owner conducting the gaming excursion
on a per-person basis without regard to the actual fee paid by the person using
the ticket, with the exception that no tax shall be paid by admittees who are
actual and necessary officials, employees of the licensee or other persons
actually working on the riverboat. A tax is imposed on the adjusted gross
receipts received from gaming games under the Riverboat Gambling Act at a rate
of twenty percent (20%) of the amount of the adjusted gross receipts. Adjusted
gross receipts is defined as the total of all cash and property (including
checks received by a licensee), whether collected or not, received by a licensee
from gaming operations less the total of all cash paid out as winnings to
patrons including a provision for uncollectible gaming receivables as is further
set forth in the Riverboat Gambling Act. The Indiana Gaming Commission may, from
time to time, impose other fees and assessments on riverboat owner licensees. In
addition, all use, excise and retail taxes apply to sales aboard riverboats.
In general, riverboat excursions are limited to a duration of at least two
and no more than four hours, and no gaming may be conducted while the riverboat
is docked, with the exception of (i) the 30 minutes during passenger embarkation
and disembarkation and (ii) when weather, water or traffic prevent the riverboat
from cruising. Minimum and maximum wagers on games are set by the licensee, and
wagering may not be conducted with money or other negotiable currency. No person
under the age of 21 is permitted to be present on a riverboat, and wagers may
only be taken from a person present on a licensed riverboat.
No riverboat licensee or riverboat license applicant may enter into or
perform any contract or transaction in which it transfers or receives
consideration which is not commercially reasonable or which does not reflect the
fair market value of the goods or services rendered or received as determined at
the time the contract is executed. Any contract entered into by a riverboat
licensee or riverboat license applicant that exceeds the total dollar amount of
$50,000 shall be a written contract. A riverboat license applicant means an
applicant for a riverboat owner's license that has been issued a certificate of
suitability.
10
Pursuant to Indiana Gaming Commission rules, riverboat licensees and
riverboat license applicants must submit an internal control procedure regarding
purchasing transactions which must contain provisions regarding ethical
standards, compliance with state and federal laws, and prohibitions on the
acceptance of gifts and gratuities by purchasing and contracting personnel from
suppliers of goods or services. The rules also require any riverboat licensee or
applicant to submit any contract, transaction or series of transactions greater
than $500,000 in any 12-month period to the Indiana Gaming Commission within 10
days of execution, and to submit a summary of all contracts or transactions
greater than $50,000 in any 12-month period on a quarterly basis. The rules
provide that contracts submitted to the Indiana Gaming Commission are not
submitted for approval, but grant the Indiana Gaming Commission authority to
cancel or terminate any contract not in compliance with Indiana law and Indiana
Gaming Commission rules.
Indiana gaming laws provide that the opportunity for full minority and
women's business enterprise participation in the riverboat industry in Indiana
is essential to social and economic parity for minority and women business
persons. The Indiana Gaming Commission has the power to review compliance with
the goals of participation by minority and women business persons and impose
appropriate conditions on licensees to insure that goals for such business
enterprises are met.
Under the Riverboat Gambling Act, a riverboat licensee or a riverboat
license applicant shall designate certain minimum percentages of the value of
its contracts for goods and services to be expended with minority business
enterprises and womens' business enterprises such that 10% of the dollar value
of the riverboat licensee's or the riverboat license applicant's contracts be
expended with minority enterprises and 5% of the dollar value of the riverboat
licensee's or the riverboat license applicant's contracts be expended with
women's business enterprises. Expenditures with minority and women business
enterprises are not mutually exclusive. Licensees are required to report the
dollar value and percentage of contracts awarded to minority business
enterprises and women's business enterprises annually. If the Indiana Gaming
Commission determines that a licensee has not met these requirements, it may
suspend, limit or revoke the owner's license or fine or impose appropriate
conditions on the licensee.
All licensees subject to the jurisdiction of the Indiana Gaming Commission
have a continuing duty to maintain suitability for licensure. The Indiana Gaming
Commission may initiate an investigation or disciplinary action or both against
a licensee about whom the commission has reason to believe is not maintaining
suitability for licensure, is not complying with licensure conditions, and/or is
not complying with Indiana gaming laws or regulations. The Indiana Gaming
Commission may suspend, revoke, restrict or place conditions on the license of a
licensee; require the removal of a licensee or an employee of a licensee; impose
a civil penalty or take any other action deemed necessary by the Indiana Gaming
Commission to insure compliance with Indiana gaming laws.
IOWA
In 1989, the State of Iowa legalized riverboat gaming on the Mississippi and
Missouri Rivers and certain other waterways located in Iowa. The Excursion
Gambling Act grants the Iowa Racing and Gaming Commission (the "Iowa
Commission") jurisdiction over all gambling operations.
The legislation authorized the granting of licenses to conduct riverboat
gaming to not-for-profit corporations which, in turn, are permitted to enter
into operating agreements with persons who are licensed by the Iowa Commission
to operate riverboat casinos. The number of licenses which may be granted is not
limited by statute or regulation.
Gaming is permitted only on riverboats which recreate, as nearly as
practicable, Iowa's riverboat history and have a capacity for at least 250
persons with tickets. In addition the licensee must utilize Iowa resources,
goods and services in the operation of the riverboat. An excursion gambling boat
must operate at least one excursion each day for 100 days during the excursion
season, (from April 1 through October 31). Excursions consist of a minimum two
hours during the excursion season. While an excursion
11
gambling boat is docked, passengers may embark or disembark at any time during
its business hours. If during the excursion season it is determined that it
would be unsafe to complete any portion of an excursion, or if mechanical
problems prevent the completion of any portion of an excursion, the boat may be
allowed to remain dockside.
A gaming license will be issued for not more than three years and is subject
to annual renewals thereafter. The Iowa Commission has broad discretion with
regard to such renewals. The annual license fee to operate an excursion gambling
boat shall be based on the passenger carrying capacity, including crew, for
which the excursion gambling boat is registered. The annual fee shall be five
dollars per person capacity. Licenses issued by the Iowa Commission may not be
transferred to another person or entity. The Company must submit detailed
financial and operating reports to the Iowa Commission.
Iowa statute stipulates that a referendum must be held in 2002 to reaffirm
gaming in each county that has gaming and further stipulates that similar
referenda be held every eight years thereafter. Minimum and maximum wagers on
games are set by the licensee. Wagering may only be conducted with chips,
wagering debit cards or coins. Wagers may only be made by persons 21 years of
age and older. A licensee shall not accept a credit card to purchase coins,
tokens or other forms of credit to be wagered on gambling games.
The legislation imposes a graduated tax based on adjusted gross receipts at
a rate of 5% on the first $1 million, 10% on the next $2 million and 20% on any
amount over $3 million. The tax is to be paid by the licensee within 10 days
after the close of business of the day when the wagers were made. The
legislation also permits the Iowa Commission to impose an admission fee for each
person embarking on an excursion vessel, and the city or county in which gaming
is conducted is permitted to impose an admission fee of not greater than 50
cents.
Pursuant to its rule making authority, the Iowa Commission requires
officers, directors and certain key employees of the Company to be licensed by
the Iowa Commission. In addition, anyone having a material relationship or
involvement with the Company may be required to be found suitable or to be
licensed, in which case those persons would be required to pay the costs and
fees of the Iowa Commission. The Iowa Commission has jurisdiction to disapprove
a change in position by such officers or key employees and the power to require
the Company to suspend or dismiss officers, directors or other key employees or
sever relationships with other persons who refuse to file appropriate
applications or whom the Iowa Commission finds unsuitable to act in such
capacities. Any contract in excess of $50,000 must be submitted to and approved
by the Iowa Commission.
The Iowa Commission may also require any individual who has a material
relationship with the Company to be investigated and licensed or found suitable.
Any person who acquires 5% or more of the Company's equity securities must be
approved by the Iowa Commission prior to such acquisition. The applicant
stockholder is required to pay all costs of such investigation.
Iowa Governor Terry Branstad has proposed that the Iowa legislature impose a
five-year moratorium on the expansion of gaming.
LOUISIANA
In July 1991, the Louisiana legislature adopted legislation permitting
certain types of gaming activity on certain rivers and waterways in Louisiana.
The legislation granted authority to supervise riverboat gaming activities to
the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement
Division of the Louisiana State Police (the "Louisiana Enforcement Division").
The Louisiana Riverboat Gaming Commission was authorized to hear and determine
all appeals relative to the granting, suspension, revocation, condition or
renewal of all licenses, permits and applications. In addition, the Louisiana
Riverboat Gaming Commission was to establish rules providing for and
determining, among other things, authorized routes, duration of excursions and
the stops a riverboat may make, minimum levels of insurance, construction of
riverboats, periodic inspections and procedures for negotiable instrument
12
transactions involving patrons. The Louisiana Enforcement Division was
authorized, among other things, to investigate applicants and issue licenses,
investigate violations of the statute, conduct continuing reviews of gaming
activities and exercise other broad oversight powers.
In an April 1996 special session of the Louisiana legislature, Louisiana
lawmakers passed a measure which established the Louisiana Gaming Control Board
and provides that such board shall be the successor to all prior authorities,
and the sole and exclusive authority, with regard to the regulation and
supervision of gaming operations and activities in Louisiana except for the
regulation of horse racing and offtrack betting and the conducting of charitable
gaming operations. Effective May 1, 1996, the powers, duties, functions, and
responsibilities of the Louisiana Riverboat Gaming Commission and the Louisiana
Enforcement Division, including those with respect to riverboat gaming, are
transferred to the Louisiana Gaming Control Board. The Department of Public
Safety and Corrections, Office of State Police, retains certain enforcement
powers and responsibilities relative to investigations, audits, and cruising
procedures.
The transfer of a license or permit or an interest in a license or permit is
prohibited. The sale, purchase, assignment, transfer, pledge or other
hypothecation, lease, disposition or acquisition (a "Transfer") by any person of
securities which represents 5% or more of the total outstanding shares issued by
a corporation that holds a license is subject to Louisiana Gaming Control Board
disapproval. A security issued by a corporation that holds a license must
disclose these restrictions. Prior Louisiana Gaming Control Board approval is
required for the Transfer of any "ownership interest" of 5% or more in any
licensee or for the Transfer of any "economic interest" of 5% or more in any
licensee or Affiliated Gaming Person. No such prior approval is required for the
transfer of any ownership interest of 5% or more in any corporate licensee. An
"economic interest" is defined for purposes of a Transfer as any interest
whereby a person receives or is entitled to receive, by agreement or otherwise,
a profit, gain, thing of value, loss, credit, security interest, ownership
interest or other benefit.
A licensee must notify the Louisiana Gaming Control Board in writing within
five (5) days of the completion of the following transactions:
1. Withdrawal of capital in excess of five percent (5%) of the
licensee's net gaming proceeds for the preceding twelve month period;
2. The granting of a loan or any other extension of credit in excess of
five percent (5%) of the licensee's net gaming proceeds for the preceding
twelve month period;
3. Any advance or other distribution of any type of asset in excess of
five percent (5%) of the licensee's net gaming proceeds for the preceding
twelve month period;
No prior approval of any such withdrawal, loan, advance or distribution is
required, but such transaction is ineffective if subsequently disapproved by the
Louisiana Gaming Control Board. In addition, the Louisiana Gaming Control Board
may issue an emergency order for not more than 10 days prohibiting payment of
profits, income or accruals by, or investments in, a licensee.
Riverboat gaming licensees and their Affiliated Gaming Persons are required
to notify the Louisiana Gaming Control Board within 30 days after any such
person applies for, receives or accepts a loan, or makes use of any cash,
property, credit, loan or line of credit, or guarantees, or grants other form of
security for a loan (a "Loan") unless such transaction involves publicly
registered debt and securities (in which event such person shall file the
registration statement and other materials with the Louisiana Gaming Control
Board), unless more stringent conditions are imposed by the Louisiana Gaming
Control Board, or the amount of the Loan is below certain specified thresholds.
The Louisiana Gaming Control Board is required to investigate the reported Loan,
and to either approve or disapprove the transaction. If disapproved, the Loan
must be rescinded by the Licensee or Affiliated Gaming Person.
13
Fees for conducting gaming activities on a riverboat include (i) $50,000 per
riverboat for the first year of operation and $100,000 per year per riverboat
thereafter; (ii) a state franchise fee of 15% of net gaming proceeds; (iii) a
state license fee of 3.5% of net gaming proceeds; and (iv) a local fee of up to
$2.50 per passenger.
In April 1996, the Louisiana legislature approved legislation mandating
local option elections to determine whether to prohibit or continue to permit
three individual types of gaming in Louisiana on a parish-by-parish basis. The
referendum was brought before the Louisiana voters at the time of the November
1996 presidential election. Voters elected to permit riverboat gaming in all
parishes where it is presently conducted and to allow land-based casino gaming
in Orleans Parish. Voters in 31 parishes elected to permit video draw poker
devices, but in 33 parishes, including East Baton Rouge Parish, voters elected
to prohibit the devices. Current operators of video poker devices in East Baton
Rouge Parish (and the other parishes where voters elected to prohibit video
poker) will be allowed to operate only until the end of their current license
plus two extensions. Typically video poker licenses have a maximum one year
duration.
MISSOURI
Gaming was originally authorized in the State of Missouri on November 3,
1992, although no governmental action was taken to enforce or implement the
original law. On April 29, 1993, Missouri enacted the Missouri Gaming Law which
replaced the original law and established the Missouri Gaming Commission, which
is responsible for the licensing and regulation of riverboat gaming in Missouri.
The number of licenses which may be granted is not limited by statute or
regulation. The Missouri Gaming Law grants specific powers and duties to the
Missouri Gaming Commission to supervise riverboat gaming and implement the
Missouri Gaming Law and take any other action as may be reasonable or
appropriate to enforce the Missouri Gaming Law. The Missouri Gaming Commission
has discretion to approve permanently moored ("dockside") riverboat casinos if
it finds that the best interest of Missouri and the safety of the public
indicate the need for continuous docking of an excursion gambling boat.
Under the Missouri Gaming Law, the ownership and operation of riverboat
gaming facilities in Missouri are subject to extensive state and local
regulation. If a company is granted a gaming license in Missouri, such company,
any subsidiaries it may form and its officers, directors, significant
shareholders and employees will be subject to regulations. The initial license
and first subsequent license renewal of an excursion gambling boat operator
shall be for a period of one year. Thereafter, license renewal periods shall be
two years. However, the Missouri Gaming Commission may reopen license hearings
at any time. In addition to the owners license and operators license for the
riverboat, every individual participating in gaming operations in any capacity
is required to have an occupational license from the Missouri Gaming Commission.
Applicants and licensees are responsible to keep the application and any
requested materials current at all times, and this responsibility shall continue
throughout any period of licensure granted by the Missouri Gaming Commission. In
addition, Missouri has extensive licensing disclosure requirements.
The Missouri Gaming Commission may revoke or suspend gaming licenses and
impose other penalties for violation of the Missouri Gaming Law and the rules
and regulations which may be promulgated thereunder. Penalties include, but are
not limited to, forfeiture of all gaming equipment used in the conduct of
unauthorized gambling games and fines of up to three times a licensee's highest
daily gross receipts derived from wagering on the gambling games, whether
authorized or unauthorized, conducted during the preceding twelve months. In
addition, the Missouri Gaming Commission requires 60 days notice of, and may
disapprove or require delay pending further investigation of, transactions in
excess of the greater of $500,000 or 30% of licensee's net worth, up to
$1,000,000, which transactions involve or relate to the gaming licensee.
The Missouri Gaming Law imposes operational requirements on riverboat
operators, including a charge of two dollars per gaming customer per excursion
that licensees must pay to the Missouri Gaming
14
Commission, a minimum payout requirement of 80% for slot machines, a 20% tax on
adjusted gross receipts, prohibitions against providing credit to gaming
customers (except for the use of credit cards and cashing checks) and a
requirement that each licensee reimburse the Missouri Gaming Commission for all
costs of any Missouri Gaming Commission staff necessary to protect the public on
the licensee's riverboat. Licensees must also submit to the Commission on a
quarterly basis an audit of compliance and of the financial transactions and
condition of the licensee's total operations for the calendar quarter and pay
the associated auditing fees. The Missouri Gaming Law provides for a loss limit
of $500 per person per excursion. Although the Missouri Gaming Law provides no
limit on the amount of riverboat space that may be used for gaming, the Missouri
Gaming Commission is empowered to impose such space limitations through the
adoption of rules and regulations. Additionally, United States Coast Guard
safety regulations could affect the amount of riverboat space that may be
devoted to gaming. The Missouri Gaming Law also includes requirements as to the
form of riverboats, which must resemble Missouri's riverboat history to the
extent practicable and include certain non-gaming amenities.
The licensee may receive wagers only from a person present on a licensed
excursion gambling boat. Wagering shall not be conducted with money or other
negotiable currency. A person under 21 years of age shall not make a wager on an
excursion gambling boat and shall not be allowed in the area of the excursion
boat where gambling is being conducted.
With respect to the availability of dockside gaming, which may be more
profitable than cruise gaming, the Missouri Gaming Commission is empowered to
determine on a site by site basis where such gaming is in the best interest of
Missouri and the safety of the public and shall be permitted.
Pursuant to its rule making authority, the Missouri Gaming Commission has
adopted certain regulations which provide, among other things, that: (i)
riverboat excursions are limited to a duration of four hours, and gaming may be
conducted at any time during the excursion; (ii) no gaming licensee or
occupational licensee may pledge, hypothecate or transfer in any way any
license, or any interest in a license, issued by the Missouri Gaming Commission;
(iii) without first notifying the Missouri Gaming Commission at least 60 days
prior to such consummation of any of the following transactions (and during such
period the Missouri Gaming Commission may disapprove the transaction or require
the transaction to be delayed pending further investigation) (a) a gaming
licensee or a holding company affiliated with a gaming licensee may not make a
public issuance of debt, (b) a publicly held gaming licensee or a publicly held
holding company may not make any issuance of an ownership interest equaling 5%
or greater of the gaming licensee or holding company or (c) a person or entity
may not pledge or hypothecate an ownership interest in a gaming licensee that is
not a publicly held company or a holding company that is not a publicly held
company provided that no such ownership interest may be transferred voluntarily
or involuntarily pursuant to any pledge without separate notice to the Missouri
Gaming Commission as required by the regulations; (iv) not later than 7 days
after the consummation of any transfer of ownership interest in a publicly held
gaming licensee, if such transfer would result in an entity or group of entities
acting in concert owning, directly or indirectly, a total amount of ownership
interest equaling 5% or greater of the ownership interest in the gaming
licensee, the transferee must report such consummation to the Missouri Gaming
Commission; (v) no withdrawals of capital, loans, advances or distribution of
any type of assets in excess of 5% of accumulated earnings of a licensee to
anyone with an ownership interest in the licensee may occur without prior
Missouri Gaming Commission approval; and (vi) the Missouri Gaming Commission may
take action against a licensee or other person who has been disciplined in
another jurisdiction for gaming related activity.
The Missouri Gaming Commission is authorized to enter the premises of
excursion gambling boats, facilities, or other places of business of a licensee
in Missouri to determine compliance with the Missouri Gaming Law and to
investigate alleged violations of the Missouri Gaming Law or Missouri Gaming
Commission rules, orders or final decisions. A holder of any license shall be
subject to imposition of penalties, suspension or revocation of such license, or
other action for any act or failure to act by himself or his agents or employees
that is injurious to the public health, safety, morals, good order and general
15
welfare of the people of the state of Missouri, or that would discredit the
Missouri gaming industry or the state of Missouri. The Missouri Gaming
Commission may waive any licensing requirement or procedure for any type of
license if it determines that the waiver is in the best interests of the public.
In addition, a supplier's license is required of persons who sell or lease
gambling equipment, gambling supplies or both to any licensee. A licensee
licensed to conduct gambling games shall acquire all gambling games or
implements of gambling from a licensed supplier.
On August 29, 1996, certain residents of St. Louis County (the "St. Louis
Plaintiffs") filed a lawsuit in Cole County, Missouri seeking declaratory and
injunctive relief generally against the Missouri Gaming Commission and
specifically against the granting of licenses by the Missouri Gaming Commission
to Harrah's Maryland Heights Corp. ("Harrah's") and Players Maryland Heights, LP
("Players") with respect to their casino development in Maryland Heights,
Missouri. The suit alleged that (i) the Missouri legislature lacks the
constitutional authority to authorize the Missouri Gaming Commission to license
casinos except on excursion gambling boats and floating facilities "upon" the
Mississippi and Missouri Rivers, (ii) the Missouri Gaming Commission has wrongly
construed a statute to permit it to grant gaming licenses to excursion gambling
boats or floating facilities placed within artificial spaces and (iii) the
Missouri Gaming Commission is not authorized to regulate gaming operations
conducted upon floating facilities. In December 1996, the Missouri court
dismissed the St. Louis Plaintiffs' claim and the St. Louis Plaintiffs appealed
the decision to the Missouri Supreme Court. In December 1997, the Missouri
Supreme Court ruled that the definition of the words "upon the Mississippi and
Missouri Rivers" in the Missouri Constitution required that to be permitted an
artificial basin must be contiguous to the river and that the artificial basin
must be filled with river water and touch the surface stream of the river for
considerable distances.
The Company conducts its gaming operations at the Argosy Casino in Riverside
on a docked, excursion riverboat from a constructed harbor that is open to the
Missouri River. The Company believes that, if necessary, it could modify its
operations in Riverside so as to be in compliance with even the strictest
construction of the St. Louis Plaintiffs' interpretation of Missouri gaming law.
The Company is unable at this time to determine what effect, if any, this action
would have on its business, results of operations, competitive position in the
Kansas City and St. Louis markets or the merits of the St. Louis Plaintiffs'
action.
LEGISLATIVE AND REGULATORY CONSIDERATIONS IN CERTAIN ADJACENT JURISDICTIONS
KANSAS. Casino gaming is currently illegal in Kansas as a constitutionally
prohibited form of lottery. In order to amend the Kansas constitution,
two-thirds of the members of each house of the Kansas legislature and a majority
of Kansas voters would have to approve a proposed amendment.
The State of Kansas has approved Class III Indian compacts with four
separate tribes authorizing the tribes to conduct table and keno games, but not
slot machines, on their respective reservation lands. One such casino is open
and is located approximately 60 miles from Kansas City.
KENTUCKY. Casino gaming is illegal in Kentucky as a constitutionally
prohibited form of lottery. In order to amend the Kentucky constitution,
three-fifths of the members of each house of the Kentucky legislature and a
majority of Kentucky voters would have to approve a proposed amendment. Several
Kentucky racetracks have publicly lobbied for the right to conduct casino games.
OHIO. Casino gaming is illegal in Ohio as a constitutionally prohibited
form of lottery. In order to amend the Ohio constitution, three-fifths of the
members of each house of the Ohio legislature and a majority of Ohio voters
would have to approve any proposed amendment.
NEBRASKA. A number of efforts to expand gaming in Nebraska failed during
1996. After an effort to present a statewide referendum on legalizing casino
gaming failed in the Nebraska legislature, three separate voter petition drives
also failed.
16
FEDERAL AND NON-GAMING REGULATIONS
The Company and its subsidiaries are subject to certain federal, state and
local safety and health laws, regulations and ordinances that apply to
businesses generally, such as the Clean Air Act, Clean Water Act, Occupational
Safety and Health Act, Resource Conservation Recovery Act and Comprehensive
Environmental Response, Compensation and Liability Act. The Company has not
made, and does not anticipate making, material expenditures with respect to such
environmental laws and regulations. However, the coverage and attendant
compliance costs associated with such laws, regulations and ordinances may
result in additional costs to the Company. For example, in 1990 the U.S.
Congress enacted the Oil Pollution Act to consolidate and reconcile mechanisms
under various oil spill response laws. The Department of Transportation has
proposed regulations requiring owners and operators of certain vessels to
establish through the U.S. Coast Guard evidence of financial responsibility in
the amount of $5.5 million for clean-up of oil pollution. This requirement would
be satisfied by either proof of adequate insurance (including self-insurance) or
the posting of a surety bond or guaranty.
All vessels operated by the Company must comply with U.S. Coast Guard
requirements as to safety and must hold a Certificate of Seaworthiness. These
requirements set limits on the operation of the vessels and require individual
licensing of all personnel involved with the operation of the vessel. Loss of
the Certificate of Seaworthiness of a vessel would preclude its use as a
riverboat. Every five years, vessels must be dry docked for an inspection of the
outside of the hull resulting in a loss of service for a period of time. The U.
S. Coast Guard is developing a pilot program which would utilize underwater
equipment to complete a hull inspection while the vessel remains in service.
This procedure was utilized to inspect the Alton Gaming Company riverboat casino
in February 1998. If the procedure is disapproved by the U. S. Coast Guard,
Alton Gaming Company would be required to remove its riverboat from service and
seek to lease another riverboat casino or discontinue operations for the
inspection period.
All shipboard employees of the Company employed on U.S. Coast Guard
regulated vessels, including those who have nothing to do with the actual
operation of the vessel, such as dealers, waiters and security personnel, may be
subject to the Jones Act which, among other things, exempts these employees from
state limits on workers' compensation awards.
The Company is subject to the provisions of the Americans With Disabilities
Act but does not anticipate incurring significant expenses to bring its
facilities or procedures into compliance with such Act.
The Bank Secrecy Act (the "BSA"), enacted by Congress in 1985, requires
banks, other financial institutions and casinos to monitor receipts and
disbursements of currency in excess of $10,000 and report them to the United
States Department of the Treasury (the "Treasury"). In management's opinion, the
BSA may have resulted in a reduction in the volume of play by high level
wagerers. The Treasury has proposed tentative amendments to the BSA which would
apply solely to casinos and their reporting of currency transactions. The most
significant proposed change in the BSA is a reduction in the threshold at which
customer identification data must be obtained and documented by the casino, from
$10,000 to $3,000 (which may include the aggregation of smaller denomination
transactions). Additionally, the amendments would substantially increase the
record-keeping requirements imposed upon casinos relating to customer data,
currency and non-currency transactions. Management believes the proposed
amendments, if enacted in their current form, could result in a further
reduction in the volume of play by upper-and middle-level wagerers while adding
operating costs associated with the more extensive record-keeping requirements.
However, the effect on the Company's operations is not expected to be material.
17
ITEM 2. PROPERTIES
The following is a list of the Company's principal properties as of December
31, 1996. Substantially all of the properties of the Company are subject to the
lien of the Company's senior lenders under its $235 million First Mortgage Note
Indenture dated June 5, 1996.
INTEREST FUNCTION LEASE EXPIRATION
--------- --------------------------- ------------------
ALTON, ILLINOIS
Office Building Leased Executive Offices August 1999
Alton Belle II Owned Riverboat Casino
Support Barges Owned Landing, ticketing and
office facilities
RIVERSIDE, MISSOURI
Real Property Owned Permanent Landing Site
Real Property Leased Landing rights
Argosy IV Owned Riverboat Casino
BATON ROUGE, LOUISIANA
Real Property Owned Vessel Access
Argosy III Owned Riverboat Casino
Support Barge Owned Staging Barge
LAWRENCEBURG, INDIANA (1)
Real Property Owned Permanent Landing Site
SIOUX CITY, IOWA
Argosy V Owned Riverboat Casino
Support Barge Owned Staging Barge
OTHER
Sprit of America Owned Temporary Lawrenceburg
Staging Vessel
Argosy I Owned Riverboat Casino
- ------------------------
(1) Owned by a partnership pursuant to which the Company, through a wholly-owned
subsidiary, has a 57.5% partnership interest and serves as general partner.
18
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings arising in the
ordinary course of business. The Company does not believe that the results of
such legal proceedings, even if the outcome were unfavorable to the Company,
would have a material adverse impact on either its financial condition or
results of operations.
CHALLENGE TO LICENSE FOR LAWRENCEBURG CASINO BY UNSUCCESSFUL APPLICANT
On November 29, 1996, Schilling Casino Corporation d/b/a Empire Casino &
Resort ("Empire"), an unsuccessful competing applicant for the riverboat owner's
license in Lawrenceburg, Indiana that was awarded to the Indiana Partnership by
the Indiana Gaming Commission (the "Commission"), filed with the Commission a
purported "Request for Hearing" (the "Request") on the denial of Empire's
application for the Lawrenceburg license. Empire's Request, which was referred
to an Administrative Law Judge (the "ALJ"), did not seek a stay of the award of
the license to the Indiana Partnership or of the Indiana Partnership's
commencement of regular gaming operations from its temporary gaming facility at
Lawrenceburg, which commenced December 10, 1996. The Company and the Indiana
Partnership were granted leave to intervene in the administrative proceedings on
the Empire Request.
The grounds asserted in the Empire Request included claims that (i) the
application process followed by the Commission did not afford Empire due process
and violated Indiana laws; (ii) the Indiana Partnership failed to comply with
conditions in the certificate and failed to open the temporary gaming facility
in a timely fashion, (iii) the Indiana Partnership made misrepresentations to
the Commission during the licensing hearings; (iv) the Commission could not
lawfully have extended the certificate beyond June 30, 1996 (one year after the
date of its initial award) without reconsidering all other applications; and (v)
the endorsement of the Indiana Partnership by the City of Lawrenceburg was
without legal authority and was given improper weight by the Commission.
The Company and the Indiana Partnership filed with the ALJ a motion or
summary judgment to dismiss Empire's Request; the Commission filed with the ALJ
a motion for partial summary judgment on Empire's Request; and Empire filed with
the ALJ its "discovery plan" describing discovery it wished to pursue in the
matter, as to which the Company and the Indiana Partnership filed a motion for
protective order.
After briefing and a hearing before the ALJ, the ALJ issued on June 13, 1997
his findings of fact and conclusions of law and his recommended orders to the
Commission (the "ALJ Entries") on the various matters presented. The ALJ Entries
rejected the claims asserted in Empire's Request; granted the Commission's
motion for partial summary judgment; and denied the discovery sought by Empire.
The ALJ Entries treated the motion for summary judgment by the Company and the
Indiana Partnership as moot (given the recommendation that the Commission's
motion for partial summary judgment be granted); and denied the Company's and
Indiana Partnership's motion to dismiss, which had been based in part on the
claim that Empire's Request did not timely comply with procedural requirements.
Finally, the ALJ Entries stated Empire would be entitled to an evidentiary
hearing only for purposes of attempting to establish that it should have been
awarded the Lawrenceburg license, an issue on which Commission regulations place
the burden of proof on Empire.
Empire submitted to the Commission exceptions and objections to the ALJ
Entries. (The Company and the Indiana Partnership also filed exceptions to the
ALJ Entries, to preserve for the record at any subsequent hearing or judicial
review proceeding those points on which they disagreed with the ALJ Entries.) At
a meeting on August 19, 1997, at which counsel for Empire and counsel for the
Company and the Indiana Partnership addressed the Commission, the Commission
considered the ALJ Entries and the exceptions and objections of the parties, and
entered an order adopting the ALJ Entries in their entirety (the "Commission
Order").
19
On August 25, 1997, the Commission formally notified Empire that it had
entered the Commission Order as the "final determination of the Commission" on
Empire's Request, and advised that any person who wished to seek judicial review
of the Commission Order was required to file a petition for review in an
appropriate court within thirty days of service of the notice. The Commission
notice also advised Empire that it could seek a hearing on the denial of its
license application, as contemplated by the ALJ Entries.
Empire has not filed any petition for judicial review of the Commission
Order, and the time for filing of such a petition expired in late September
1997. Furthermore, in response to an order issued by the ALJ on September 3,
1997, Empire's counsel notified the ALJ in writing on September 15, 1997, that
it would not seek a hearing before the ALJ on the denial of its license
application.
CAPITOL HOUSE PRESERVATION COMPANY, L.L.C. VS. JAZZ ENTERPRISES, INC., ET AL.
In July 1995, Capitol House Preservation Company, L.L.C. ("Capitol House")
filed a cause of action in the U. S. District Court of the Middle District of
Louisiana against Jazz, the former shareholders of Jazz ("Former Jazz
Shareholders"), Catfish Queen Partnership (the "Partnership"), Argosy of
Louisiana, Inc. ("Argosy Louisiana") and the Company alleging that Jazz and
Argosy obtained the gaming license for Baton Rouge based upon false and
fraudulent pretenses and declarations and financial misrepresentations. The
complaint alleges tortious conduct as well as violations of RICO and seeks
damages of $158 million plus court costs and attorneys' fees. The plaintiff was
an applicant for a gaming license in Baton Rouge whose application was denied by
the Louisiana Enforcement Division. The Company believes the allegations of the
plaintiff are without merit and intends to vigorously defend such cause of
action.
On June 7, 1995, the Company consummated its purchase of all of the
outstanding capital stock of Jazz from the Former Jazz Shareholders. The Company
intends to seek indemnification from the Former Jazz Shareholders for any
liability the Company, Argosy Louisiana or Jazz suffers as a result of such
cause of action. As part of the consideration payable by the Company to the
Former Jazz Shareholder for the acquisition of Jazz, the Company agreed at the
time of such acquisition to annual deferred purchase price payments of
$1,350,000 for each of the first ten years after closing and $500,000 for each
of the next ten years. Payments are to be made quarterly by the Company. The
definitive acquisition documents provide the Company with off-set rights against
such deferred purchase price payments for indemnification claims of the Company
against the Former Jazz Shareholders and for the liabilities that the Former
Jazz Shareholder contractually agreed to retain. There can be no assurance that
the Former Jazz Shareholders will have assets sufficient to satisfy any claim in
excess of the Company's off-set rights.
The defendants filed a Motion to Dismiss, or alternatively to abstain and
stay the action, pending resolution of certain Louisiana state court claims
filed by Capitol House. The trial court decided in favor of the defendants and
dismissed the suit without prejudice to the rights of plaintiff to revive the
suit after the conclusion of the pending state court matters. The plaintiff
appealed this dismissal to the U. S. Fifth Circuit Court of Appeals. While the
appeal was pending, several of the Louisiana state court claims were resolved.
On March 11, 1997, the U. S. Fifth Circuit Court of Appeals vacated the trial
court's dismissal and remanded the case to the district court for further
proceedings. The defendants have re-urged the previously filed motion to
dismiss. On November 17, 1997, the district court granted the motion and
dismissed, with prejudice, all of the federal claims under RICO. The claims of
Capitol House that arose under Louisiana state law were dismissed, without
prejudice. Capitol House filed an appeal of the district court dismissal on
January 9, 1998, and the matter will be appealed to the U. S. Fifth Circuit
Court of Appeals. Additionally, Capitol House filed an amended petition in the
Nineteenth Judicial District Court for East Baton Rouge Parish, State of
Louisiana, Suit Number 418,525 on November 26, 1997, amending its previously
filed but unserved suit against Richard Perryman, the person selected by the
Louisiana Gaming Division to evaluate and rank the applicants seeking a gaming
license for East Baton Rouge Parish, and now adding its state law claims against
Jazz, the former shareholders of Jazz, Argosy Gaming Company, Argosy of
Louisiana, Inc. and Catfish Queen Partnership in Commendam, d/b/a the Belle of
Baton Rouge Casino. This suit alleges that these parties violated the Louisiana
Unfair Trade Practices Act
20
in connection with obtaining the gaming license which was issued to the Company.
This suit alleges the same, or substantially similar, facts that formed the
basis of the federal claim which was dismissed on November 17, 1997. The
defendants have obtained an extension of time to file their response and intend
to file an Exception and/or a Motion to Dismiss in response to Capitol House's
state court suit.
MARION COUNTY, INDIANA GRAND JURY
On or after March 15, 1996, the Company, its partners in the Lawrenceburg
casino project and certain other individuals and entities were served with
document request subpoenas issued by the Office of the Prosecuting Attorney of
Marion County, Indiana in connection with a grand jury investigation entitled:
STATE OF INDIANA V. ORIGINAL INVESTIGATION-OFFICIAL MISCONDUCT. Indiana law
requires that at the time a target of an investigation is determined, that
entity or person must be so advised by the Office of the Prosecuting Attorney.
On March 23, 1996 the Company was advised by the Marion County prosecutor that
no target subpoenas had been issued by the grand jury in its investigation as of
that date. As described below, the grand jury has since handed up indictments on
April 28, 1997 against four persons, but the Company and the partners of the
Indiana Partnership continue not to have been advised by the Marion County
Prosecutor that any of them is a target of the investigation. However, there can
be no assurance that further targets will not be identified as further
information and documents are obtained and considered by the grand jury. Due to
the confidential nature of grand jury proceedings, the Company is not aware of
the specific subject matter or matters of the investigation, other than to the
extent revealed by the April 28, 1997 indictments. The Company believes it has
fully complied with its subpoena, and has been informed by its partners that
they have done the same.
The subpoenas requested information regarding the current or prior ownership
interest in the Company and the partners of the Indiana Partnership by the
individuals or entities described below. The subpoenas also requested that the
Company and its partners produce a broad category of documents including
documents regarding employment and other agreements, gifts, payments and
correspondence between the Company and any of its partners on the one hand and
several business entities and individuals, including a then-Indiana state
legislator (Samuel Turpin), certain Indiana lobbyists, and certain Lawrenceburg,
Indiana city officials and businessmen on the other hand. The Company has
learned that this legislator (Turpin) has served as an employee of a subsidiary
of Conseco, Inc., the parent company of the 29% limited partner in the Indiana
Partnership since September 1995. Additionally, the Company has learned that
Turpin has served since September 1993 as a consultant to American Consulting
Engineers, Inc. ("ACE"), a major Indiana engineering firm that is engaged in
many state and local government funded construction projects. ACE also serves as
lead engineer for the Lawrenceburg casino project. On May 24, 1996, the Indiana
House Legislative Ethics Committee voted to reprimand, but take no further
action against, Turpin for failing to properly report the foregoing employment
and consulting arrangements on his 1993, 1994 and 1995 statements of economic
interests. On June 27, 1996, Turpin announced his resignation as chairman of the
Indiana House Ways and Means Committee. Turpin did not seek re-election in 1996
and is no longer a member of the Indiana House of Representatives.
On April 28, 1997, the grand jury made a "First and Partial Report" that
handed up felony indictments against (1) Willis Conner, co-owner of ACE; (2)
Kenneth Cragen, president of and lobbyist for the Indiana Motor Truck
Association ("IMTA"); (3) Turpin; and (4) James Wurster, co-owner of ACE.
Conner, Wurster and Turpin are each charged with one count of bribery in
connection with payments made by ACE to Turpin while he served in the Indiana
General Assembly, which payments were stated to be for consulting fees for
duties outside the legislative process, but which the indictment charges were in
return for official acts by Turpin that promoted the economic interests of ACE.
The press release by the Marion County prosecutor at the time of the indictments
described those economic interests as including "the promoting of certain
riverboat gaming interests in which ACE had a financial interest, the diverting
of state funds into highway construction and, while Turpin was a member of the
State Budget Committee, the release of state funds that benefited particular ACE
public works projects." Turpin was also charged with
21
five counts of filing fraudulent campaign finance reports, and one count of
perjury in connection with a sworn statement to the Indiana Bureau of Motor
Vehicles. Wurster was also charged with one count, and Cragen with two counts,
of unlawful lobbying in connection with lobbying activities involving IMTA and
ACE.
The company (including entities controlled by its employees) believes that
it has not engaged in, or been informed by its partners that they have engaged
in, any illegal conduct in the pursuit of or the granting of the gaming license
to the Indiana partnership of Lawrenceburg. Because the grand jury proceedings
were unlikely to be concluded quickly, on March 25, 1996, a former U.S. Attorney
(James Richmond) and his law firm were retained to conduct, as special
independent counsel (the "special independent counsel"), an internal
investigation into the activities and actions of the Company and the entities
controlled by any person employed by the Company with respect to (i) the hiring
by Conseco, Inc. and the Indiana engineering firm of the then-state legislator,
(Turpin) (ii) the endorsement of the Indiana Partnership by the City of
Lawrenceburg and the financial affairs of certain Lawrenceburg officials with
respect to such endorsement and the awarding of the certificate of suitability
by the Indiana Gaming Commission, and (iii) their lobbying efforts in
furtherance of the Indiana legislature's enactment of legislation authorizing
gaming and limiting gaming licenses to one per county. A special committee of
independent directors of the Company was appointed to supervise and coordinate
the special independent counsel's investigation. The special independent counsel
did not investigate Conseco, Inc. The Company was advised that Conseco, Inc.
also retained independent counsel and such counsel conducted its own internal
investigation of matters that may be the subject of the grand jury proceedings
and such investigation found no wrongdoing by Conseco, Inc. or any person or
entity it controls, or is controlled by.
From March 25 to April 15, 1996, the special independent counsel conducted
its investigation and issued an interim report in which it concluded that it
found no evidence that the Company or any entity controlled by or person
employed by the Company had any involvement in, or knowledge of, the
relationship between the then-state legislator (Turpin) and Conseco, Inc. or the
Indiana engineering firm (ACE), or attempted to improperly influence any City of
Lawrenceburg official, state legislator or Indiana Gaming Commission member or
staff member in connection with the endorsement of the partnership by the City
of Lawrenceburg and the awarding of the certificate of suitability to the
Indiana Partnership with regard to lobbying, including the lobbying with respect
to one gaming license per county legislation. The special independent counsel
found no evidence that the Company or any entity controlled by or person
employed by the Company attempted to unduly influence any legislator in any way.
However, no investigation was made of any lobbyist's records, activities or
expenditures, nor were any outside lobbyists interviewed. The special
independent counsel also audited the Company's compliance with the lobbying
disclosure statute in Indiana and found only technical errors in the Company's
lobbying disclosure statements. No evidence was found that these technical
errors were intentional or designed to hide any lobbying activity. In conducting
its investigation, the special independent counsel, among other things, reviewed
numerous boxes of documents produced by the executive and Lawrenceburg offices
of the Company and extensively interviewed the nine Company officers and
employees most closely related to the Lawrenceburg Casino project, as well as
the principal of R.J. Investments, Inc., a 4% limited partner of the Indiana
Partnership.
Several months after the completion of his investigation, the special
independent counsel (Richmond) was retained as Acting General Counsel of the
Company for the period January 14, 1997 through April 30, 1997.
No assurance can be given, however, that the nature and scope of the
investigation conducted by the special independent counsel for the Company and
Conseco, was sufficient to uncover conduct that might be considered unlawful. In
the event that the Company, any entity controlled by the Company, any person
employed by the Company, the Indiana Partnership or any of its partners is found
by the Marion County prosecutor to have engaged in unlawful conduct, there is no
assurance what effect such action would have on the Indiana Partnership's gaming
license.
22
In the event that a partner is determined by the Indiana Gaming Commission
to be unsuitable for ownership of a gaming license, the terms of the Indiana
Partnership's partnership agreement provide that the Indiana Partnership shall
redeem 100% of such unsuitable partner's interest for an amount equal to 90% of
the "appraised value" of that partner's interest, determined in accordance with
the terms of the partnership agreement. The purchase price is payable in five
annual installments, only from available cash flow or sale or financing proceeds
of the partnership, and bears interest at "prime". Also, there can be no
assurance that the Indiana Gaming Commission would not take other actions such
as suspending, revoking or failing to renew the Indiana Partnership's gaming
license. There can be no assurance that the grand jury investigation will not
lead to events having a material adverse effect on the Company.
MATTERS CONCERNING H. STEVEN NORTON
In September, 1993, H. Steven Norton, an employee of the Company at the
time, filed a cause of action against John T. Connors, a significant shareholder
of the Company and a former officer of J. Connors Group Inc., a predecessor
entity of the Company ("JCG"), seeking $50 million in damages. Mr. Norton
alleged that Mr. Connors failed to fulfill his promise made in the summer of
1991 to establish a partnership with Mr. Norton in which each would have an
equal 50% interest in JCG, which had a 25% partnership interest in the Company's
predecessor entity that owned the Alton Belle casino. As a result of the
reorganization effected immediately prior to its initial public offering, the
Company succeeded to all the rights, properties and assets, and assumed all the
liabilities, of all of its predecessor entities, including JCG. Subsequent to
filing the lawsuit, Mr. Connors advised the Company that his dealings with Mr.
Norton, which are the subject of the litigation, were in his capacity as an
officer of JCG, and that the Company should assume the defense and reimburse Mr.
Connors for the approximately $130,000 spent to date on legal fees, and that any
liability resulting from the litigation was assumed by the Company as a result
of the Company's reorganization. The Company responded to Mr. Connors that it
believed that his actions and dealings with Mr. Norton were solely in his
individual capacity as a shareholder of JCG, and the Company declined to assume
the defense or reimburse him for previously incurred legal fees, and the Company
denied that it has any liability with respect to such matter. If, however, JCG
were to have been found liable to Mr. Norton as a result of the actions of Mr.
Connors, then the Company could under certain circumstances be liable to Mr.
Norton for any damages awarded against JCG.
In April 1995, Mssrs. Norton and Connors agreed to voluntarily dismiss the
lawsuit without prejudice. However, on May 22, 1996, Mr. Norton refiled the suit
against Mr. Connors and is again seeking $50 million in damages. The Company
believes that Mr. Connors will again seek to cause the Company to indemnify and
reimburse him from liability thereunder. Therefore, there can be no assurance
that the lawsuit will not lead to events having a material adverse effect on the
Company.
Mr. Norton's employment with the Company ended on February 27, 1998. Prior
to the termination of his employment, Mr. Norton asserted that he was entitled
to additional compensation from the Company relating to efforts relating to the
Lawrenceburg, Indiana casino. The Company's position is that it has no
obligation to Mr. Norton relating to the Lawrenceburg, Indiana casino. The
Company expects that if no agreement is reached with respect to Mr. Norton's
Lawrenceburg claim and other severance related claims Mr. Norton will commence a
cause of action against the Company, which the Company will vigorously defend.
GAMING INDUSTRY CLASS ACTIONS
The Company has been named, along with two gaming equipment suppliers, 41 of
the country's largest gaming operators and four gaming distributors (the "Gaming
Industry Defendants") in three class action lawsuits pending in Las Vegas,
Nevada. The suits allege that the Gaming Industry Defendants violated the
Racketeer Influenced and Corrupt Organizations Act ("RICO") by engaging in a
course of fraudulent and misleading conduct intended to induce people to play
their gaming machines based upon a false belief concerning how those gaming
machines actually operate, as well as to the extend to which there
23
is actually an opportunity to win on any given play. The suites seek unspecified
compensatory and punitive damages. On January 14, 1997, the Court consolidated
all three actions under the case name WILLIAM H. POULOS, ETC. V. CAESARS WORLD,
INC., ET AL. On February 13, 1997 the plaintiffs filed a consolidated amended
complaint. The Court subsequently dismissed this complaint, in part, and on
January 8, 1998, the plaintiffs filed a second consolidated amended complaint.
On February 11, 1998 the defendants filed their consolidated answer. On March
19, 1998 the court split discovery between merit discovery and class
certification discovery and stayed merit discovery pending a decision on class
certification. The Company is unable to determine what effect, if any, the suit
would have on its business or operations.
CONSERVANCY DISTRICT LEASE LITIGATION IN DEARBORN COUNTY, INDIANA
On March 21, 1997, an action was filed in the Circuit Court of Dearborn
County, Indiana as Cause No. 15CO1-9703-CP-073, challenging the validity of a
lease to the City by the Conservancy District of Lawrenceburg, Indiana (the
"District") of certain land owned by the District, which land has in turn been
subleased by the City to the the Indiana Partnership and is being used for
development and operation of the riverboat gaming facility in the City for which
the Indiana Partnership has been awarded a riverboat owner's license by the
Commission. Defendants are the District and its individual directors. In early
1998, the Indiana Partnership petitioned to intervene to assist in defending the
validity of the challenged lease, which petition is pending before the Court.
The District and its directors have advised that they are contesting the action
and intend to continue to do so vigorously. If permitted to intervene, the
Indiana Partnership also intends to contest the action vigorously.
PENDING INTERNAL REVENUE SERVICE AUDIT
On November 1, 1994, the Company received a Notice of the beginning of an
Administrative Proceeding from the Internal Revenue Service ("IRS") for the 1992
and 1993 tax years of Metro Entertainment & Tourism, Inc. ("Metro"). Metro was
merged with and into the Company immediately prior to its initial public
offering in February 1993. Metro along with J. Connors Group, Inc. ("Connors")
were the partners of Alton Riverboat Gambling Partnership ("ARGP") which until
the Company's initial public offering owned and operated the Alton, Illinois
riverboat casino. The IRS has proposed certain adjustments with respect to the
Company for its 1993 tax year in a 30-day letter. The IRS has also proposed
adjustments for ARGP that flow through to Metro in a 60-day letter. Finally, on
March 16, 1998 the IRS issued a 60-day letter to Metro for its tax years ending
December 1992 and February 1993. The principal issues raised by the IRS in the
Metro 60-day letter involve the status of Metro as an S Corporation and the
deductibility of the $8.5 million accomodation fee paid to William McEnery in
1992 and 1993. The total Federal tax liability asserted by the IRS against the
Company resulting from these proposed adjustments is approximately $11.0 million
including interest through December 31, 1997 but excluding penalties, if any.
The Company intends to protest these proposed adjustments to the Appeals Office
of the IRS and vigorously contest these proposed adjustments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Proxy Statement, page 18 section entitled
"Market for Registrants Common Equity and Related Stockholder Matters."
24
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from the Annual Report, inside front cover,
entitled "Financial Highlights."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from the Annual Report, pages 26-33 entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Argosy Gaming Company are
included in this report:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY GAMING COMPANY
Incorporated by reference from the Annual Report, pages 34-51, sections
entitled "Consolidated Balance Sheets", "Consolidated Statements of Operations",
"Consolidated Statements of Cash Flows", "Consolidated Statements of
Stockholders' Equity", "Notes to Consolidated Financial Statements" and "Report
of Independent Auditors".
FINANCIAL STATEMENTS OF GUARANTOR SUBSIDIARIES OF THE COMPANY'S FIRST MORTGAGE
NOTES PROVIDED PURSUANT TO RULE 3-10 OF REGULATION S-X.
FINANCIAL STATEMENTS OF ALTON GAMING COMPANY
Report of Independent Auditors....................................................... 27
Balance Sheets....................................................................... 28
Statements of Income................................................................. 29
Statements of Stockholder's Equity................................................... 30
Statements of Cash Flows............................................................. 31
Notes to Financial Statements........................................................ 32
FINANCIAL STATEMENTS OF THE MISSOURI GAMING COMPANY
Report of Independent Auditors....................................................... 36
Balance Sheets....................................................................... 37
Statements of Operations............................................................. 38
Statements of Stockholder's Equity................................................... 39
Statements of Cash Flows............................................................. 40
Notes to Financial Statement......................................................... 41
CONSOLIDATED FINANCIAL STATEMENTS OF ARGOSY OF LOUISIANA, INC.
Report of Independent Auditors....................................................... 45
Consolidated Balance Sheets.......................................................... 46
Consolidated Statements of Operations................................................ 47
Consolidated Statements of Stockholder's Equity...................................... 48
Consolidated Statements of Cash Flows................................................ 49
Notes to Consolidated Financial Statements........................................... 50
FINANCIAL STATEMENTS OF CATFISH QUEEN PARTNERSHIP IN COMMENDAM
Report of Independent Auditors....................................................... 55
Balance Sheets....................................................................... 56
Statements of Operations............................................................. 57
25
Statements of Partners' Equity....................................................... 58
Statements of Cash Flows............................................................. 59
Notes to Financial Statements........................................................ 60
FINANCIAL STATEMENTS OF JAZZ ENTERPRISES, INC.
Report of Independent Auditors....................................................... 64
Balance Sheets....................................................................... 66
Statements of Operations............................................................. 67
Statements of Stockholder's Equity................................................... 68
Statements of Cash Flows............................................................. 69
Notes to Financial Statements........................................................ 70
CONSOLIDATED FINANCIAL STATEMENTS OF THE INDIANA GAMING COMPANY
Report of Independent Auditors....................................................... 76
Consolidated Balance Sheets.......................................................... 77
Consolidated Statements of Operations................................................ 78
Consolidated Statements of Stockholder's Equity...................................... 79
Consolidated Statements of Cash Flows................................................ 80
Notes to Consolidated Financial Statements........................................... 81
FINANCIAL STATEMENTS OF INDIANA GAMING COMPANY, L.P.
Report of Independent Auditors....................................................... 86
Balance Sheets....................................................................... 87
Statements of Operations............................................................. 88
Statements of Partners' Equity....................................................... 89
Statements of Cash Flows............................................................. 90
Notes to Financial Statements........................................................ 91
The following consolidated financial schedules of Argosy Gaming Company are
included in response to Item 14(a):
I: Condensed Financial Information of Registrant S-1.
All other schedules specified under Regulation S-X for Argosy Gaming Company
have been omitted because they are either non-applicable, not required or
because the information required is included in the financial statements or
notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
26
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Alton Gaming Company
We have audited the accompanying balance sheets of Alton Gaming Company as
of December 31, 1997 and 1996, and the related statements of income,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Alton Gaming Company at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 13, 1998
27
ALTON GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
CURRENT ASSETS:
Cash...................................................................................... $ 3,807 $ 3,563
Accounts receivable, net of allowance for doubtful accounts of $259 and $311,
respectively............................................................................ 211 330
Deferred income taxes..................................................................... 690 631
Other current assets...................................................................... 549 521
--------- ---------
Total current assets.................................................................... 5,257 5,045
--------- ---------
Due from affiliates....................................................................... 10,405 10,592
Net property and equipment................................................................ 27,447 30,112
Other assets.............................................................................. 6 7
--------- ---------
Total assets............................................................................ $ 43,115 $ 45,756
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 799 $ 1,547
Accrued payroll and related expenses...................................................... 1,221 1,011
Slot club liability....................................................................... 766 956
Other accrued liabilities................................................................. 1,515 1,164
Accrued insurance......................................................................... 1,107 1,168
--------- ---------
Total current liabilities............................................................... 5,408 5,846
--------- ---------
OTHER LONG-TERM OBLIGATIONS--RELATED PARTY.................................................. 186 171
DEFERRED INCOME TAXES....................................................................... 3,745 3,494
STOCKHOLDER'S EQUITY:
Common stock--$1 par value, 1,000 shares authorized, issued and outstanding............... 1 1
Capital in excess of par.................................................................. 256 256
Retained earnings......................................................................... 33,519 35,988
--------- ---------
Total stockholder's equity............................................................ 33,776 36,245
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 43,115 $ 45,756
--------- ---------
--------- ---------
See accompanying notes to financial statements.
28
ALTON GAMING COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 61,877 $ 72,369 $ 81,413
Food, beverage and other....................................................... 7,433 7,817 7,849
--------- --------- ---------
69,310 80,186 89,262
Less promotional allowances.................................................... (2,102) (2,253) (3,269)
--------- --------- ---------
Net revenues..................................................................... 67,208 77,933 85,993
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 31,672 36,082 36,185
Food, beverage and other....................................................... 7,113 7,473 6,820
Other operating expenses....................................................... 5,623 5,706 5,437
Selling, general and administrative............................................ 10,856 12,226 10,818
Depreciation and amortization.................................................. 4,455 4,206 4,288
Allocation of corporate costs--related party................................... 2,247 4,193 3,742
--------- --------- ---------
61,966 69,886 67,290
--------- --------- ---------
Income from operations........................................................... 5,242 8,047 18,703
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income................................................................ 70 50 87
Interest expense............................................................... (14) (51) (178)
--------- --------- ---------
56 (1) (91)
--------- --------- ---------
Income before income taxes....................................................... 5,298 8,046 18,612
Income tax expense............................................................... 2,002 3,198 7,399
--------- --------- ---------
Net income....................................................................... $ 3,296 $ 4,848 $ 11,213
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
29
ALTON GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
------- ------- ---------- -------- --------------
Balance, December 31, 1994.............. 1,000 $ 1 $ 256 $ 22,812 $ 23,069
Net income............................ 11,213 11,213
--
------- ----- -------- -------
Balance, December 31, 1995.............. 1,000 1 256 34,025 34,282
Net income............................ 4,848 4,848
Dividends............................. (2,885) (2,885)
--
------- ----- -------- -------
Balance, December 31, 1996.............. 1,000 1 256 35,988 36,245
Net income............................ 3,296 3,296
Dividends............................. (5,765) (5,765)
--
------- ----- -------- -------
Balance, December 31, 1997.............. 1,000 $ 1 $ 256 $ 33,519 $ 33,776
--
--
------- ----- -------- -------
------- ----- -------- -------
See accompanying notes to financial statements.
30
ALTON GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................................... $ 3,296 $ 4,848 $ 11,213
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 4,455 4,206 4,288
Loss on disposal of equipment................................................ 90
Deferred income taxes........................................................ 192 597 1,612
Changes in operating assets and liabilities:
Accounts receivable........................................................ 119 138 16
Other current assets....................................................... (28) 395 32
Other assets............................................................... 166 327
Accounts payable........................................................... (748) 273 (8)
Other accrued liabilities.................................................. 96 (1,503) 1,799
Income taxes payable to affiliate.......................................... 214 (5,570) (9,474)
--------- --------- ----------
Net cash provided by operating activities................................ 7,686 3,550 9,805
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (1,686) (1,680) (1,566)
--------- --------- ----------
Net cash used in investing activities.................................... (1,686) (1,680) (1,566)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................................... (5,765) (2,885)
Payments on long-term debt--related party.................................... (431)
Due from affiliate........................................................... (6) 692 (6,548)
Increase (decrease) in other long term obligations--related party............ 15 13 (294)
--------- --------- ----------
Net cash used in financing activities.................................... (5,756) (2,180) (7,273)
--------- --------- ----------
Net increase (decrease) in cash.............................................. 244 (310) 966
Cash, beginning of year...................................................... 3,563 3,873 2,907
--------- --------- ----------
Cash, end of year............................................................ $ 3,807 $ 3,563 $ 3,873
--------- --------- ----------
--------- --------- ----------
See accompanying notes to financial statements.
31
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Alton Gaming Company ("Company"), an Illinois
Corporation and wholly-owned subsidiary of Argosy Gaming Company ("Argosy"), is
engaged in the business of providing casino-style gaming and related
entertainment to the public through the operation of the Alton Belle casino in
Alton, Illinois.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Shore improvements................................ 5 to 30 years
Riverboat, dock and improvements.................. 5 to 20 years
Furniture, fixtures and equipment................. 5 to 10 years
REVENUES AND PROMOTIONAL ALLOWANCES--The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of food, beverage and other items
provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
direct cost of providing promotional allowances has been included in costs and
expenses as follows:
1997 1996 1995
--------- --------- ---------
Food, beverage and other......................................... $ 1,112 $ 1,238 $ 1,662
ADVERTISING COSTS--The Company expenses advertising costs as incurred.
Advertising expense was $2,807, $3,225 and $3,089 for the years ended December
31, 1997, 1996 and 1995, respectively.
INCOME TAXES--Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
32
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Leasehold and shore improvements................................................ $ 1,933 $ 1,194
Riverboat, dock and improvements................................................ 30,497 29,801
Furniture, fixtures and equipment............................................... 12,209 13,627
---------- ----------
44,639 44,622
Less accumulated depreciation and amortization.................................. (17,192) (14,510)
---------- ----------
Net property and equipment...................................................... $ 27,447 $ 30,112
---------- ----------
---------- ----------
3. INCOME TAXES
Income tax expense for the years ended December 31, 1997, 1996 and 1995,
consists of the following:
1997 1996 1995
--------- --------- ---------
Current:
Federal.................................................................. $ 1,586 $ 2,273 $ 5,150
State.................................................................... 224 328 637
--------- --------- ---------
1,810 2,601 5,787
--------- --------- ---------
Deferred:
Federal.................................................................. 155 526 1,419
State.................................................................... 37 71 193
--------- --------- ---------
192 597 1,612
--------- --------- ---------
Income tax expense..................................................... $ 2,002 $ 3,198 $ 7,399
--------- --------- ---------
--------- --------- ---------
The provision for income taxes for the years ended December 31, 1997, 1996
and 1995, differs from that computed at the Federal Statutory tax rate as
follows:
1997 1996 1995
--------- --------- ---------
Federal statutory rate...................................................... 34.0% 35.0% 35.0%
State income taxes, net of federal benefit.................................. 4.8 4.7 4.5
Other....................................................................... (1.0) 0.3
--- --- ---
37.8% 39.7% 39.8%
--- --- ---
--- --- ---
33
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Depreciation....................................................................... $ (3,791) $ (3,524)
Start-up costs..................................................................... 46 30
Other.............................................................................. 690 631
--------- ---------
Net deferred tax liability......................................................... $ (3,055) $ (2,863)
--------- ---------
--------- ---------
4. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $14, $148 and $5 for interest for the years ended December
31, 1997, 1996 and 1995, respectively, and $1,597, 8,170 and $15,261 for income
taxes in 1997, 1996 and 1995 to Argosy.
During 1997, the Company transferred equipment to affiliates with a carrying
value of $278. Amounts due from affiliates increased by this amount as a result
of the transfer.
During 1997, Argosy transferred a barge to the Company with a carrying value
of $432. Amounts due from affiliates decreased by this amount as a result of the
transfer.
5. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1997, are as follows:
YEARS ENDING DECEMBER 31,
- --------------------------------------------------------------------------------------
1998.................................................................................. $ 197
1999.................................................................................. 155
2000.................................................................................. 139
2001.................................................................................. 3
Rent expense for the years ended December 31, 1997, 1996 and 1995, was $532,
$565 and $490, respectively.
6. OTHER RELATED PARTY TRANSACTIONS
The Company has entered into a management agreement with Argosy based on a
cost allocation model which was approved by the Illinois Gaming Board.
The Company participates in Argosy's property, general liability, worker's
compensation and other insurance programs. The Company's estimated share of
these costs, which is allocated directly to the Company by Argosy, was $2,023,
$3,309 and $2,154 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Interest expense to related parties amounted to $14, $32 and $178 for the
years ended December 31, 1997, 1996 and 1995, respectively.
In January 1996, the Company entered into a 5 year operating lease agreement
with Argosy for certain office space. The lease carries annual rentals of
approximately $126 throughout the lease term.
34
ALTON GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
During 1994, the Company transferred the original Alton Belle along with
other barge facilities having a total cost of approximately $11,300 and
accumulated depreciation of approximately $3,300 to an affiliate. This amount is
included in due from affiliates in the accompanying balance sheets. No interest
is charged on this advance.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expenses
recognized by the Company under the Plan were $530, $461 and $461 for the years
ended December 31, 1997, 1996 and 1995, respectively.
8. COMMITMENTS AND CONTINGENCIES
A predecessor entity to the Company ("Predecessor"), as a result of a
certain shareholder loan transaction, could be subject to federal and certain
state income taxes (plus interest and penalties, if any) if it is determined
that it failed to satisfy all of the requirements of the S-Corporation
provisions of the Internal Revenue Code relating to the prohibition concerning a
second class of stock. An audit is currently being conducted by the Internal
Revenue Service ("IRS") of the Company's federal income tax returns for the 1992
and 1993 tax years, and the IRS has asserted the S-Corporation status as one of
the issues although the IRS has yet to make a formal claim of deficiency. If the
IRS successfully challenges the Predecessor's S-Corporation status, the Company
would be required to pay federal and certain state income taxes on the
Predecessor's taxable income from the commencement of its operations until
February 25, 1993 (plus interest and penalties, if any, thereon until the date
of payment). If the Predecessor was required to pay federal and certain state
income taxes on its taxable earnings through February 25, 1993, such payments
could amount to approximately $13,900, including interest through December 31,
1997, but excluding penalties, if any. While the Company believes the
Predecessor has legal authority for its position that it is not subject to
federal and certain state income taxes because it met the S-Corporation
requirements, no assurances can be given that the Predecessor's position will be
upheld. This contingent liability could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. No
provision has been made for this contingency in the accompanying financial
statements.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes") and retired an outstanding credit facility. The
assets of the Company are pledged as collateral, and the Company is a guarantor,
under the terms of the Mortgage Notes.
35
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Missouri Gaming Company
We have audited the accompanying balance sheets of The Missouri Gaming
Company as of December 31, 1997 and 1996, and the related statements of
operations, stockholder's equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Missouri Gaming Company
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Kansas City, Missouri
February 13, 1998
36
THE MISSOURI GAMING COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
CURRENT ASSETS:
Cash...................................................................................... $ 3,629 $ 6,143
Accounts receivable, net.................................................................. 269 220
Income taxes receivable from affiliate.................................................... 94
Prepaid rent.............................................................................. 1,041 1,160
Other current assets...................................................................... 217 183
Deferred income taxes..................................................................... 370
--------- ---------
Total current assets................................................................ 5,620 7,706
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 70,878 75,773
OTHER ASSETS:
Deposits.................................................................................. 221 88
Prepaid rent.............................................................................. 917 1,917
Other..................................................................................... 1,060 1,267
--------- ---------
Total other assets.................................................................. 2,198 3,272
--------- ---------
TOTAL ASSETS................................................................................ $ 78,696 $ 86,751
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 1,352 $ 3,505
Accrued payroll and related expenses...................................................... 1,181 1,299
Slot club liability....................................................................... 674 636
Accrued insurance......................................................................... 917 748
Other accrued liabilities................................................................. 920 1,561
Income taxes payable to affiliate......................................................... 4,435
--------- ---------
Total current liabilities........................................................... 5,044 12,184
--------- ---------
DUE TO AFFILIATES........................................................................... 56,007 56,345
DEFERRED INCOME TAXES....................................................................... 1,851 907
STOCKHOLDER'S EQUITY:
Common stock--$.01 par value, 1,000 shares authorized, issued and outstanding.............
Capital in excess of par.................................................................. 5,000 5,000
Retained earnings......................................................................... 10,794 12,315
--------- ---------
Total stockholder's equity.......................................................... 15,794 17,315
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY.................................................. $ 78,696 $ 86,751
--------- ---------
--------- ---------
See accompanying notes to financial statements.
37
THE MISSOURI GAMING COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
REVENUES:
Casino........................................................................ $ 61,750 $ 82,247 $ 86,443
Admissions.................................................................... 1,983 15,300
Food, beverage and other...................................................... 10,050 11,065 5,203
--------- --------- ----------
71,800 95,295 106,946
Less promotional allowances................................................... (5,252) (6,822) (12,888)
--------- --------- ----------
Net revenues.................................................................. 66,548 88,473 94,058
--------- --------- ----------
COSTS AND EXPENSES:
Casino........................................................................ 33,568 43,733 41,883
Food, beverage and other...................................................... 8,583 9,552 4,934
Selling, general and administrative........................................... 11,871 13,399 13,590
Other operating expenses...................................................... 4,098 5,263 4,199
Depreciation and amortization................................................. 5,947 6,724 7,395
Preopening.................................................................... 392
Lease termination............................................................. 3,508
--------- --------- ----------
64,067 82,571 72,001
--------- --------- ----------
Income from operations.......................................................... 2,481 5,902 22,057
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income............................................................... 231 40
Interest expense.............................................................. (5,162) (6,048) (3,626)
--------- --------- ----------
(4,931) (6,008) (3,626)
--------- --------- ----------
(Loss) income before income taxes............................................... (2,450) (106) 18,431
Income tax benefit (expense).................................................... 929 42 (6,875)
--------- --------- ----------
Net (loss) income............................................................... $ (1,521) $ (64) $ 11,556
--------- --------- ----------
--------- --------- ----------
See accompanying notes to financial statements.
38
THE MISSOURI GAMING COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CAPITAL IN TOTAL
COMMON EXCESS OF RETAINED STOCKHOLDER'S
SHARES STOCK PAR EARNINGS EQUITY
----------- ----------- ----------- --------- ------------
Balance, December 31, 1994............................... 1,000 $ $ 5,000 $ 823 $ 5,823
Net income............................................. 11,556 11,556
----- ----------- ----------- --------- ------------
Balance, December 31, 1995............................... 1,000 5,000 12,379 17,379
Net loss............................................... (64) (64)
----- ----------- ----------- --------- ------------
Balance, December 31, 1996............................... 1,000 5,000 12,315 17,315
Net loss............................................... (1,521) (1,521)
----- ----------- ----------- --------- ------------
Balance, December 31, 1997............................... 1,000 $ $ 5,000 $ 10,794 $ 15,794
----- ----------- ----------- --------- ------------
----- ----------- ----------- --------- ------------
See accompanying notes to financial statements.
39
THE MISSOURI GAMING COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................... $ (1,521) $ (64) $ 11,556
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization of fixed assets................................. 5,740 6,484 7,109
Amortization of other assets.................................................. 207 240 286
Deferred income taxes......................................................... 455 1,320 734
Lease termination costs....................................................... 1,941
Changes in operating assets and liabilities:
Accounts receivable......................................................... (49) (91) (92)
Other current assets........................................................ 85 505 182
Accounts payable............................................................ (2,153) 947 5,232
Accrued liabilities......................................................... (339) 812 601
Income taxes payable to affiliate........................................... (4,529) (1,587) 4,230
Other assets................................................................ 1,000 1,000 1,217
--------- ---------- ----------
Net cash (used in) provided by operating activities......................... (1,104) 11,507 31,055
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (998) (19,192) (31,496)
--------- ---------- ----------
Net cash used in investing activities....................................... (998) (19,192) (31,496)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on installment contracts............................................. (94) (797) (5,277)
Due from affiliate............................................................ (185) 10,294 4,762
Decrease in deposits.......................................................... (133) 200
--------- ---------- ----------
Net cash (used in) provided by financing activities......................... (412) 9,697 (515)
--------- ---------- ----------
Net (decrease) increase in cash............................................... (2,514) 2,012 (956)
Cash, beginning of year....................................................... 6,143 4,131 5,087
--------- ---------- ----------
Cash, end of year............................................................. $ 3,629 $ 6,143 $ 4,131
--------- ---------- ----------
--------- ---------- ----------
See accompanying notes to financial statements.
40
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Missouri Gaming Company ("Company") (a Missouri company and a wholly
owned subsidiary of Argosy Gaming Company, ("Argosy")) owns and operates a
Riverboat casino and related facilities in Riverside, Missouri. The Company
operated from a temporary facility while its permanent facility was under
construction. The permanent facility was opened to the public on January 15,
1996 and serves as a dining and entertainment outlet to the riverboat casino.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts in 1996 and 1995 have been reclassified to conform to the
1997 presentation.
CASH AND CASH EQUIVALENTS
The Company considers cash and all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings and shore improvements.............................. 5 to 30
years
Riverboat, dock and improvements.............................. 5 to 20
years
Furniture, fixtures and equipment............................. 5 to 10
years
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Company recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of admissions and food and beverage and other items which were provided to
customers without charge, has been included in revenues, and a corresponding
amount has been deducted as promotional allowances. The estimated direct cost of
providing promotional allowances has been included in operating costs and
expenses as follows:
1997 1996 1995
--------- --------- ---------
Admissions.................................................... $ $ 315 $ 4,601
Food, beverage and other...................................... 2,419 1,902 522
ADMISSIONS REVENUE
Admissions revenue is recognized at the time the related service is
performed. The Company ceased charging customers an admission fee in the first
quarter of 1996 and, therefore, no longer recognizes any admission revenue.
41
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense for
the years ended December 31, 1997, 1996 and 1995 was $2,548, $3,214 and $2,619,
respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated income
tax returns of Argosy. The Company computes federal and state income taxes on a
separate return basis. Taxes due are settled between the Company and Argosy in
accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Land and improvements $ 14,658 $ 14,658
Buildings and improvements...................................................... 29,107 28,542
Riverboat, dock and improvements................................................ 23,810 24,115
Furniture, fixtures and equipment............................................... 18,501 18,033
---------- ----------
86,076 85,348
Accumulated depreciation and amortization....................................... (15,198) (9,575)
---------- ----------
Net property and equipment...................................................... $ 70,878 $ 75,773
---------- ----------
---------- ----------
3. RIVERSIDE AGREEMENT
The Company entered into a Lease and Development Agreement ("Agreement")
with the City of Riverside, Missouri. The Agreement, as amended, required the
Company to pay $1,600 for the construction of a city park and for the
development of a golf course. These payments were capitalized, are included as
an intangible asset in the accompanying balance sheet, and are being amortized
over ten years using the straight-line method. The unamortized portion of these
payments is included in other assets in the accompanying balance sheets.
Under the terms of the Agreement, the Company leases its site from the City
of Riverside. The $5,000 minimum rent due for the initial five-year term of the
lease was paid in advance as required by the Agreement. In addition to minimum
rent, during the initial five-year lease term, percentage rent is payable at 3%
of revenues, as defined, over $100 million annually. The Company has the option
to extend the Agreement for three successive five-year terms. In all extension
periods, there will be no minimum rent and percentage rent will be payable as
follows: (i) 3% on the first $50 million of revenues; (ii) 4% on revenues
between $50 million and $100 million; and (iii) 5% on revenues in excess of $100
million.
The Agreement requires the Company to maintain a net worth of $5,000 at all
times, unless approved by the City of Riverside.
42
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INCOME TAXES
Income tax benefit (expense) for years ended December 31, 1997, 1996 and
1995 consists of the following:
1997 1996 1995
--------- --------- ---------
Current:
Federal................................................................. $ 1,240 $ 1,200 $ (5,419)
State................................................................... 144 162 (722)
--------- --------- ---------
1,384.... 1,362 (6,141)
--------- --------- ---------
Deferred:
Federal................................................................. (417) (1,162) (646)
State................................................................... (38) (158) (88)
--------- --------- ---------
(455) (1,320) (734)
--------- --------- ---------
Income tax benefit (expense)............................................ $ 929 $ 42 $ (6,875)
--------- --------- ---------
--------- --------- ---------
The provision for income taxes for the years ended December 31, 1997, 1996
and 1995 differs from that computed at the Federal Statutory corporate tax rate
as follows:
1997 1996 1995
--------- --------- ---------
Federal statutory rate................................................. (34.0)% (35.0)% 35.0%
State income taxes, net of federal benefit............................. (4.1) (4.8) 4.4
Nondeductible contributions............................................
Other.................................................................. 0.2 (2.4)
--------- --------- ---
(37.9)% (39.8)% 37.0%
--------- --------- ---
--------- --------- ---
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Start-up costs..................................................................... $ 323 $ 565
Depreciation....................................................................... (2,174) (1,472)
Other, net......................................................................... 370 (119)
--------- ---------
Net deferred tax liability......................................................... $ (1,481) $ (1,026)
--------- ---------
--------- ---------
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment of $135 and $1,681 in 1996 and 1995,
respectively which was financed through installment contracts.
The Company paid $5,393, $8,043 and $273 for interest and $3,518, $225 and
$1,911 for taxes in 1997, 1996 and 1995, respectively.
43
THE MISSOURI GAMING COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS
The Company participates in Argosy's property, general liability, worker's
compensation and other insurance programs. The Company's estimated share of
these costs, which is allocated directly to the Company by Argosy, was $2,603,
$2,853 and $2,584 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has outstanding long-term debt with Argosy in the amounts of
$56,007 and $56,345 at December 31, 1997 and 1996, respectively. These amounts
represent funds received in connection with the construction of the permanent
facility. The Company accrues interest on the long-term debt at a rate of 12%
annually. There are no stated repayment terms on the long-term debt and payments
are made from available cash flow.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
7. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was $422, $441 and $490 for the years
ended December 31, 1997, 1996 and 1995, respectively.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1997, are as follows:
YEAR ENDING
DECEMBER 31,
- --------------------------------------------------------------------------------------
1998.................................................................................. $ 277
1999.................................................................................. 58
2000.................................................................................. 35
2001.................................................................................. 26
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$1,539, $1,874 and $3,447, respectively.
The Company is restricted from making certain distributions to Argosy and
other affiliates unless approved by state gaming authorities.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes") and retired an outstanding credit facility. The
assets of the Company are pledged as collateral, and the Company is a guarantor,
under the terms of the Mortgage Notes.
9. LEASE TERMINATION
In the second quarter of 1996, the Company determined that it no longer had
a use for the temporary restaurant and entertainment barge. Accordingly, the
Company expensed the remaining lease costs and any termination costs associated
with the lease.
44
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Argosy of Louisiana, Inc.
We have audited the accompanying consolidated balance sheets of Argosy of
Louisiana, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Argosy of
Louisiana, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New Orleans, Louisiana
February 13, 1998
45
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,429 $ 3,051
Accounts receivable, net of allowance for doubtful accounts of $838 and $856,
respectively............................................................................ 484 611
Deferred income taxes..................................................................... 427
Income taxes receivable from related party................................................ 742 879
Other current assets...................................................................... 429 859
--------- ---------
Total current assets.................................................................... 5,084 5,827
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 43,896 49,021
OTHER ASSETS:
Deferred lease acquisition cost, net...................................................... 1,808 1,915
Other..................................................................................... 13 291
--------- ---------
Total other assets...................................................................... 1,821 2,206
--------- ---------
TOTAL ASSETS................................................................................ $ 50,801 57,054
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 771 $ 1,127
Accrued payroll and related expenses...................................................... 919 749
Other accrued liabilities................................................................. 999 1,697
Due to affiliates......................................................................... 1,795
Accrued interest-related party............................................................ 902
Accrued insurance......................................................................... 1,693 448
Accrued gaming taxes...................................................................... 500 580
Notes payable and current maturities of long-term debt-related party...................... 10,268 5,578
--------- ---------
Total current liabilities............................................................... 17,847 10,179
--------- ---------
LONG-TERM DEBT-RELATED PARTY................................................................ 37,842 42,812
DEFERRED INCOME TAXES 1,183
MINORITY INTEREST IN CONSOLIDATED PARTNERSHIP............................................... 2,672 3,174
STOCKHOLDER'S DEFICIT:
Common stock-$1 par value, 1,000 shares authorized, issued and outstanding................ 1 1
Accumulated deficit....................................................................... (7,561) (295)
--------- ---------
(7,560) (294)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT................................................. $ 50,801 $ 57,054
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
46
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 47,628 $ 51,007 $ 48,427
Food, beverage and other....................................................... 7,046 7,641 4,945
--------- --------- ---------
54,674 58,648 53,372
Less promotional allowances...................................................... (4,238) (5,228) (3,566)
--------- --------- ---------
Net revenues..................................................................... 50,436 53,420 49,806
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 27,887 26,923 25,547
Food, beverage and other....................................................... 6,799 4,894 3,772
Other operating expenses....................................................... 5,147 4,757 4,013
Selling, general and administrative............................................ 12,346 10,939 10,164
Depreciation and amortization.................................................. 5,468 6,379 5,430
Referendum expenses............................................................ 1,347
--------- --------- ---------
57,647 55,239 48,926
--------- --------- ---------
(Loss) income from operations.................................................... (7,211) (1,819) 880
--------- --------- ---------
INTEREST EXPENSE (INCOME) NET:
Interest to related party...................................................... 1,402 1,603
Interest....................................................................... (89) (119) 92
--------- --------- ---------
(Loss) income before income taxes and minority interest.......................... (8,524) (3,303) 788
Income tax benefit (expense)..................................................... 756 1,061 (333)
Minority interest................................................................ 502 145 36
--------- --------- ---------
Net (loss) income................................................................ $ (7,266) $ (2,097) $ 491
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
47
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RETAINED
COMMON EARNINGS
SHARES STOCK (DEFICIT) TOTAL
----------- ------------- ----------- ---------
Balance, December 31, 1994............................................... 1,000 $ 1 $ 1,311 $ 1,312
Net income............................................................. 491 491
--
----- ----------- ---------
Balance, December 31, 1995............................................... 1,000 1 1,802 1,803
Net loss............................................................... (2,097) (2,097)
--
----- ----------- ---------
Balance, December 31, 1996............................................... 1,000 1 (295) (294)
Net loss............................................................... (7,266) (7,266)
--
----- ----------- ---------
Balance, December 31, 1997............................................... 1,000 $ 1 $ (7,561) $ (7,560)
--
--
----- ----------- ---------
----- ----------- ---------
See accompanying notes to consolidated financial statements.
48
ARGOSY OF LOUISIANA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................................ $ (7,266) $ (2,097) $ 491
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation................................................................... 5,083 5,780 4,951
Amortization................................................................... 385 599 479
Minority interest.............................................................. (502) (145) (36)
Deferred income taxes.......................................................... (756) (1,061) 1,143
Changes in operating assets and liabilities:
Accounts receivable.......................................................... 127 185 (593)
Income tax receivable from related party..................................... 137
Accrued interest to related party............................................ 902
Other current assets......................................................... 430 (166) (645)
Accounts payable............................................................. (356) (191) 282
Accrued payroll and related expenses......................................... 170 138 (392)
Other accrued liabilities.................................................... 467 1,047 (469)
--------- --------- ----------
Net cash (used in) provided by operating activities........................ (1,179) 4,089 5,211
--------- --------- ----------
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (444) (713) (13,914)
Proceeds from sale of equipment to affiliates.................................... 486
--------- --------- ----------
Net cash provided by (used in) investing activities........................ 42 (713) (13,914)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in amounts due to affiliates............................................ 1,795
(Decrease) increase in notes payable and long-term debt.......................... 8,160
Payments on notes payable and long-term debt..................................... (280) (5,595) (3,048)
Notes receivable-affiliate....................................................... 2,801
Decrease (increase) in other assets.............................................. 69 (82)
--------- --------- ----------
Net cash provided by (used in) financing activities........................ 1,515 (5,526) 7,831
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................. 378 (2,150) (872)
Cash and cash equivalents, beginning of year..................................... 3,051 5,201 6,073
--------- --------- ----------
Cash and cash equivalents, end of year........................................... $ 3,429 $ 3,051 $ 5,201
--------- --------- ----------
--------- --------- ----------
See accompanying notes to consolidated financial statements.
49
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Argosy of Louisiana, Inc. (collectively with its controlled partnership
Catfish Queen Partnership in Commendam ("Partnership") "the Company") was formed
on July 29, 1993. The Company entered a partnership agreement with Jazz
Enterprises, Inc. ("Jazz") to form the Partnership to provide riverboat gaming
and related entertainment in Baton Rouge, Louisiana. The Company, a wholly owned
subsidiary of Argosy Gaming Company (Argosy), is the 90% general partner of the
Partnership, along with the 10% partner in commendam Jazz, which became a wholly
owned subsidiary of Argosy in 1995.
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. These
consolidated financial statements include the accounts of the Company and the
Partnership. All significant intercompany accounts and transactions have been
eliminated.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
The Company considers cash and all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1997 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed on the
straight-line method over the estimated useful lives or lease period as follows:
Riverboat, dock and improvements 15 to 20 years
Furniture, fixtures and equipment 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS
Deferred lease acquisition costs resulted from the contribution of certain
leases by Jazz to the Partnership. This cost is amortized on the straight-line
method over 20 years. Accumulated amortization was $350 and $243 at December 31,
1997 and 1996, respectively.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Company recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of food, beverage and other items which were
50
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances.
The estimated direct cost of providing promotional allowances for food and
beverages and other items was $2,493, $2,534 and $2,166 in 1997, 1996 and 1995,
respectively, and has been included in food and beverage and other items costs
and expenses.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$1,656, $1,527 and $1,580 in 1997, 1996 and 1995, respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated tax
returns of Argosy. The Company computes federal and state taxes on a separate
return basis. Taxes due are settled between the Company and Argosy in accordance
with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Leasehold and shore improvements.......................................................... $ 6,967 $ 6,948
Riverboat, docks and improvements......................................................... 36,072 36,051
Furniture, fixtures and equipment......................................................... 16,825 17,136
Construction in progress.................................................................. 317 317
---------- ----------
60,181 60,452
Less accumulated depreciation and amortization............................................ (16,285) (11,431)
---------- ----------
Net property and equipment................................................................ $ 43,896 $ 49,021
---------- ----------
---------- ----------
3. LONG-TERM DEBT-RELATED PARTY
Notes payable and long term debt consists of the following:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
8% unsecured note payable to Argosy in quarterly installments of $930,815 including
interest, through July 2001.............................................................. $ 17,527 $ 17,527
Noninterest-bearing unsecured note payable to Argosy due 1998............................. 1,844 1,844
Noninterest-bearing advances from Argosy, no stated maturity.............................. 28,739 29,019
---------- ----------
48,110 48,390
Less current maturities................................................................... (10,268) (5,578)
---------- ----------
$ 37,842 $ 42,812
---------- ----------
---------- ----------
During 1996, the right to a note payable from the Partnership to the Company
was assigned to Argosy.
51
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The carrying value of long term debt approximates fair value at December 31,
1997 and 1996. During 1997, the Company did not make scheduled debt payments to
Argosy. Argosy has agreed to provide operating support to the Company and to the
extent necessary will not demand payment on the current portion of the long-term
debt during 1998 and has agreed to not demand payment on the noninterest bearing
advances prior to January 1, 1999.
Maturities of long term debt, excluding the noninterest bearing advances,
but including scheduled payments under the notes payable to Argosy which were
due prior to December 31, 1997 and which have not yet been paid are as follows:
1998 $10,268
1999 3,082
2000 3,337
2001 2,684
4. INCOME TAXES
Income tax benefit (expense) consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
Current:
Federal........................................................................... $ 718
State............................................................................. 92
--------- --------- ----------
Total current....................................................................... 810
--------- --------- ----------
Deferred:
Federal........................................................................... 691 934 (1,000)
State............................................................................. 65 127 (143)
--------- --------- ----------
Total deferred...................................................................... 756 1,061 (1,143)
--------- --------- ----------
Income tax benefit (expense)........................................................ $ 756 $ 1,061 $ (333)
--------- --------- ----------
--------- --------- ----------
The tax effects of significant temporary differences representing deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Tax over book depreciation................................................................... $ (5,025) $ (4,688)
Net operating loss carryforward.............................................................. 6,790 3,108
Pre-opening.................................................................................. 222 397
Other, net................................................................................... 450 427
--------- ---------
2,437 (756)
Valuation allowance.......................................................................... (2,437)
--------- ---------
Net deferred tax assets (liabilities)........................................................ $ $ (756)
--------- ---------
--------- ---------
52
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Tax at U. S. statutory rates.................................................... (35.0)% (35.0 )% 35.0 %
State income tax, net of federal tax benefit.................................... (5.3 ) (3.9 ) 5.7
Nondeductible referendum expenses............................................... 16.4
Prior year taxes................................................................ (4.6 )
Valuation allowance............................................................. 28.6
Targeted jobs tax credits, net.................................................. (3.3 )
Other, net...................................................................... 2.8 (5.0 ) 4.9
----- ----- -----
(8.9 )% (32.1 )% 42.3 %
----- ----- -----
----- ----- -----
5. RELATED PARTY TRANSACTIONS
The Company leases, for a minimum of five years with six five-year renewal
options, a docking site, office and warehouse space from Jazz. Rent under terms
of the lease ranges from 6% to 10% of adjusted gross receipts.
Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz,
the partners agreed that all rents from November 1, 1994 through the closing of
the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to
the closing of the Jazz purchase, the Partnership resumed its obligations under
the lease with Jazz.
Rent expense was approximately $3,398, $3,539 and $2,202 in 1997, 1996 and
1995, respectively. Approximately $2,920, $3,091 and $1,800 in 1997, 1996 and
1995, respectively resulted from the above mentioned lease with Jazz.
The Company participates in Argosy's property, general liability, workers
compensation and other insurance programs. The Company's share of these costs
was approximately $2,511, $1,989 and $2,183 in 1997, 1996 and 1995,
respectively.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
6. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was approximately $392, $320 and $503
in 1997, 1996 and 1995, respectively.
7. SUPPLEMENTAL CASH FLOW INFORMATION
In 1995, the Company entered into capital lease obligations totaling $376
for the acquisition of property and equipment.
The Company paid interest of $500, $2,811 and $943 in 1997, 1996 and 1995,
respectively.
53
ARGOSY OF LOUISIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
During 1996, Argosy transferred property and equipment to the Company with a
fair value of $1,844, subject to an unsecured note payable.
During 1996, the Company transferred property and equipment to Jazz with a
fair value of $12,471 and recorded a receivable from Jazz in the same amount.
The rights to this receivable was assigned to Argosy and reduced the amounts due
to Argosy from non-interest bearing advances.
8. COMMITMENTS AND CONTINGENCIES
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to pay to the City-Parish $2.50
per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional
passenger fee, which is now $2.50 per passenger, until actual construction of a
hotel commences by Jazz or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1997, the Company has paid all admission
payments due under the above agreements.
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1997 are as follows:
1998 $485
1999 351
2000 319
2001 342
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes") and retired an outstanding credit facility. The
assets of the Company are pledged as collateral, and the Company is a guarantor,
under the terms of the Mortgage Notes.
54
REPORT OF INDEPENDENT AUDITORS
The Partners
Catfish Queen Partnership in Commendam
We have audited the accompanying balance sheets of Catfish Queen Partnership
in Commendam as of December 31, 1997 and 1996, and the related statements of
operations, partners' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Catfish Queen Partnership in
Commendam at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
New Orleans, Louisiana
February 13, 1998
55
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
1997 1996
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents................................................................. $ 3,429 $ 3,051
Accounts receivable, net of allowance for doubtful accounts of $838 and $856.............. 484 611
Inventories............................................................................... 145 203
Other current assets...................................................................... 173 320
--------- ---------
Total current assets.................................................................... 4,231 4,185
--------- ---------
NET PROPERTY AND EQUIPMENT.................................................................. 43,579 48,704
OTHER ASSETS:
Deferred lease acquisition costs, net..................................................... 1,808 1,915
Other..................................................................................... 13 291
--------- ---------
Total other assets...................................................................... 1,821 2,206
--------- ---------
TOTAL ASSETS................................................................................ $ 49,631 $ 55,095
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable.......................................................................... $ 771 $ 1,127
Accrued payroll and related expenses...................................................... 919 749
Accrued gaming taxes...................................................................... 500 580
Accrued insurance......................................................................... 1,693 448
Other accrued liabilities................................................................. 959 1,720
Accrued interest-related party............................................................ 902
Due to affiliates......................................................................... 1,795
Notes payable and current maturities of long-term debt.................................... 10,268 5,578
--------- ---------
Total current liabilities............................................................... 17,807 10,202
--------- ---------
LONG-TERM DEBT.............................................................................. 9,103 13,793
PARTNERS' EQUITY............................................................................ 22,721 31,100
--------- ---------
TOTAL LIABILITIES AND PARTNERS' EQUITY...................................................... $ 49,631 $ 55,095
--------- ---------
--------- ---------
See accompanying notes to financial statements.
56
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
REVENUES:
Casino......................................................................... $ 47,628 $ 51,007 $ 48,427
Food, beverage and other....................................................... 7,046 7,641 4,945
--------- --------- ---------
54,674 58,648 53,372
Less promotional allowances.................................................... (4,238) (5,228) (3,566)
--------- --------- ---------
Net revenues..................................................................... 50,436 53,420 49,806
--------- --------- ---------
COSTS AND EXPENSES:
Casino......................................................................... 27,887 26,923 25,547
Food, beverage and other....................................................... 6,799 4,894 3,772
Other operating expenses....................................................... 5,147 4,757 4,013
Selling, general and administrative............................................ 12,201 10,786 9,954
Depreciation and amortization.................................................. 5,468 5,644 5,430
Referendum expenses............................................................ 1,347
--------- --------- ---------
57,502 54,351 48,716
--------- --------- ---------
(Loss) income from operations.................................................... (7,066) (931) 1,090
INTEREST EXPENSE (INCOME)(NET):
Related parties................................................................ 1,402 1,603 1,603
Other.......................................................................... (89) (119) 92
--------- --------- ---------
(1,313) 1,484 1,695
--------- --------- ---------
Net loss......................................................................... $ (8,379) $ (2,415) $ (605)
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
57
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
ARGOSY OF JAZZ TOTAL
LOUISIANA, ENTERPRISES, PARTNERS'
INC. INC. EQUITY
----------- ----------- ---------
Partners' equity at December 31, 1994......................................... $ 30,708 $ 3,412 $ 34,120
Net loss.................................................................... (545) (60) (605)
----------- ----------- ---------
Partners' equity at December 31, 1995......................................... 30,163 3,352 33,515
Net loss.................................................................... (2,173) (242) (2,415)
----------- ----------- ---------
Partners' equity at December 31, 1996......................................... 27,990 3,110 31,100
Net loss.................................................................... (7,541) (838) (8,379)
----------- ----------- ---------
Partners' equity at December 31, 1997......................................... $ 20,449 $ 2,272 $ 22,721
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to financial statements.
58
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (8,379) $ (2,415) $ (605)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation.................................................................... 5,083 5,045 4,951
Amortization.................................................................... 385 599 479
Changes in operating assets and liabilities:
Accounts receivable........................................................... 127 185 (593)
Other current assets.......................................................... 205 353 (700)
Accounts payable.............................................................. (356) (167) 257
Accrued payroll and related expenses.......................................... 170 138 (376)
Accrued interest to related parties........................................... 902 (1,195) 803
Other accrued liabilities..................................................... 404 889 299
--------- --------- ---------
Net cash (used in) provided by operating activities............................... (1,459) 3,432 4,515
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................... (444) (713) (952)
Proceeds from sale of equipment to affiliates..................................... 486
--------- --------- ---------
Net cash provided by (used in) financing activities............................. 42 (713) (952)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in advances from affiliates................................... 1,795 (1,754)
Payment on notes payable and long-term debt....................................... (4,938) (2,487)
(Increase) decrease in other assets............................................... 69 (82)
--------- --------- ---------
Net cash provided by (used in) financing activities............................. 1,795 (4,869) (4,323)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 378 (2,150) (760)
Cash and cash equivalents, beginning of period.................................... 3,051 5,201 5,961
--------- --------- ---------
Cash and cash equivalents, end of period.......................................... $ 3,429 $ 3,051 $ 5,201
--------- --------- ---------
--------- --------- ---------
See accompanying notes to financial statements.
59
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Catfish Queen Partnership in Commendam ("Partnership") provides riverboat
gaming and related entertainment in Baton Rouge, Louisiana. The Partnership is
comprised of a 90% general partner, Argosy of Louisiana, Inc. ("General
Partner"), a wholly owned subsidiary of Argosy Gaming Company ("Argosy"), and a
10% partner in commendam, Jazz Enterprises, Inc. ("Jazz") which became a wholly
owned subsidiary of Argosy in 1995.
On November 5, 1996 the voters of East Baton Rouge Parish voted to continue
to allow riverboat gaming in the parish. Costs associated with the Partnership's
efforts to pass this referendum have been reflected in the accompanying
statement of operations.
Net income (loss) is allocated to the partners based on their respective
ownership interests.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
The Partnership considers cash and all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1997 and 1996.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation and amortization
is computed on the straight-line method over the estimated useful lives or lease
period as follows:
15 to 20
Riverboat, dock and improvements..................... years
Furniture, fixtures and equipment.................... 5 to 7 years
DEFERRED LEASE ACQUISITION COSTS
Deferred lease acquisition costs resulted from the contribution of certain
leases by Jazz to the Partnership. These costs are amortized on the
straight-line method over 20 years. Accumulated amortization was $350 and $243
at December 31, 1997 and 1996, respectively.
CASINO REVENUES AND PROMOTIONAL ALLOWANCES
The Partnership recognizes as casino revenues the net win from gaming
activities, which is the difference between gaming wins and losses. The retail
value of food, beverage and other items which were
60
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances.
The estimated direct cost of providing promotional allowances for food and
beverages and other items was $2,493, $2,534 and $2,166 in 1997, 1996 and 1995,
respectively, and has been included in food and beverage costs and expenses.
ADVERTISING COSTS
The Partnership expenses advertising costs as incurred. Advertising expense
was $1,656, $1,527 and $1,580 in 1997, 1996 and 1995, respectively.
INCOME TAXES
No provision (credit) for federal or state income taxes is recorded in the
financial statements, as income taxes are the responsibility of the individual
partners.
2. PROPERTY EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Leasehold and shore improvements.................................................. $ 6,967 $ 6,948
Riverboat, docks and improvements................................................. 36,072 36,051
Furniture, fixtures and equipment................................................. 16,825 17,136
--------- ---------
59,864 60,135
Less accumulated depreciation and amortization.................................... (16,285) (11,431)
--------- ---------
Net property and equipment........................................................ $ 43,579 $ 48,704
--------- ---------
--------- ---------
3. LONG-TERM DEBT
Notes payable and long term debt consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
8% unsecured note payable to Argosy in quarterly installments of $930,815,
including interest, through July 2001............................................ $ 17,527 $ 17,527
Noninterest-bearing unsecured note payable to Argosy due 1998..................... 1,844 1,844
--------- ---------
19,371 19,371
Less current maturities........................................................... (10,268) (5,578)
--------- ---------
$ 9,103 $ 13,793
--------- ---------
--------- ---------
During 1994, the General Partner transferred property and equipment to the
Partnership with a fair value of $20,039, subject to an unsecured note payable
of $20,039 to the General Partner. In 1996, the General Partner assigned its
rights to this note to Argosy.
61
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The carrying value of long term debt approximates fair value at December 31,
1997 and 1996. During 1997, the Partnership did not make scheduled debt payments
to Argosy. Argosy has agreed to provide operating support to the Partnership
and, to the extent necessary, will not demand payment on the current portion of
the long-term debt during 1998.
Maturities of long term debt, including scheduled payments under the notes
payable to Argosy, which were due prior to December 31, 1997 and which have not
yet been paid are as follows:
1998....................................................... $ 10,268
1999....................................................... 3,082
2000....................................................... 3,337
2001....................................................... 2,684
4. RELATED PARTY TRANSACTIONS
The Partnership leases, for a minimum of five years with six five-year
renewal options, a docking site, office and warehouse space from Jazz. Rent
under terms of the lease ranges from 6% to 10% of adjusted gross receipts.
Pursuant to Argosy's agreement to purchase 100% of the common stock of Jazz,
the partners agreed that all rents from November 1, 1994 through the closing of
the Jazz purchase (June 1995) shall not be due or paid to Jazz. Subsequent to
the closing of the Jazz purchase, the Partnership resumed its obligations under
the lease with Jazz.
Rent expense was $3,398, $3,539 and $2,202 in 1997, 1996 and 1995,
respectively. Approximately $2,920, $3,091 and $1,800 in 1997, 1996 and 1995,
respectively, resulted from the above mentioned lease with Jazz.
The Partnership participates in Argosy's property, general liability,
workers compensation and other insurance programs. The Partnership's estimated
share of these costs, which is allocated directly to the Partnership by Argosy,
was approximately $2,511, $1,989 and $2,183 for the years ended December 31,
1997, 1996 and 1995, respectively.
Indirect costs incurred by Argosy, on behalf of the Partnership, are not
allocated as they are immaterial.
5. EMPLOYEES BENEFIT PLAN
The Partnership participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Partnership will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized by the Partnership under the Plan was approximately $392, $320 and
$503 in 1997, 1996 and 1995, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
In 1995, the Partnership entered into capital lease obligations totaling
$376 for the acquisition of property and equipment. Amounts due to the General
Partner decreased by $562 as a result of the transfer of certain fixed assets to
the General Partner in 1995.
62
CATFISH QUEEN PARTNERSHIP IN COMMENDAM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The Partnership paid interest of $500, $2,811 and $943 in 1997, 1996 and
1995, respectively.
During 1996, Argosy transferred property and equipment with a fair value of
$1,844, subject to an unsecured note payable to Argosy.
7. COMMITMENTS AND CONTINGENCIES
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and Jazz entered into an
agreement which requires Jazz and the Company to pay to the City-Parish $2.50
per passenger. Additionally, Jazz agreed to pay to the City-Parish an additional
passenger fee, which is now $2.50 per passenger, until actual construction of a
hotel commences by Jazz or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1997, the Partnership has paid all
admission payments due under the above agreements.
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1997 are as follows:
1998......................................................... $ 485
1999......................................................... 351
2000......................................................... 319
2001......................................................... 342
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes") and retired an outstanding credit facility. The
assets of the Partnership are pledged as collateral, and the Partnership is a
guarantor, under the terms of the Mortgage Notes.
63
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Jazz Enterprises, Inc.
We have audited the accompanying balance sheets of Jazz Enterprises, Inc. as
of December 31, 1997 and 1996, and the related statements of operations,
stockholder's deficit and cash flows for the years ended December 31, 1997 and
1996 and for the seven months ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jazz Enterprises, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1997 and 1996 and the seven months ended
December 31, 1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 13, 1998
64
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Jazz Enterprises, Inc.
We have audited the accompanying statements of operations, stockholder's
equity, and cash flows for the year ended February 28, 1995 of Jazz Enterprises,
Inc. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows for the year
ended February 28, 1995 of Jazz Enterprises, Inc. in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Reno, Nevada
July 10, 1995
65
JAZZ ENTERPRISES, INC.
BALANCE SHEETS
(IN THOUSANDS)
COMPANY
--------------------
DECEMBER 31,
--------------------
1997 1996
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 20
Prepaid insurance..................................................................... 109 $ 78
Other current assets.................................................................. 28
--------- ---------
Total current assets................................................................ 157 78
--------- ---------
NET PROPERTY AND EQUIPMENT.............................................................. 54,593 57,297
GOODWILL, NET........................................................................... 19,922 20,519
NOTE RECEIVABLE......................................................................... 1,892 1,892
OTHER ASSETS:
Deposits.............................................................................. 196 196
Investment in partnership............................................................. 2,183 3,021
Other current assets.................................................................. 1,011 468
--------- ---------
Total other assets.................................................................. 3,390 3,685
--------- ---------
TOTAL ASSETS............................................................................ $ 79,954 $ 83,471
--------- ---------
--------- ---------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............................................. $ 3,000 $ 3,478
Current maturities of long-term debt.................................................. 491
--------- ---------
Total current liabilities........................................................... 3,491 3,478
--------- ---------
LONG-TERM DEBT.......................................................................... 81,237 81,485
STOCKHOLDER'S DEFICIT:
Common stock, no par value, 100,000 shares authorized, 200 shares issued and
outstanding
Accumulated deficit................................................................... (4,774) (1,492)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT............................................. $ 79,954 $ 83,471
--------- ---------
--------- ---------
See accompanying notes to financial statements.
66
JAZZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
COMPANY
----------------------------------------- PREDECESSOR COMPANY
SEVEN MONTHS ---------------------------
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1997 1996 1995 1995
------------ ------------ ------------- THREE MONTHS ------------
ENDED
MAY 30,
1995
-------------
(UNAUDITED)
REVENUES:
Lease revenue........................... $ 2,920 $ 3,091 $ 1,786 $ 813
Rent revenue............................ 378 354 382 817
------------ ------------ ------ ----- ------------
3,298 3,445 2,168 1,630
------------ ------------ ------ ----- ------------
COSTS AND EXPENSES:
Operating expenses...................... 1,071 593 104 48 788
Selling, general and administrative..... 1,608 1,714 1,086
Depreciation and amortization........... 2,354 1,382 405
Preopening costs........................ 100 597 5,642
------------ ------------ ------ ----- ------------
5,033 3,789 1,595 645 6,430
------------ ------------ ------ ----- ------------
(Loss) income from operations (1,735) (344) 573 (645) (4,800)
OTHER EXPENSE (INCOME):
Interest expense........................ 909 951 490 94 282
Equity in loss of unconsolidated
partnership........................... 838 242 8
Interest income......................... (200) (31) (83)
Gain on sale of assets.................. (60)
------------ ------------ ------ ----- ------------
(Loss) income before income taxes......... (3,282) (1,537) 75 (708) (4,939)
Income tax expense........................ (30) (65) (65)
------------ ------------ ------ ----- ------------
Net (loss) income......................... $ (3,282) $ (1,537) $ 45 $ (773) $ (5,004)
------------ ------------ ------ ----- ------------
------------ ------------ ------ ----- ------------
See accompanying notes to financial statements.
67
JAZZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
PREDECESSOR COMPANY SHARES AMOUNT CAPITAL DEFICIT TOTAL
- --------------------------------------------------------- ----------- --------- ----------- ------------ ---------
Balance at February 28, 1994............................. 200 $ $ 100 $ (2,057) $ (1,957)
Capital contributions.................................. 2,448 2,448
Net income............................................. (5,004) (5,004)
--- --------- ----------- ------------ ---------
Balance at February 28, 1995............................. 200 2,548 (7,061) (4,513)
Capital contributions (unaudited)...................... 646 646
Net loss (unaudited)................................... (773) (773)
--- --------- ----------- ------------ ---------
Balance at May 30, 1995 (unaudited)...................... 200 $ $ 3,194 $ (7,834) $ (4,640)
--- --------- ----------- ------------ ---------
--- --------- ----------- ------------ ---------
RETAINED
COMMON EARNINGS
COMPANY SHARES STOCK (DEFICIT) TOTAL
- ------------------------------------------------------------------------ ----------- ---------- --------- ---------
Balance, June 1, 1995................................................... 200 $ $ $
Net income............................................................ 45 45
--- ---------- --------- ---------
Balance, December 31, 1995.............................................. 200 45 45
Net loss.............................................................. (1,537) (1,537)
--- ---------- --------- ---------
Balance, December 31, 1996.............................................. 200 (1,492) (1,492)
Net loss.............................................................. (3,282) (3,282)
--- ---------- --------- ---------
Balance, December 31, 1997.............................................. 200 $ (4,774) $ (4,774)
--- ---------- --------- ---------
--- ---------- --------- ---------
See accompanying notes to financial statements.
68
JAZZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
COMPANY
----------------------------------------- PREDECESSOR COMPANY
SEVEN MONTHS ----------------------------
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28,
1997 1996 1995 1995
------------- ------------ ------------ THREE MONTHS -------------
ENDED
MAY 30,
1995
-------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................... $ (3,282) $ (1,537) $ 45 $ (773) $ (5,004)
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization........... 2,354 1,382 405 35 104
Write down associated with real estate
owned................................. 1,386
Gain on sale of assets.................. (60)
Equity in losses of unconsolidated
partnership........................... 838 242 8 (700)
Current assets.......................... (27) 90 (4) (12)
Prepaid expenses........................ (32) 9 (93)
Other assets............................ 35
Accounts payable and accrued
liabilities........................... (478) 24 80 191 1,371
Increase in income taxes payable........ 65 27
------------- ------------ ------------ ----- -------------
Net cash (used in) provided by
operating activities................ (627) 201 534 (473) (2,946)
------------- ------------ ------------ ----- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Goodwill.................................. (9,388)
Increase (decrease) in bank overdraft..... (234) 234
Proceeds from sale of assets.............. 101
Decrease (increase) in escrow deposit..... 255
Capital expenditures...................... (897) (22,988) (2,538) (85) (5,331)
Loans and advances to related parties..... (31) (1,054)
------------- ------------ ------------ ----- -------------
Net cash used in investing
activities.......................... (897) (22,988) (11,926) (350) (5,795)
------------- ------------ ------------ ----- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings--
related party............................ 7,879
Increase in long-term debt................ 760 52
Principal payments on long-term debt...... (115) (2,191) (184)
Advances from affiliate................... 1,442 25,414 11,608 180 935
Increase in other assets.................. (543) (468)
Contributed capital....................... 647 1,869
Decrease in construction related payable.. (2,132)
------------- ------------ ------------ ----- -------------
Net cash provided by financing
activities.......................... 1,544 22,755 11,424 827 8,603
------------- ------------ ------------ ----- -------------
Net increase (decrease) in cash and cash
equivalents.............................. 20 (32) 32 4 (138)
Cash and cash equivalents at beginning of
period................................... 32 2 140
------------- ------------ ------------ ----- -------------
Cash and cash equivalents at end of
period................................... $ 20 $ $ 32 $ 6 $ 2
------------- ------------ ------------ ----- -------------
------------- ------------ ------------ ----- -------------
See accompanying notes to financial statements.
69
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Jazz Enterprises, Inc., ("Jazz" or "the Company") a Louisiana corporation
was incorporated on June 10, 1992 for the purpose of developing a riverboat
gaming operation and an entertainment complex, known as "Catfish Town" in Baton
Rouge, Louisiana.
In July 1993, the Company entered into a partnership ("Partnership") with
Argosy of Louisiana, Inc., (a wholly owned subsidiary of Argosy Gaming Company
("Argosy")) ("ALI") in which the Company owns 10% and ALI owns 90%, to operate a
riverboat casino in Baton Rouge, Louisiana, which opened September 30, 1994. The
Company contributed its Certificate of Preliminary Approval and certain leases
to the Partnership.
On December 5, 1994, the stockholders of Jazz entered in an agreement to
sell 100% of the common stock of Jazz to Argosy. The transaction was consummated
on May 30, 1995 and was accounted for as a purchase, therefore establishing a
new basis of accounting. Terms of the transaction allowed Argosy to acquire
Jazz's 10% limited partnership interest in the Baton Rouge casino and all of
Jazz's interest in the Catfish Town real estate development.
Under terms of the purchase agreement, Argosy made initial cash payments to
Jazz totaling $8,500 and is required to make additional payments to the former
shareholders of Jazz of $1,350 annually for ten years, and payments of $500
annually for the following ten years. The net present value of these additional
payments was approximately $9,400 assuming a discount rate of 10.5%, and is
included in long-term debt in the accompanying balance sheets. In addition,
Argosy forgave loans to Jazz and its principals of approximately $20,700,
assumed certain construction obligations, ordinary course accounts payable and
other liabilities totaling approximately $7,300 and paid expenses of
approximately $900. Under terms of the Purchase Agreement substantially all
other obligations of Jazz existing at the time of the purchase remain the
responsibility of the former owners of Jazz.
In the accompanying financial statements, "Predecessor Company" refers to
Jazz prior to its purchase by Argosy and "Company" refers to Jazz subsequent to
its purchase by Argosy. The financial statements of the Predecessor Company are
not comparable to the financial statements of the Company.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
The Company and Predecessor Company consider cash and all liquid investments
with an original maturity of three months or less to be cash equivalents.
The carrying value of cash and cash equivalents approximates fair value at
December 31, 1997.
70
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
GOODWILL
Goodwill represents the cost in excess of fair value of net assets acquired,
at the date of acquisition, and is amortized over 40 years. Accumulated
amortization is $1,541 and $944 at December 31, 1997 and 1996, respectively.
INVESTMENT IN PARTNERSHIP
The Company records its investment in the Partnership under the equity
method as it believes that it has significant influence over the Partnership
since the Partnership's parent and Jazz are wholly-owned subsidiaries of Argosy.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Leasehold improvements are
amortized over the life of the respective lease. Depreciation is computed on the
straight-line method over the shorter of the estimated useful lives or lease
period as follows:
Buildings and improvements............................. 31 years
5 to 7
Furniture, fixtures and equipment...................... years
RENTAL INCOME
Rental income is recognized over the life of the associated lease. Minimum
future rents to be received under operating leases are:
1998................................................... $ 488
1999................................................... 563
2000................................................... 698
2001................................................... 721
2002................................................... 737
Thereafter............................................. 1,296
PREOPENING COSTS
Preopening costs, which consist primarily of labor, training and marketing
costs incurred by the Predecessor Company and the Company, are expensed as
incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
$0, $53, $0, $27 and $66 for 1997, 1996, the seven months ended December 31,
1995, the three months ended May 30, 1995 and the year ended February 28, 1995,
respectively.
INCOME TAXES
Earnings or losses from the Company are included in the consolidated tax
returns of Argosy. The Company computes federal and state taxes on a separate
return basis. Taxes due are settled between the Company and Argosy in accordance
with the terms of a tax sharing arrangement.
71
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Income taxes for the Predecessor Company were recorded in accordance with
the liability method specified by Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes."
INTERIM FINANCIAL STATEMENTS
The financial statements of the Predecessor Company for the three months
ended May 30, 1995 are unaudited; however, in the opinion of management, all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the Predecessor Company's financial position and results of
operations for such periods have been included. The results for the three months
ended May 30, 1995 are not necessarily indicative of the results to be expected
for future periods.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Land........................................................................................ $ 8,187 $ 8,187
Buildings and improvements.................................................................. 47,012 48,192
Furniture, fixtures and equipment........................................................... 2,444 2,444
Construction in progress.................................................................... 50
--------- ---------
57,643 58,873
Less accumulated depreciation and amortization.............................................. (3,050) (1,576)
--------- ---------
Net property and equipment.................................................................. $ 54,593 $ 57,297
--------- ---------
--------- ---------
3. LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
DECEMBER 31,
--------------------
1997 1996
--------- ---------
Notes payable to former owner, principal and interest due quarterly through September 2015,
discounted at 10.5%........................................................................ $ 7,656 $ 7,011
Noninterest bearing advances from Argosy, no stated maturity................................ 74,072 74,474
--------- ---------
81,728 81,485
Less current maturities..................................................................... (491)
--------- ---------
$ 81,237 $ 81,485
--------- ---------
--------- ---------
72
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The carrying value of long term debt approximates fair value at December 31,
1997. Maturities of long term debt, excluding the noninterest bearing advances
from Argosy, are as follows:
1998....................................................... $ 491
1999....................................................... 545
2000....................................................... 604
2001....................................................... 670
2002....................................................... 743
Thereafter................................................. 4,603
Argosy has indicated that it will not demand payment on the noninterest
bearing advances prior to January 1, 1999.
4. INCOME TAXES
Income tax expense consists of the following:
COMPANY PREDECESSOR COMPANY
---------------------------------------- --------------------------
SEVEN MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MAY 31, 1995 FEBRUARY 28,
1997 1996 1995 (UNAUDITED) 1995
------------ ------------ ------------ ------------ ------------
Current:
Federal................................ $ $ $ 30 $ $
State.................................. 65 65
------------ ------------ ------------ ------------ ------------
Total current............................ 30 65 65
------------ ------------ ------------ ------------ ------------
Income tax expense....................... $ $ $ 30 $ 65 $ 65
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
The tax effects of significant temporary differences of the Company
representing deferred tax assets and liabilities at December 31, 1997 and 1996
are as follows:
1997 1996
--------- ---------
Tax over book depreciation................................................. $ (828) $ (440)
Preopening................................................................. 824 (833)
Effects of NOL Carryforward................................................ 2,287 728
Other, net................................................................. 20 34
--------- ---------
2,303 1,155
Valuation allowance........................................................ (2,303) (1,155)
--------- ---------
Net deferred tax assets.................................................... $ $
--------- ---------
--------- ---------
The Company has recorded a valuation allowance against its net deferred tax
assets due to the uncertainty of realization. The Company has tax net operating
loss carryforwards of approximately $5,517 which expire from 2008 through 2012.
5. RELATED PARTY TRANSACTIONS
The Company leases, for a minimum of five years with six five-year renewal
options, a docking site, office and warehouse space to the Partnership. Rent
under terms of the lease ranges from 6% to 10% of
73
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
adjusted gross receipts, as defined. Approximately $2,920, $3,091 and $1,786 in
1997, 1996 and for the seven months ended December 31, 1995, respectively,
resulted from this lease with the Partnership. As a result of the sale of 100%
of the common stock of the Predecessor Company to Argosy, the lease fees were
suspended from November 1994 until the closing of the purchase. Subsequent to
the closing of the sale of the Company to Argosy, the partnership resumed its
obligations under the lease with the Company.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, the Company received property and equipment with a carrying
value of $12,471 from Argosy and this amount increased the noninterest bearing
advances from related parties.
The Company paid interest of $909, $951 and $490 in 1997, 1996 and for the
seven months ended December 31, 1995, respectively.
During the year ended February 28, 1995, the Predecessor Company acquired
equipment financed by vendors totaling $19.
During the year ended February 28, 1995, the Predecessor Company's
stockholders paid $578 to reduce amounts due to affiliates.
During the year ended February 28, 1995, construction costs and other
payables in the amount of $3,352 were paid on behalf of the Predecessor Company
by Argosy.
During the year ended February 28, 1995, land in the amount of $425 was
exchanged for notes payable by the Predecessor Company.
During the year ended February 28, 1995, the Predecessor Company paid cash
for interest and state income taxes in the amount of $6 and $38, respectively.
No interest or taxes were paid during the three months ended May 30, 1995.
7. COMMITMENTS
On September 21, 1994, the City of Baton Rouge and the Parish of East Baton
Rouge (collectively referred to as "City-Parish") and the Predecessor Company
entered into an agreement which required the Predecessor Company and the
Partnership to pay to the City-Parish $2.50 per passenger. Additionally, the
Predecessor Company agreed to pay to the City-Parish an additional passenger
fee, which is now $2.50 per passenger, until actual construction of a hotel
commences by the Company or another Argosy affiliate.
Argosy has guaranteed the additional $2.50 per passenger if required, for
the initial five-year certification term approved by the Louisiana Riverboat
Gaming Commission. Through December 31, 1997, the Partnership has paid all
admission payments due under the above agreements.
74
JAZZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1997 are as follows:
1998....................................................... $ 214
1999....................................................... 214
2000....................................................... 202
2001....................................................... 202
2002....................................................... 202
Thereafter................................................. 14,942
Rent expense for the years ended December 31, 1997, 1996, the seven months
ended December 31, 1995, the three months ended May 30, 1995 and the year ended
February 28, 1995 was $244, $283, $265, $48 and $788, respectively.
On June 5, 1996, Argosy issued $235 million of 13 1/4% First Mortgage Notes,
due 2004 ("Mortgage Notes"). The assets of the Company are pledged as
collateral, and the Company is a guarantor, under the terms of the Mortgage
Notes.
75
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
The Indiana Gaming Company
We have audited the accompanying consolidated balance sheets of The Indiana
Gaming Company as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Indiana
Gaming Company at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Indianapolis, Indiana
February 13, 1998
76
THE INDIANA GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 41,257 $ 9,216
Accounts receivable, net of allowance for doubtful accounts of $347 and $22,
respectively.......................................................................... 382 138
Deferred income taxes................................................................... 74
Other current assets.................................................................... 1,179 1,706
---------- ----------
Total current assets.............................................................. 42,892 11,060
---------- ----------
NET PROPERTY AND EQUIPMENT................................................................ 176,407 69,392
OTHER ASSETS:
Deposits................................................................................ 530 5
Restricted cash and cash equivalents.................................................... 13,114 14,919
Intangible assets, net of accumulated amortization of $1,292 and $61, respectively...... 30,844 31,459
Deferred income taxes................................................................... 2,785
---------- ----------
Total other assets................................................................ 47,273 46,383
---------- ----------
TOTAL ASSETS.............................................................................. $ 266,572 $ 126,835
---------- ----------
---------- ----------
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 5,936 $ 3,115
Accrued payroll and related expenses.................................................... 2,924 912
Accrued interest and dividends payable-related parties.................................. 5,260 2,198
Installment contracts payable........................................................... 3,288 3,252
Other accrued liabilities............................................................... 5,824 1,452
Income taxes payable.................................................................... 5,915
Current maturities of long-term debt.................................................... 12,856 2,900
Current maturities of other long-term obligations....................................... 4,583 5,169
---------- ----------
Total current liabilities......................................................... 46,586 18,998
---------- ----------
LONG-TERM DEBT............................................................................ 195,405 86,612
OTHER LONG-TERM OBLIGATIONS............................................................... 2,000 15,000
MINORITY INTERESTS........................................................................ 17,656 14,490
STOCKHOLDER'S EQUITY
Common stock -- $.01 par value, 1,000 shares authorized, issued and outstanding.........
Accumulated earnings (deficit).......................................................... 4,925 (8,265)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY................................................ $ 266,572 $ 126,835
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
77
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
REVENUES:
Casino....................................................................... $ 127,908 $ 3,930 $
Admissions................................................................... 16,809 776
Food, beverage and other..................................................... 7,005 167
---------- ---------- ---------
151,722 4,873
Less promotional allowances.................................................. (14,698) (462)
---------- ---------- ---------
Net revenues................................................................... 137,024 4,411
---------- ---------- ---------
COSTS AND EXPENSES:
Casino....................................................................... 58,081 2,116
Food, beverage and other..................................................... 5,746 149
Other operating expenses..................................................... 13,119 711
Selling, general and administrative.......................................... 21,606 783
Depreciation and amortization................................................ 10,922 378
Management fees-related parties.............................................. 1,924 38
Preopening................................................................... 11,036 2,143
---------- ---------- ---------
111,398 15,211 2,143
---------- ---------- ---------
Income (loss) from operations.................................................. 25,626 (10,800) (2,143)
---------- ---------- ---------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 1,400 127
Interest expense............................................................. (3,588) (192)
---------- ---------- ---------
(2,188) (65)
---------- ---------- ---------
Income (loss) before minority interests and income taxes....................... 23,438 (10,865) (2,143)
Minority interests............................................................. (6,989) 4,721 906
Income tax expense............................................................. (3,259)
---------- ---------- ---------
Net income (loss).............................................................. $ 13,190 $ (6,144) $ (1,237)
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to consolidated financial statements.
78
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
TOTAL
ACCUMULATED STOCKHOLDER'S
COMMON (DEFICIT) (DEFICIT)
SHARES STOCK EARNINGS EQUITY
----------- ----------- ---------------- --------------
Balance, December 31, 1994................................. 1,000 $ (884) $ (884)
Net loss................................................. (1,237) (1,237)
----- ----- ------- -------
Balance, December 31, 1995................................. 1,000 (2,121) (2,121)
Net loss................................................. (6,144) (6,144)
----- ----- ------- -------
Balance, December 31, 1996................................. 1,000 (8,265) (8,265)
Net income............................................... 13,190 13,190
----- ----- ------- -------
Balance, December 31, 1997................................. 1,000 $ 4,925 $ 4,925
----- ----- ------- -------
----- ----- ------- -------
See accompanying notes to consolidated financial statements.
79
THE INDIANA GAMING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss)............................................................ $ 13,190 $ (6,144) $ (1,237)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................ 10,922 453 20
Deferred taxes........................................................... (2,859)
Minority interests....................................................... 6,989 (4,721) (906)
Changes in operating assets and liabilities:
Accounts receivable...................................................... (244) (138) 238
Other current assets..................................................... 527 (941) (201)
Accounts payable......................................................... 2,821 1,630 1,965
Accrued interest payable................................................. 1,917 656
Income taxes payable..................................................... 5,915
Accrued liabilities...................................................... 6,381 2,289 75
----------- ---------- ----------
Net cash provided by (used in) operating activities........................ 45,559 (6,916) (46)
----------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow............................................. 1,805 (14,919)
Purchases of property and equipment........................................ (113,141) (52,879) (7,566)
Payments under development agreement....................................... (13,586) (6,946) (4,405)
----------- ---------- ----------
Net cash used in investing activities...................................... (124,922) (74,744) (11,971)
----------- ---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Increase in advances from affiliates....................................... 49,812 50,438 10,535
Payments on installment contracts.......................................... (4,116) (1,805)
Repayment of long-term debt................................................ (2,710)
Payment of preferred equity return to partner.............................. (1,163)
Partnership equity distributions........................................... (1,514)
Proceeds from contributed capital.......................................... 19,044 1,484
Proceeds from long-term debt............................................... 71,648 23,197
Other...................................................................... (553)
----------- ---------- ----------
Net cash provided by financing activities.................................... 111,404 90,874 12,019
----------- ---------- ----------
Net increase in cash and cash equivalents.................................... 32,041 9,214 2
Cash and cash equivalents, beginning of year................................. 9,216 2
----------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 41,257 $ 9,216 $ 2
----------- ---------- ----------
----------- ---------- ----------
See accompanying notes to consolidated financial statements.
80
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The Indiana Gaming Company, a wholly owned
subsidiary of Argosy Gaming Company ("Argosy") (collectively with its controlled
partnership Indiana Gaming Company L.P. ("Partnership") "the Company") was
formed effective April 11, 1994 to provide riverboat gaming and related
entertainment in Lawrenceburg, Indiana. The Company is a 57 1/2% general partner
in the Partnership, together with three limited partners including, Conseco
Entertainment, L.L.C., ("Conseco") a 29% limited partner, Centaur, Inc., a 9.5%
limited partner and RJ Investments, Inc., a 4% limited partner. On December 10,
1996, the Company commenced operations at a temporary site and ceased being in
the development stage. The Partnership opened its permanent pavilion on December
10, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. These
consolidated financial statements include the accounts of the Company and the
Partnership. All significant intercompany transactions have been eliminated.
CASH AND CASH EQUIVALENTS -- The Company considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Temporary site improvements 1 year
5-31
Leasehold and shore improvements years
5-20
Riverboat, docks and improvements years
5-10
Furniture, fixtures and equipment years
RESTRICTED CASH AND CASH EQUIVALENTS -- Restricted cash and cash equivalents
represents funds placed into an escrow account which may only be used to fund
progress payments related to the construction of the Company's permanent
facility.
LICENSE APPLICATION FEES -- License application fees associated with
obtaining a gaming license have been capitalized and are a part of intangible
assets at December 31, 1997 and 1996. These costs are being amortized over the
life of the gaming license, which is five years. Accumulated amortization was
$141 and $11 at December 31, 1997 and 1996, respectively.
REVENUES AND PROMOTIONAL ALLOWANCES -- The Company recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food, beverage and other
items provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
direct cost of providing promotional allowances has been included in costs and
expenses as follows:
1997 1996
--------- ---------
Admissions................................................................... $ 6,935 $ 190
Food, beverage and other..................................................... 1,200 4
PREOPENING COSTS -- Preopening costs, which consisted primarily of labor,
vessel rent, training and marketing costs incurred prior to the commencement of
gaming operations, were expensed as incurred.
ADVERTISING COSTS -- The Company expenses advertising costs as incurred.
Advertising expense was $4,877, $503 and $112 for the years ended December 31,
1997, 1996 and 1995, respectively.
81
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES -- Earnings or losses from the Company are included in the
consolidated income tax returns of Argosy. The Company computes federal and
state income taxes on a separate return basis. Taxes due are settled between the
Company and Argosy in accordance with the terms of a tax sharing arrangement.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------
1997 1996
---------- ---------
Land................................................................... $ 16,045 $ 16,015
Leasehold and shore improvements....................................... 103,427 5,892
Riverboat, docks and improvements...................................... 40,815
Furniture, fixtures and equipment...................................... 21,809 9,367
Construction in progress............................................... 4,753 38,534
---------- ---------
186,849 69,808
Less accumulated depreciation and amortization......................... (10,442) (416)
---------- ---------
Net property and equipment............................................. $ 176,407 $ 69,392
---------- ---------
---------- ---------
3. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996:
1997 1996
---------- ---------
Capital loans payable to Argosy, noninterest bearing, no stated due
date.................................................................. $ 116,127 $ 66,315
Capital loans payable to Conseco, interest at prime plus 6% (14.5% at
December 31, 1997) principal paid in equal annual installments through
2004.................................................................. 67,134 23,197
Notes payable, principal and interest payments due monthly through
December 2001, interest payable at prime plus 1% (9.5% at December 31,
1997)................................................................. 25,000
---------- ---------
208,261 89,512
Less current maturities................................................ (12,856) (2,900)
---------- ---------
$ 195,405 $ 86,612
---------- ---------
---------- ---------
Interest expense on the capital loans from Conseco compounds quarterly to
the extent unpaid. Principal on the capital loans is amortized in equal annual
installments through 2004. The Company is obligated to pay contemporaneously
with distributions of Cash Flow, as defined, current and accrued interest and
then principal on the Capital Loans to the Partner, pro rata, in relation to
their principal balance of the respective Capital Loans then outstanding.
Interest expense amounted to $3,588 (net of $8,391 capitalized) and $192
(net of $1,680 capitalized) in the years ended December 31, 1997 and 1996,
respectively.
82
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Maturities of long-term debt, excluding the capital loans payable to Argosy,
at December 31, 1997 are as follows:
1998............................................... $ 12,856
1999............................................... 13,181
2000............................................... 13,532
2001............................................... 23,794
2002............................................... 9,591
Thereafter......................................... 19,180
4. INCOME TAXES
Income tax expense for years ended December 31, 1997, 1996 and 1995 consists
of the following:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Current:
Federal..................................................... $ 5,337
State....................................................... 781
--------- --------- ---------
Total current................................................. 6,118
--------- --------- ---------
Deferred:
Federal..................................................... (2,466)
State....................................................... (393)
--------- --------- ---------
Total deferred................................................ (2,859)
--------- --------- ---------
Income tax expense............................................ $ 3,259
--------- --------- ---------
--------- --------- ---------
The provision for income taxes for the year ended December 31, 1997, 1996
and 1995 differs from that computed at the Federal Statutory tax rate as
follows:
1997 1996 1995
--------- --------- ---------
Federal statutory rate................................................ 35.0% (35.0)% (35.0)%
State income taxes, net of federal benefit............................ 5.1 (5.1) (5.1)
Valuation allowance................................................... (20.0) 39.0 39.1
Other................................................................. (0.3) 1.1 1.0
--------- --------- ---------
19.8% % %
--------- --------- ---------
--------- --------- ---------
The tax effects of significant temporary differences representing deferred
tax assets at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Preopening................................................................ $ 2,785 $ 3,239
NOL carryforward.......................................................... 60
Other, net................................................................ 74 5
--------- ---------
2,859 3,304
Valuation allowance....................................................... (3,304)
--------- ---------
$ 2,859 $
--------- ---------
--------- ---------
83
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
In 1996, the Company recorded a valuation allowance against all of its
deferred tax assets due to the uncertainty of realization. The Company utilized
a net operating loss carryforward for income tax purposes of approximately $260
during 1997.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amount of $4,154 and $5,056 in 1997
and 1996, respectively, which was financed through installment contracts.
The Company paid $5,300 (including $5,007 to related parties) and $207 in
interest for the years ended December 31, 1997 and 1996. No interest was paid in
1995.
The Company paid $143 in taxes for the year ended December 31, 1997. No
taxes were paid in 1996 or 1995.
Indirect costs incurred by Argosy, on behalf of the Company, are not
allocated as they are immaterial.
6. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1997, are
as follows:
YEARS ENDING DECEMBER 31,
- ------------------------------------------------------------------
1998.............................................................. $ 420
1999.............................................................. 402
2000.............................................................. 179
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
$6,459, $2,837 and $148, respectively.
7. RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the Company, as the sole and exclusive manager of
all operations of the Partnership. The term of the Management Agreement is
twenty years, however, the term may be extended in the event that the term of
the Partnership is extended beyond the year 2014. The Partnership will pay to
the Company a Management Fee in the amount of 12.5% of the operating profit of
the Partnership, as defined. Under a separate financial advisory agreement the
Company has agreed to pay Conseco a financial advisory fee equal to 40% of the
management fee.
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Company entered into lease agreements with Argosy for the temporary
riverboat casino and related landing facility. Aggregate monthly rentals are
approximately $500 for these facilities. Total expense recognized under the
leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases ended
in 1997.
84
THE INDIANA GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Argosy provides certain services for the Company, primarily, centralized
reservations and insurance. Reimbursement for these expenses has been included
in the income statement in the appropriate cost categories.
The Company has entered into leases with shareholders of a limited partner
for parking lots and outdoor advertising. Total expense recognized under these
leases was $107 and $133 in 1997 and 1996, respectively.
8. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan which covers substantially all of its
full-time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants'
contributions in an amount determined annually by the Company. Expense
recognized under the Plan was $517, $52 and $5 for the years ended December 31,
1997, 1996 and 1995.
9. COMMITMENTS AND CONTINGENCIES
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS -- In accordance
with the terms of the Development Agreement, the Company entered into a lease
with the City of Lawrenceburg for docking privileges for the riverboat casino.
The initial term of the lease is for six years and thereafter automatically
extends for up to nine renewal term periods of five years each, unless
terminated by the Company. Under the terms of the Development Agreement, the
Company pays an annual fee to the City of Lawrenceburg ranging from 5%-14% of
Adjusted Gross Receipts, as defined, with a minimum of $6 million per year.
The Company has agreed to pay the City of Lawrenceburg approximately $33,848
in reimbursements for infrastructure improvements and unrestricted grants. These
have been recorded as an intangible asset in the balance sheet at December 31,
1997 and 1996. The reimbursement for infrastructure improvements and
unrestricted city grants are being amortized over the 28 year term, including
extensions, of the Development Agreement. Accumulated amortization was $1,151
and $50 for the years ended December 31, 1997 and 1996, respectively.
Included in other long term obligations is $6,583 representing the remaining
grants and infrastructure payments due by the Company under the terms of the
Riverboat Gaming Development Agreement with the City of Lawrenceburg
("Development Agreement"). The remaining amount is payable as follows: $4,583 in
1998 and $2,000 in 1999.
BONDING OBLIGATION -- The Company is required, by Indiana Gaming Statute, to
post a bond in favor of the Indiana Gaming Commission to collateralize certain
obligations to the City of Lawrenceburg under the Development Agreement, and to
the State of Indiana. This bond is collateralized by certain real estate of the
Company.
TERMINATION OF LAWRENCEBURG PARTNERSHIP -- Under the terms of the
partnership agreement, after the third anniversary date of commencement of
operations each limited partner has the right to sell its interest to the other
partners (pro rata in accordance with their respective percentage interests). In
the event of this occurrence, if the partners cannot agree on a selling price,
the Partnership will be sold in its entirety.
GUARANTY OF PARENT OBLIGATIONS -- On June 5, 1996 Argosy issued $235 million
of 13 1/4% First Mortgage Notes, due 2004 ("Mortgage Notes"). The Company has
pledged its interest in the Partnership, and its rights to certain payments from
the Partnership, as collateral, under the terms of the Mortgage Notes.
Additionally, the Company is a guarantor of the Mortgage Notes.
85
REPORT OF INDEPENDENT AUDITORS
The Partners
Indiana Gaming Company, L.P.
We have audited the accompanying balance sheets of Indiana Gaming Company,
L.P. as of December 31, 1997 and 1996, and the related statements of operations,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Indiana Gaming Company, L.P.
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Indianapolis, Indiana
February 13, 1998
86
INDIANA GAMING COMPANY, L.P.
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 41,257 $ 9,216
Accounts receivable, net of allowance for doubtful accounts of $347 and $22,
respectively.......................................................................... 382 138
Other current assets.................................................................... 1,179 1,706
---------- ----------
Total current assets.................................................................. 42,818 11,060
---------- ----------
NET PROPERTY AND EQUIPMENT................................................................ 175,030 68,349
OTHER ASSETS:
Deposits................................................................................ 589 5
Restricted cash and cash equivalents.................................................... 13,114 14,919
Intangible assets, net of accumulated amortization of $1,292 and $61, respectively...... 30,844 31,459
---------- ----------
Total other assets.................................................................... 44,547 46,383
---------- ----------
TOTAL ASSETS.............................................................................. $ 262,395 $ 125,792
---------- ----------
---------- ----------
CURRENT LIABILITIES:
Accounts payable........................................................................ $ 5,936 $ 2,963
Accrued payroll and related expenses.................................................... 2,924 912
Accrued interest and preferred equity return............................................ 12,571 5,240
Installment contracts payable........................................................... 3,288 3,252
Other accrued liabilities............................................................... 5,503 1,452
Due to affiliates....................................................................... 1,182 1,278
Current maturities of other long-term obligations....................................... 4,583 5,169
Current maturities of long-term debt.................................................... 25,832 7,066
---------- ----------
Total current liabilities............................................................. 61,819 27,332
---------- ----------
LONG-TERM DEBT............................................................................ 157,139 49,463
OTHER LONG-TERM OBLIGATIONS............................................................... 2,000 15,000
PARTNERS' EQUITY:
General partner......................................................................... 23,826 19,549
Limited partners........................................................................ 17,611 14,448
---------- ----------
Total partners' equity................................................................ 41,437 33,997
---------- ----------
TOTAL LIABILITIES AND PARTNERS' EQUITY.................................................... $ 262,395 $ 125,792
---------- ----------
---------- ----------
See accompanying notes to financial statements.
87
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
REVENUES:
Casino....................................................................... $ 127,908 $ 3,930 $
Admissions................................................................... 16,809 776
Food, beverage and other..................................................... 7,005 167
---------- ---------- ---------
151,722 4,873
Less promotional allowances.................................................. (14,698) (462)
---------- ---------- ---------
Net revenues................................................................... 137,024 4,411
---------- ---------- ---------
COSTS AND EXPENSES:
Casino....................................................................... 58,081 2,116
Food, beverage and other..................................................... 5,746 149
Other operating expenses..................................................... 13,119 711
Selling, general and administrative.......................................... 21,606 685
Depreciation and amortization................................................ 10,922 378
Management fees-related parties.............................................. 4,809 94
Preopening................................................................... 10,979 2,131
---------- ---------- ---------
114,283 15,112 2,131
---------- ---------- ---------
Income (loss) from operations.................................................. 22,740 (10,701) (2,131)
OTHER INCOME (EXPENSE):
Interest income.............................................................. 1,400 127
Interest expense............................................................. (7,694) (534)
---------- ---------- ---------
(6,294) (407)
---------- ---------- ---------
Net income (loss) prior to preferred equity return............................. 16,446 (11,108) (2,131)
Preferred equity return........................................................ (5,443) (3,726)
---------- ---------- ---------
Net income (loss) attributable to common equity partners....................... $ 11,003 $ (14,834) $ (2,131)
---------- ---------- ---------
---------- ---------- ---------
See accompanying notes to financial statements.
88
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF PARTNERS' EQUITY
(IN THOUSANDS)
COMMON EQUITY (DEFICIT) PREFERRED EQUITY
----------------------------------- ----------------------------------- TOTAL
GENERAL LIMITED GENERAL LIMITED PARTNERS'
PARTNER PARTNERS TOTAL PARTNER PARTNERS TOTAL EQUITY
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1994................. $ 3,681 $ 1,131 $ 4,812 $ $ $ $ 4,812
Capital contributions.................... 5,066 1,484 6,550 5,336 5,336 11,886
Net loss................................. (1,225) (906) (2,131) (2,131)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1995................. 7,522 1,709 9,231 5,336 5,336 14,567
Capital contributions.................... 3,850 3,850 15,220 15,194 30,414 34,264
Net loss prior to preferred equity
return................................. (6,387) (4,721) (11,108) (11,108)
Preferred equity return.................. (2,142) (1,584) (3,726) 2,184 1,542 3,726
Accrued preferred equity distribution.... (2,184) (1,542) (3,726) (3,726)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1996................. (1,007) (746) (1,753) 20,556 15,194 35,750 33,997
Net income prior to preferred equity
return................................. 9,456 6,990 16,446 16,446
Preferred equity return.................. (3,130) (2,313) (5,443) 3,136 2,307 5,443
Accrued preferred equity distribution.... (3,136) (2,307) (5,443) (5,443)
Common equity distributions.............. (2,049) (1,514) (3,563) (3,563)
----------- ----------- --------- ----------- ----------- --------- -----------
Balance, December 31, 1997................. $ 3,270 $ 2,417 $ 5,687 $ 20,556 $ 15,194 $ 35,750 $ 41,437
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
See accompanying notes to financial statements.
89
INDIANA GAMING COMPANY, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) attributable to common equity partners................... $ 11,003 $ (14,834) $ (2,131)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization............................................ 10,922 453 20
Accrued preferred equity dividends....................................... 5,443 3,726
Changes in operating assets and liabilities:
Accounts receivable...................................................... (244) (138) 238
Other current assets..................................................... 527 (941) (201)
Accounts payable......................................................... 3,502 1,977 1,965
Accrued interest payable................................................. 4,625 1,514
Accrued liabilities...................................................... 5,436 2,289 75
----------- ---------- ----------
Net cash provided by (used in) operating activities.................... 41,214 (5,954) (34)
----------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Restricted cash held in escrow............................................. 1,805 (14,919)
Purchases of property and equipment........................................ (112,867) (51,955) (7,445)
Payments under development agreement....................................... (13,586) (6,946) (4,405)
----------- ---------- ----------
Net cash used in investing activities.................................. (124,648) (73,820) (11,850)
----------- ---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Payments on installment contracts.......................................... (4,116) (1,805)
Payment of preferred return to partners.................................... (2,736)
Proceeds from contributed capital.......................................... 34,264 11,886
Repayment of long-term debt-related party.................................. (6,369)
Proceeds from long-term debt............................................... 132,812 56,529
Partnership equity distributions........................................... (3,563)
Other...................................................................... (553)
----------- ---------- ----------
Net cash provided by financing activities.............................. 115,475 88,988 11,886
----------- ---------- ----------
Net increase in cash and cash equivalents.................................... 32,041 9,214 2
Cash and cash equivalents, beginning of year................................. 9,216 2
----------- ---------- ----------
Cash and cash equivalents, end of year....................................... $ 41,257 $ 9,216 $ 2
----------- ---------- ----------
----------- ---------- ----------
See accompanying notes to financial statements.
90
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Indiana Gaming Company, L.P. ("Partnership"), an
Indiana limited partnership, was formed effective April 11, 1994 to provide
riverboat gaming and related entertainment in Lawrenceburg, Indiana. The
Partnership is comprised of a 57.5% general partner, The Indiana Gaming Company
("General Partner"), a wholly owned subsidiary of Argosy Gaming Company,
("Argosy"), and three limited partners including, Conseco Entertainment, L.L.C.,
("Conseco") a 29% limited partner, Centaur, Inc., a 9.5% limited partner and RJ
Investments, Inc., a 4% limited partner. Net income (loss) is allocated to the
partners based on their respective ownership interests. On December 10, 1996,
the Partnership commenced operations at a temporary site and ceased being in the
development stage. The Partnership opened its permanent pavilion on December 10,
1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Partnership considers cash and all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Temporary site improvements...................................... 1 year
5-31
Leasehold and shore improvements................................. years
5-20
Riverboat, docks and improvements................................ years
5-10
Furniture, fixtures and equipment................................ years
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
represents funds placed into an escrow account which may only be used to fund
progress payments related to the construction of the Partnership's permanent
landing facility.
LICENSE APPLICATION FEES--License application fees associated with obtaining
a gaming license have been capitalized and included in the balance sheet as a
part of intangible assets at December 31, 1997 and 1996. These costs are being
amortized over the life of the gaming license, which is five years. Accumulated
amortization was $141 and $11 at December 31, 1997 and 1996, respectively.
REVENUES AND PROMOTIONAL ALLOWANCES--The Partnership recognizes as casino
revenues the net win from gaming activities, which is the difference between
gaming wins and losses. The retail value of admissions, food, beverage and other
items provided to customers without charge has been included in revenues, and a
corresponding amount has been deducted as promotional allowances. The estimated
direct cost of providing promotional allowances has been included in costs and
expenses as follows:
1997 1996
--------- ---------
Admissions............................................................. $ 6,935 $ 190
Food, beverage and other............................................... 1,200 4
PREOPENING COSTS--Preopening costs, which consist primarily of labor, vessel
rent, training and marketing costs incurred prior to the commencement of gaming
operations, were expensed as incurred.
91
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
ADVERTISING COSTS--The Partnership expenses advertising costs as incurred.
Advertising expense was $4,877, $503 and $112 for the years ended December 31,
1997, 1996 and 1995, respectively.
INCOME TAXES--No provision (credit) for federal or state income taxes is
recorded in the financial statements, as income taxes are the responsibility of
the individual partners.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------
1997 1996
---------- ---------
Land............................................................................. $ 16,045 $ 16,015
Leasehold and shore improvements................................................. 102,050 5,892
Riverboat, docks and improvements................................................ 40,815
Furniture, fixtures and equipment................................................ 21,809 9,367
Construction in progress......................................................... 4,753 37,491
---------- ---------
185,472 68,765
Less accumulated depreciation and amortization................................... (10,442) (416)
---------- ---------
Net property and equipment....................................................... $ 175,030 $ 68,349
---------- ---------
---------- ---------
3. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------
1997 1996
---------- ---------
Capital loans payable to partners, interest at prime plus 6% (14.5% at December
31, 1997), principal paid in equal annual installments through 2004............. $ 157,971 $ 56,529
Notes payable, principal and interest payments due monthly through December 2001,
interest payable at prime plus 1% (9.5% at December 31, 1997)................... 25,000
---------- ---------
182,971 56,529
Less current maturities.......................................................... (25,832) (7,066)
---------- ---------
$ 157,139 $ 49,463
---------- ---------
---------- ---------
Interest expense on the capital loans from the partners compounds quarterly
to the extent unpaid. Principal on the capital loans is amortized in equal
annual installments through 2004. The Partnership is obligated to pay
contemporaneously with distributions of Cash Flow, as defined, current and
accrued interest, first, and then principal, on the Capital Loans to the
Partners, pro rata, in relation to the principal balances of their respective
Capital Loans then outstanding.
The Notes payable are collateralized by the vessel and certain equipment.
Interest expense to related parties amounted to $7,320 (net of $8,321
capitalized) and $636 (net of $874 capitalized) for the years ended December 31,
1997 and 1996, respectively.
92
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Maturities of long-term debt at December 31, 1997 are as follows:
1998....................................................... $ 25,832
1999....................................................... 26,156
2000....................................................... 26,507
2001....................................................... 36,769
2002....................................................... 22,566
Thereafter................................................. 45,141
4. PREFERRED EQUITY
Under the terms of the partnership agreement governing the Partnership,
preferred equity of $35,750 has been contributed to the Partnership. Of this
amount $20,556 was contributed by the General Partner and $15,194 was
contributed by Conseco.
The preferred equity carries a 14% dividend rate which is cumulative and is
compounded annually. The preferred equity return is to be paid from available
cash flow, as defined, in accordance with the terms of the partnership
agreement.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Partnership acquired equipment in the amount of $4,154 and $5,056 in
1997 and 1996, respectively, which was financed through installment contracts.
The Partnership paid $12,004 ($11,712 to related parties) and $207 in
interest for the years ended December 31, 1997 and 1996, respectively. No
interest was paid in 1995.
6. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year, including related party leases, as of December 31, 1997, are
as follows:
YEARS ENDING
DECEMBER 31,
- ----------------------------------------------------------------------------
1998........................................................................ $ 420
1999........................................................................ 402
2000........................................................................ 179
Rent expense, including related party leases, for the years ended December
31, 1997, 1996 and 1995 was $6,459, $2,837, and $148, respectively.
7. OTHER RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management Agreement, as amended
("Management Agreement"), with the General Partner, as the sole and exclusive
manager of all operations of the Partnership. The term of the Management
Agreement is twenty years, however, the term may be extended in the event that
the term of the Partnership is extended beyond the year 2014. The Partnership
will pay to the General Partner a Management Fee in the amount of 12.5% of the
operating profit of the Partnership, as defined. Under a separate financial
advisory agreement the General Partner has agreed to pay Conseco a financial
advisory fee equal to 40% of the Management Fee.
93
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
The partnership agreement stipulates that the Partnership shall distribute
excess cash flow, as defined, to the partners at least quarterly, in the
following order: (i) partner tax distributions, (ii) prepayment of principal on
capital loans, (iii) accrued preferred equity return, (iv) return of preferred
equity and, (v) return of common equity.
The Partnership entered into lease agreements with Argosy for the temporary
riverboat casino and related landing facility. Aggregate monthly rentals were
approximately $500 for these facilities. Total expense recognized under the
leases was $5,665 and $2,462 in 1997 and 1996, respectively. These leases ended
in 1997.
Argosy provides certain services for the Partnership, primarily, centralized
reservations and insurance. Reimbursement for these expenses has been included
in the income statement in the appropriate cost categories.
The Partnership has entered into leases with shareholders of a limited
partner for parking lots and outdoor advertising. Total expense recognized under
these leases was $107 and $133 in 1997 and 1996, respectively.
8. EMPLOYEES BENEFIT PLAN
The Company participates in the Argosy Gaming Company Employees Savings
Trust, a 401(k) defined contribution plan, which covers substantially all of its
full time employees. Participants may contribute a portion of their eligible
salaries (as defined) subject to maximum limits, as determined by provisions of
the Internal Revenue Code. The Company will match a portion of participants
contributions in an amount determined annually by the Company. Expense
recognized by the Company under the Plan was $517, $52 and $5 for the years
ended December 31, 1997, 1996 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES
CITY INFRASTRUCTURE IMPROVEMENTS AND UNRESTRICTED GRANTS--In accordance with
the terms of the Development Agreement, the Partnership entered into a lease
with the City of Lawrenceburg for docking privileges for its riverboat casino.
The initial term of the lease is for six years and thereafter automatically
extends for up to nine renewal term periods of five years each, unless
terminated by the Partnership. Under the terms of the Development Agreement, the
Partnership pays an annual fee to the City of Lawrenceburg ranging from 5%-14%
of Adjusted Gross Receipts, as defined, with a minimum of $6 million per year.
The Partnership has agreed to pay the City of Lawrenceburg $33,848 in
reimbursements for infrastructure improvements and unrestricted grants.
Subsequent to the commencement of operations at the temporary site, these have
been recorded as an intangible asset in the balance sheet at December 31, 1997
and 1996. The reimbursement for infrastructure improvements and unrestricted
city grants are being amortized over the 28 year term, including extensions, of
the Development Agreement. Accumulated amortization was $1,151 and $50 at
December 31, 1997 and 1996, respectively.
Included in other long term obligations is $6,583 representing the remaining
grants and infrastructure payments due by the Partnership under the terms of the
Riverboat Gaming Development Agreement with the City of Lawrenceburg
("Development Agreement"). The remaining amount is payable as follows: $4,583 in
1998 and $2,000 in 1999.
94
INDIANA GAMING COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
BONDING OBLIGATION--The Partnership is required, by Indiana Gaming Statute,
to post a bond in favor of the Indiana Gaming Commission to collateralize
certain obligations to the City of Lawrenceburg under the Development Agreement,
and to the State of Indiana. This bond is collateralized by certain real estate
of the Partnership.
TERMINATION OF LAWRENCEBURG PARTNERSHIP--Under the terms of the Partnership
Agreement, after the third anniversary date of commencement of operations each
limited partner has the right to sell its interest to the other partners (pro
rata in accordance with their respective percentage interests). In the event of
this occurrence, if the partners cannot agree on a selling price, the
Partnership will be sold in its entirety.
95
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is set forth under the
captions "Election of Directors" and "Management" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is set forth under the
caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is set forth under the
caption "Record Date, Required Vote, Outstanding Shares and Holdings of Certain
Stockholders--Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is set forth under the
caption "Certain Transactions" in the Proxy Statement and is incorporated herein
by reference.
96
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K.
1. The following consolidated financial statements of the Company and
independent auditors' report thereon, included in the Annual Report, are
incorporated by reference in Item 8. The remaining information appearing in
the Annual Report is not deemed to be filed as part of this report, except
as expressly provided herein.
Consolidated Balance Sheets--December 31, 1997 and 1996.
Consolidated Statements of Operations--years ended December 31, 1997,
1996 and 1995.
Consolidated Statements of Stockholders' Equity--years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. The financial statement schedules of the Company have been omitted
because they are either not required, or not applicable or the required
information is shown in the financial statements or notes thereto.
3. The exhibits listed on the "Index to Exhibits" on page 98 are filed
with this Form 10-K or incorporated by reference as set forth below.
97
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certification of Incorporation of the Company) previously filed with the
Securities and Exchange Commission ("SEC") as an Exhibit to the company's Registration Statement on
Form S-1 (File No. 33-55878) and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
4.1 Form of the Company's 13 1/4% First Mortgage Notes due 2004 issued on June 5, 1996 in the aggregate
principal amount of $235,000,000 (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.2 Form of Guarantee issued on June 5, 1996 by Alton Gaming Company, Argosy of Louisiana, Inc., Catfish
Queen Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises,
Inc., The Missouri Gaming Company and The St. Louis Gaming Company (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated
herein by reference).
4.3 Indenture dated as of June 5, 1996 by and among the Company, First National Bank of Commerce, as
Trustee, and the Guarantors named therein, for the Company's $235,000,000 of 13 1/4% First Mortgage
Notes due 2004 (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.4 Registration Rights Agreement dated as of June 5, 1996 by and among the Company, the Guarantors named
therein and the Initial Purchasers named therein (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by
reference).
4.5 Cash Collateral and Disbursement Agreement dated June 5, 1996 by and among the Company, First National
Bank of Commerce, as Trustee, and LaSalle National Trust, N.A., as disbursement agent (previously
filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No.
333-7299) and incorporated herein by reference).
4.6 Form of Security Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Grantor (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.7 Form of Subsidiary Security Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Grantor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
98
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
4.8 Form of Pledge Agreement dated as of June 5, 1996 by and between First National Bank of Commerce, as
Trustee, and the Company, as Pledgor (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.9 Form of Subsidiary Pledge Agreements dated as of June 5, 1996 by and between First National Bank of
Commerce, as Trustee, and each of Alton Gaming Company, Argosy of Louisiana, Inc., Catfish Queen
Partnership in Commendam, The Indiana Gaming Company, Iowa Gaming Company, Jazz Enterprises, Inc.,
The Missouri Gaming Company and The St. Louis Gaming Company, each as a Pledgor (previously filed
with the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299)
and incorporated herein by reference).
4.10 Form of First Preferred Ship Mortgages dated as of June 5, 1996 executed in favor of First National
Bank of Commerce, as Trustee, by each of Alton Gaming Company (relating to Argosy I, Alton Belle
Casino II and Alton Landing), Catfish Queen Partnership in Commendam (relating to Argosy III), The
Missouri Gaming Company (relating to Argosy IV), Iowa Gaming Company (relating to Argosy V) and the
Company (relating to Spirit of America) (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-4 (File No. 333-7299) and incorporated herein by reference).
4.11 Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement dated as of June 5, 1996
by and among the Company, First National Bank of Commerce, as Trustee, and Chicago Title Insurance
Company (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-4 (File No. 333-7299) and incorporated herein by reference).
4.12 Form of Mortgage of Jazz Enterprises, Inc., and Catfish Queen Partnership in Commendam to Secure
Present and Future Indebtedness, Assignment of Leases and Rents and Security Agreement dated as of
June 5, 1996 execute in favor of First National Bank of Commerce, as Trustee (previously filed with
the SEC as an Exhibit to the Company's Registration Statement on Form S-4 (File No. 333-7299) and
incorporated herein by reference).
4.13 Specimen Common Stock Certificate (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
4.14 Indenture dated as of June 6, 1994 between the Company and Bank One, Springfield, as trustee, for the
Company's $115,000,000 12% Convertible Subordinated Notes due 2001 (previously filed with the SEC as
an Exhibit to the Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated
herein by reference).
4.15 Specimen 12% Convertible Subordinated Note due 2001 (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by
reference).
4.16 Registration Rights Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference).
99
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
9.1 Pratt Voting Trust Agreement dated as of May 5, 1992 by and between John Biggs Pratt, Sr. and Stephanie
Pratt (previously filed with the SEC as an Exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-55878) and incorporated herein by reference).
10.1 Lease dated August 1, 1992 by and between Edward McPike d/b/a Grand Properties and Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1994 and incorporated herein by reference).
10.2 Bond and Easement Agreement dated as of April 18, 1991 by and between the Alton Riverboat Gambling
Partnership and the City of Alton, Illinois (previously filed with the SEC as an Exhibit to the
Company's Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by
reference).
10.3(a) Employment Agreement by and between the Company and J. Thomas Long (previously filed with the SEC as an
Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.3(b) Agreement between J. Thomas Long and the Company dated January 13, 1997. (previously filed with the SEC
as an Exhibit to the Company's Form 10-K for the year ended December 31, 1996 and incorporated herein
by reference).
10.4 Employment Agreement by and between the Company and Patsy S. Hubbard (previously filed with the SEC as
an Exhibit to the Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference).
10.5 Stock Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.6 Form of Indemnification Agreement (previously filed with the SEC as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.7 Director Option Plan (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.8 Employment Agreement between the Company and Virginia M. McDowell.
10.9 Letter Agreement dated as of January 28, 1993 by and between L. Thomas Lakin and the Alton Riverboat
Gambling Partnership (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-55878) and incorporated herein by reference).
10.10 Letter Agreement dated as of January 28, 1993 by and between the Alton Riverboat Gambling Partnership
and H. Steven Norton (previously filed with the SEC as an Exhibit to the Company's Registration
Statement on Form S-3 (File No. 33-76456) and incorporated herein by reference.)
10.11 Letter Agreement dated March 29, 1995 by and between Floyd C. Warmann and the Company (previously filed
with the SEC as an exhibit to the Company's Form 10-K for the year ended December 31, 1994 dated
March 31, 1995 and incorporated herein by reference).
100
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
10.12 Agreement to Purchase Stock dated January 30, 1995 by and among the Company, Jazz Enterprises, Inc. and
the signatory shareholders of Jazz Enterprises, Inc. (previously filed with the SEC as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994 and incorporated herein by reference).
10.13 Contract dated June 7, 1993 by and among the City of Riverside, Missouri, The Missouri Gaming Company
and the Company, together with amendments thereto (previously filed with the SEC as an Exhibit to the
Company's Form 8-K dated March 10, 1994 and incorporated herein by reference).
10.14 Second Amended and Restated Agreement of Limited Partnership dated February 21, 1996 of Indiana Gaming
Company, L.P. (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.15 Management Agreement dated April 11, 1994 by and between Indiana Gaming Company L.P. and The Indiana
Gaming Company as amended by Amendment No. 1 to Management Agreement dated February 21, 1996
(previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year ended December
31, 1995 and incorporated herein by reference).
10.16 Affirmation of Limited Parent Guaranty of Argosy Gaming Company in favor of the partners of Indiana
Gaming Company, L.P. dated February 21, 1996 (previously filed with the SEC as an Exhibit to the
Company's Form 10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.17 Vessel Construction Contract by and between Service Marine Industries, Inc. and Indiana Gaming Company
L.P. dated as of November 14, 1995 (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1995 and incorporated herein by reference).
10.18 Riverboat Gaming Development Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming
Company L.P. dated as of April 13, 1994 as amended by Amendment Number One to Riverboat Development
Agreement between the City of Lawrenceburg, Indiana and Indiana Gaming Company L.P. dated as of
December 28, 1995 (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference).
10.19 Guaranty of Development Agreement dated as of April 13, 1994 by the Company in favor of the City of
Lawrenceburg (previously filed with the SEC as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference).
10.20 Charter Agreement dated October 27, 1994 by and between President Riverboat Casino-New York, Inc. and
The Missouri Gaming Company (previously filed with the SEC as an exhibit to the Company's Form 10-K
dated March 31, 1995 and incorporated herein by reference).
10.21 Form of Surety Bond and Guaranty, dated December 17, 1996, issued to the Indiana Gaming Commission, as
obligee with USF&G, as surety. (previously filed with the SEC as an Exhibit to the Company's Form
10-K for the year ended December 31, 1996 and incorporated herein by reference).
10.22 Employment Agreement between the Company and James B. Perry.
10.23 Employment Agreement between the Company and James G. Gulbrandsen.
101
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
13 Portions of the 1997 Annual Report to Stockholders indicated on the Cross Reference Sheet and Table of
Contents (previously filed with the SEC as an Exhibit to the Company's Form 8-K dated March 18, 1998
and incorporated herein by reference).
21 List of Subsidiaries
24.1 Consent of Ernst & Young LLP
24.2 Consent of Grant Thornton LLP
25 Powers of Attorney of directors
- ------------------------
(b) The following Reports on Form 8-K were filed by the Registrant with the
Securities and Exchange Commission during the quarter ended December 31,
1997:
None
(c) The Exhibits filed herewith, if any, are identified on the Exhibit index
102
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 25th day of March, 1998.
ARGOSY GAMING COMPANY
By: /s/ JAMES B. PERRY
-----------------------------------------
James B. Perry
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the date indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JAMES B. PERRY
- ------------------------------ President and Chief March 25, 1998
James B. Perry Executive Officer
Vice President-Chief
/s/ DALE R. BLACK Financial Officer
- ------------------------------ (Principal Accounting March 25, 1998
Dale R. Black Officer)
/s/ EDWARD F. BRENNAN*
- ------------------------------ Director
Edward F. Brennan
/s/ FELIX LANCE CALLIS*
- ------------------------------ Director
Felix Lance Callis
/s/ WILLIAM F. CELLINI*
- ------------------------------ Director
William F. Cellini
/s/ JIMMY F. GALLAGHER*
- ------------------------------ Director
Jimmy F. Gallagher
/s/ JOHN BIGGS PRATT, SR.*
- ------------------------------ Director
John Biggs Pratt, Sr.
/s/ WILLIAM MCENERY*
- ------------------------------ Director
William McEnery
*BY: /s/ JAMES B. PERRY
-------------------------
James B. Perry
ATTORNEY-IN-FACT
March 25, 1998
103
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY)
DECEMBER 31, 1997 AND 1996
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
----------------------
1997 1996
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 5,787 $ 14,516
Income taxes receivable............................................................... 1,176 11,111
Receivables........................................................................... 698 828
Deferred income taxes................................................................. 768
Other current assets.................................................................. 1,677 2,898
---------- ----------
Total current assets................................................................ 10,106 29,353
Net property and equipment............................................................ 1,153 15,475
Restricted cash and cash equivalents.................................................. 12,431 69,632
Investment in and advances to consolidated subsidiaries............................... 351,356 297,601
Other assets.......................................................................... 14,907 12,422
Deferred taxes........................................................................ 1,521 8,743
---------- ----------
TOTAL ASSETS............................................................................ $ 391,474 $ 433,226
---------- ----------
---------- ----------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............................................. $ 8,811 $ 10,525
Long-term debt........................................................................ 350,000 350,000
Deferred income taxes.................................................................
Stockholders' equity:
Common stock, $01 par; 60,000,000 shares authorized; 24,498,353 and 24,333,333 shares
issued and outstanding in 1997 and 1996, respectively............................... 245 243
Capital in excess of par.............................................................. 72,038 71,865
Retained (deficit) earnings........................................................... (39,620) 593
---------- ----------
32,663 72,701
---------- ----------
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................................. $ 391,474 $ 433,226
---------- ----------
---------- ----------
See accompanying notes to financial statements.
104
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
DECEMBER 31, 1997, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
REVENUES
Management fees and other..................................................... $ 5,795 $ 4,875 $ 4,071
COSTS AND EXPENSES
General and administrative.................................................... 23,035 15,208 13,101
Development and preopening costs.............................................. 595 835 1,060
---------- ---------- ----------
23,630 16,043 14,161
---------- ---------- ----------
Loss from operations.......................................................... (17,835) (11,168) (10,090)
Net interest expense.......................................................... (32,145) (22,177) (8,964)
Equity in net income (loss) of consolidated subsidiaries...................... 7,287 (6,769) 18,042
---------- ---------- ----------
Loss before income taxes and extraordinary items.............................. (42,693) (40,114) (1,012)
Income tax benefit............................................................ 2,480 16,165 7,965
---------- ---------- ----------
Net loss before extraordinary item............................................ (40,213) (23,949) 6,953
---------- ---------- ----------
Extraordinary loss on extinguishment of debt (net of income tax benefit of
$594)....................................................................... (890)
---------- ---------- ----------
Net (loss) income............................................................. $ (40,213) $ (24,839) $ 6,953
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to financial statements.
105
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
DECEMBER 31, 1997, 1996 AND 1995
(ALL DOLLAR AMOUNTS IN THOUSANDS)
DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $ (40,213) $ (24,839) $ 6,953
Adjustments to reconcile net (loss) income to net cash (used in) provided
by operating activities:
Depreciation............................................................... 2,100 1,671 1,437
Amortization............................................................... 1,933 1,761 1,568
Extraordinary item......................................................... 890
Writedown of assets held for sale.......................................... 9,600
Compensation expense recognized on issuance of stock....................... 175
Deferred income taxes...................................................... 6,454 (8,596) 486
Changes in operating assets and liabilities:
Other current assets..................................................... 11,254 (11,741) (1,019)
Accounts payable and accrued liabilities................................. (1,714) 2,866 4,500
---------- ----------- ----------
Net cash (used in) provided by operating activities.................... (10,411) (37,988) 13,925
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities............................................. 1,952 548
Purchases of marketable securities......................................... (126)
Investment in and advances to subsidiaries................................. (53,350) (52,719) (54,592)
Restricted cash held by trustee............................................ 57,201 (69,632)
Purchases of property and equipment........................................ (2,084) (7,641) (5,509)
---------- ----------- ----------
Net cash provided by (used in) investing activities...................... 1,767 (128,166) (59,553)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit............................................... 44,500 49,500
Retirement of line of credit............................................... (90,000) (4,000)
Proceeds from the issuance of long term debt............................... 235,000
Increase in other assets................................................... (180)
Increase in deferred finance costs......................................... (85) (9,716) (2,441)
---------- ----------- ----------
Net cash (used in) provided by financing activities...................... (85) 179,784 42,879
---------- ----------- ----------
Net (decrease) increase in cash and cash equivalents......................... (8,729) 13,630 (2,749)
Cash and cash equivalents, beginning of year................................. 14,516 886 3,635
---------- ----------- ----------
Cash and cash equivalents, end of year....................................... $ 5,787 $ 14,516 $ 886
---------- ----------- ----------
---------- ----------- ----------
See accompanying notes to financial statements.
106
ARGOSY GAMING COMPANY
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
DECEMBER 31, 1997, 1996 AND 1995
BASIS OF PRESENTATION
The accompanying condensed financial information of Argosy Gaming Company
("Argosy") includes the accounts of Argosy, and on an equity basis, the
subsidiaries which it controls. The accompanying condensed financial information
should be read in conjunction with the consolidated financial statements of
Argosy.
107