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ANNUAL REPORT
1999
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1
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, through its subsidiaries or joint ventures, owns and
operates the Alton Belle Casino, in Alton, Illinois; the Argosy Casino in
Riverside, Missouri; the Argosy Casino in Baton Rouge, Louisiana; the Belle
of Sioux City Casino in Sioux City, Iowa; and the Argosy Casino and Hotel in
Lawrenceburg, Indiana. The results of the Company's Lawrenceburg casino
reflect a phased opening strategy. The Lawrenceburg casino opened at a
temporary site on December 10, 1996, moved to and opened the permanent
pavilion on December 10, 1997 and became fully operational with the opening
of its hotel in May 1998.
The Company's results of operations for the year ended December 31, 1999
reflect increases in both revenues and operating income at all of its casino
properties. This improvement is primarily attributable to the successful
execution of the Company's operating strategy, which has been developed with
the goal to position the Company as the premier riverboat casino operator.
This strategy includes capitalizing on management's significant experience
and expertise in gaming industry operations, continued emphasis on database
marketing techniques, and prudently investing in gaming and gaming-related
assets for its properties. In addition, 1999 revenues were favorably impacted
by regulatory changes in three of its markets; dockside gaming in Alton,
beginning June 26, the July 1 elimination of video poker at many non-casino
sites in Baton Rouge, and the advent of open boarding in Kansas City on
November 15. The Company expects that these regulatory changes will continue
to have positive year over year impact through the first half of 2000. In
addition, the results of the Company's Baton Rouge casino were favorably
impacted by an elimination of an additional head tax of $2.50 per passenger
which ceased on July 29, 1999 when the Company began construction of a $20
million, 300 room convention hotel at its Baton Rouge property.
The Company's ability to recover the carrying value of its long-lived
assets in Baton Rouge is dependent on several factors, including maintaining
the current level of operating results and the competitive environment. If
the Company does not achieve anticipated operating results or experiences
deterioration in its operating results or the competitive environment,
management's evaluation of recoverability could change and the Company could
record an impairment loss amounting to a substantial portion of its $113
million Baton Rouge investment.
During December 1999, the Company replaced its landing facility at its
Alton property which had a net book value of $7.3 million. The Company is
currently evaluating the future use of these assets which may include
utilization in the Company's other operations or the sale of the assets. If
these assets are sold, a loss could be recorded for a substantial portion of
the $7.3 million net book value.
During 1999, the Company recorded an extraordinary loss of $24.9 million
(net of a $13.5 million tax benefit) related to the early extinguishment of
debt. Also, during 1999, the Company recognized a $10.0 million tax benefit
representing prior federal income tax net operating losses that are expected
to be utilized in 2000.
2
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(In Thousands)
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
CASINO REVENUES
Xxxxx Belle Casino $ 84,664 $ 67,798 $ 61,877
Argosy Casino - Riverside 84,892 71,955 61,750
Argosy Casino - Baton Rouge 53,262 46,828 47,628
Belle of Sioux City Casino 28,013 22,572 20,667
Argosy Casino - Lawrenceburg 308,316 264,352 127,908
--------- --------- ---------
Total $ 559,147 $ 473,505 $ 319,830
========= ========= =========
NET REVENUES
Xxxxx Belle Casino $ 88,079 $ 72,064 $ 67,208
Argosy Casino - Riverside 89,813 76,960 66,548
Argosy Casino - Baton Rouge 55,110 49,054 50,436
Belle of Sioux City Casino 28,889 23,526 21,672
Argosy Casino - Lawrenceburg 332,235 284,721 137,024
Other 428 343 1,195
--------- --------- ---------
Total $ 594,554 $ 506,668 $ 344,083
========= ========= =========
INCOME (LOSS) FROM OPERATIONS(1)
Xxxxx Belle Casino $ 23,115 $ 13,850 $ 7,489
Argosy Casino - Riverside 12,564 5,369 2,481
Argosy Casino - Baton Rouge 1,129 (3,381) (4,146)
Belle of Sioux City Casino 4,570 1,919 848
Argosy Casino - Lawrenceburg 103,295 87,907 25,625
Jazz Enterprises, Inc. (4) (5,118) (6,312) (4,655)
Corporate (5) (15,113) (9,990) (11,432)
Other (1,417) (1,551) 1,701
--------- --------- ---------
Total $ 123,025 $ 87,811 $ 17,911
========= ========= =========
EBITDA(1)(2)
Xxxxx Belle Casino $ 27,388 $ 17,835 $ 11,944
Argosy Casino - Riverside 18,252 11,293 8,428
Argosy Casino - Baton Rouge 6,348 1,891 1,322
Belle of Sioux City Casino 5,838 3,016 1,861
Argosy Casino - Lawrenceburg 123,083 105,674 38,471
Lawrenceburg financial advisory fee (3) (6,154) (5,200) (1,924)
Jazz Enterprises, Inc. (4) (2,417) (3,633) (2,301)
Corporate (5) (15,082) (9,436) (9,324)
Other (173) (193) 2,726
--------- --------- ---------
Total $ 157,083 $ 121,247 $ 51,203
========= ========= =========
3
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(1) Income from operations and EBITDA are presented before consideration of any
management fees paid to the Company and in the case of the Belle of Sioux
City and the Argosy Casino Lawrenceburg before the 30% and 42.5% minority
interests, respectively.
(2) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization and is presented before any management fees paid to Argosy.
EBITDA should not be construed as an alternative to operating income, or
net income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance, or as
an alternative to cash flows generated by operating, investing and
financing activities (as an indicator of cash flow or a measure of
liquidity). EBITDA is presented solely as a supplemental disclosure because
management believes that it is a widely used measure of operating
performance in the gaming industry and for companies with a significant
amount of depreciation and amortization. EBITDA may not be comparable to
similarly titled measures reported by other companies. The Company has
other significant uses of cash flows, including debt service and capital
expenditures, which are not reflected in EBITDA.
(3) The Lawrenceburg partnership pays a financial advisory fee equal to 5.0% of
its EBITDA to a minority partner.
(4) Jazz Enterprises, Inc. is a wholly-owned subsidiary that owns and operates
the Catfish Town real estate development adjacent to the Company's Baton
Rouge casino.
(5) Excludes severance expenses of $1,750 and a loss of $9,600 in connection
with a writedown of assets held for sale for the year ended December 31,
1997.
4
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 0000
XXXXXX--Xxxxxx revenues for the year ended December 31, 1999,
increased by 18.1% to $559.1 million from $473.5 million for the year ended
December 31, 1998, due in part to a $44.0 million increase in casino revenues
at the Lawrenceburg casino, which generated total casino revenues of $308.3
million for the year ended December 31, 1999. The Company's other properties
reported an aggregate 19.9% increase in casino revenues from $209.2 to $250.8
million. This improvement is primarily attributable to the regulatory changes
in Illinois, Louisiana and Missouri and to the continued implementation of
the Company's operating and marketing strategies. Specifically, Alton casino
revenues increased from $67.8 to $84.7 million due in part to dockside gaming
effective June 1999; Riverside casino revenues increased from $72.0 to $84.9
million; Sioux City casino revenues increased from $22.6 to $28.0 million and
Baton Rouge casino revenues increased from $46.8 to $53.2 million.
Casino expenses increased 13.0% to $250.6 million for the year ended
December 31, 1999, from $221.7 million for the year ended December 31, 1998.
This increase is primarily due to an increase of $17.9 million in gaming
taxes as a result of the overall increase in casino revenues. Baton Rouge
casino expense is net of a $1.6 million decrease in admission taxes due to
the elimination of an additional head tax, which commenced when construction
began on the Baton Rouge hotel in July 1999.
ADMISSIONS--Admissions revenues (net of complimentary admissions)
were $7.2 million for the years ended December 31, 1999 and 1998.
FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues
increased from $51.1 million to $58.0 million for the year ended December 31,
1999. This increase is attributable to the restaurants and the hotel at the
Lawrenceburg property being open for the entire year in 1999. Food, beverage
and other net profit improved $6.0 million to $16.5 million for the year
ended December 31, 1999. Alton, Riverside and Baton Rouge each reported
relatively the same food and beverage revenues but decreases in food and
beverage expenses. Alton's decrease was due to the closing of one of its
restaurants during the entire year ended December 31, 1999 in conjunction
with a major renovation. Riverside's and Baton Rouge's decreases were
primarily due to the decreased use of food and beverage as promotional items.
The Lawrenceburg hotel contributed $4.2 million in net revenues and
$1.9 million of operating profit. The hotel occupancy percentage was 83.2%
and the average daily room rate, including promotional allowances, was $84.
In 1998, the hotel occupancy percentage was 73.5% and the average daily room
rate, including promotional allowances, was $79 during the months the hotel
was open.
OTHER OPERATING EXPENSES--Other operating expenses increased from $26.6
million in 1998 to $27.9 million for the year ended December 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and
administrative expenses increased 21.7% to $117.5 million for the year ended
December 31, 1999, due primarily to an increase at Lawrenceburg of $3.9
million related to expanded marketing and $4.5 million in additional
development payments to the city due to the increased gaming revenues.
Corporate expenses increased due to expenses of $1.8 million related to a
severance and settlement arrangement and $3.1 million related to incentive
compensation. Marketing expenses increased $4.8 million for the year ended
December 31, 1999 but remained relatively flat, at approximately 7%, as a
percentage of casino revenues.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization
increased slightly to $34.1 million for the year ended December 31, 1999,
from $33.4 million in 1998.
INTEREST EXPENSE--Net interest expense decreased
$8.2 million to $45.7 million for the year ended December 31, 1999. The
decrease in interest expense is primarily attributable to the refinancing
completed during 1999 and a decrease of interest to a minority partner of
$3.0 million. This decrease, however, was offset by a decrease in capitalized
interest of $1.0 million.
5
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NET INCOME BEFORE EXTRAORDINARY ITEM - The Company recorded net income
before extraordinary item of $36.4 million for the year ended December 31,
1999 compared to net income before extraordinary item of $6.6 million in 1998
due primarily to the factors discussed above.
EXTRAORDINARY LOSS - The Company recorded an extraordinary loss of $24.9
million for the year ended December 31, 1999 related to the early
extinguishment of debt in conjunction with a refinancing. This extraordinary
loss is net of a $13.5 million tax benefit.
INCOME TAX EXPENSE - The Company recorded income tax expense of $5.9
million for the year ended December 31, 1999 compared to income tax expense
of $1.1 million for the year ended December 31, 1998. The Company's effective
tax rate has been impacted favorably in 1999 and 1998 due to the utilization
of net operating loss carryforwards. Income tax expense was offset by the
reversal of a $10.0 million valuation allowance related to prior federal
income tax net operating losses that are expected to be utilized in 2000. The
Company expects its effective tax rate to be approximately 39% in the future.
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS--The Company reported net
income attributable to common stockholders of $11.5 million for the year
ended December 31, 1999 compared to $5.7 million for the year ended December
31, 1998, due primarily to the factors discussed above.
6
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 0000
XXXXXX--Xxxxxx revenues for the year ended December 31, 1998, increased
by 48.1% to $473.5 million from $319.8 million for the year ended December
31, 1997, due primarily to a $136.4 million increase in casino revenues at
the Lawrenceburg casino, which generated total casino revenues of $264.4
million for the year ended December 31, 1998. The Company's other properties
reported an aggregate 9.0% increase in casino revenues from $191.9 to $209.2
million. Specifically, Alton casino revenues increased from $61.9 to $67.8
million; Riverside casino revenues increased from $61.8 to $72.0 million;
Sioux City casino revenues increased from $20.7 to $22.6 million, offset by a
decrease in Baton Rouge casino revenues from $47.6 to $46.8 million.
Casino expenses increased 35.3% to $221.7 million for the year ended
December 31, 1998, from $163.9 million for the year ended December 31, 1997.
This is primarily due to a $52.2 million increase in Lawrenceburg casino
expenses associated with the overall increase in Lawrenceburg casino
revenues. Casino expenses increased $4.6 million at Riverside in connection
with the increase in casino revenues. Alton casino expenses decreased
slightly while casino revenues increased 10%. This decrease in casino
expenses in Alton is attributable to improved operating efficiencies and the
implementation of cost reduction programs.
ADMISSIONS--Admissions revenues (net of complimentary admissions)
increased from $4.6 million in 1997 to $7.2 million in 1998 due to an
increased number of customers at the Lawrenceburg casino.
FOOD, BEVERAGE, AND OTHER--Food, beverage and other revenues increased
from $34.8 million to $51.1 million for the year ended December 31, 1998, due
to the expanded food and beverage facilities in Lawrenceburg. Food, beverage
and other net profit improved $5.6 million to $10.5 million for the year
ended December 31, 1998, due primarily to this increase in sales.
The Lawrenceburg hotel, which opened in May 1998, contributed $2.5
million in net revenues and $0.7 million of operating profit. The hotel
occupancy percentage was 73.5% and the average daily room rate including
promotional allowances, was $79.
OTHER OPERATING EXPENSES--Other operating expenses decreased from $28.7
million to $26.6 million for the year ended December 31, 1998, due primarily
to a decrease at Lawrenceburg of $2.3 million related to renting the
temporary vessel in 1997.
SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative
expenses increased 34.0% to $96.6 million for the year ended December 31,
1998, due primarily to an increase of $20.0 million at Lawrenceburg related
to expanded marketing and operating costs of the larger facility, an increase
of $2.3 million at Riverside due to expanded marketing efforts and a $1.4
million charge related to a writeoff of deferred lease costs at the Catfish
Town real estate project in Baton Rouge. The increase in selling, general and
administrative expenses was offset by a $1.5 million decrease at Baton Rouge
related primarily to insurance costs.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
slightly to $33.4 million for the year ended December 31, 1998, from $33.3
million in 1997.
INTEREST EXPENSE--Net interest expense increased $12.7 million to $53.9
million for the year ended December 31, 1998. The increase in interest
expense is primarily attributable to a decrease of $7.3 million in the amount
of capitalized interest due to the completion of the final phase of the
Lawrenceburg project in June 1998, a weighted average increase of $11.0
million in the balance of partner loans related to the Lawrenceburg casino,
and an equipment loan at the Indiana Partnership which was outstanding for
the entire year of 1998.
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS--The Company
reported net income attributable to common stockholders of $5.7 million for
the year ended December 31, 1998 as opposed to a net loss of $40.2 million
for the year ended December 31, 1997, due primarily to the factors discussed
above. In addition, in 1998, the Company recorded $0.8 million in preferred
dividends and accretion related to the sale of Preferred Stock and Warrants
in June 1998. In 1997, the Company recorded pretax charges of $9.6 million
relating to the write-down of assets held for sale and approximately $1.8
million in severance expenses. Due to its net operating loss position, the
Company's effective tax rate for 1998 was 3.4%.
7
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company generated cash flows from operating activities
of $126.7 million compared to $81.7 million for 1998. This increase is
attributable to the improved operations from the Company's Alton, Riverside,
Baton Rouge and Sioux City properties as well as in the increase in operating
income from the Lawrenceburg facility.
During 1999, the Company used cash flows for investing activities of
$37.1 million versus $14.2 million for 1998. Capital expenditures in 1999
consisted of $10.2 million in maintenance capital, primarily related to slot
machine replacements and $27.5 million for expansion projects, including the
Company's new landing facility (including 130 additional slot machines) in
Alton, renovation of the Baton Rouge boat to accommodate additional slot and
video games and commencement of construction of a 300 room hotel in Baton
Rouge. For the year ended December 31, 1998, capital expenditures were for
investment in the Company's properties including final phase construction
projects at the Lawrenceburg facility.
During 1999, the Company used $132.3 million in cash flows for financing
activities compared to $37.0 million in cash flows for the same period in
1998. In 1999, the Company received proceeds of $200 million from the
issuance of subordinated notes and $161.8 million from a bank credit
facility. The Company repaid long term debt of $327.7 million, placed $25.2
million in funds in an escrow to retire future debt, repaid $58.0 million on
the credit facility, used $30.6 million to pay premiums to retire existing
debt in connection with its refinancing and used $8.7 million to pay fees in
connection with the refinancing. In 1998, the Company received proceeds of
$7.4 million from the sale of preferred stock and warrants. Cash flows in
both 1999 and 1998 were used to repay loans related to the Company's
Lawrenceburg casino, partner equity distributions related to the Lawrenceburg
partnership and for payments on installment contracts and other long term
debt.
At December 31, 1999, the Company had approximately $47.1 million of
cash and cash equivalents, including approximately $30.0 million held at the
Indiana Partnership. In addition, the Company has placed in escrow $25.2
million to fund interest payments, redemption premium and principal for the
$22.2 million of Mortgage Notes that were not tendered in the refinancing but
which will be redeemed in June 2000. At December 31, 1999, the Company had
outstanding $200 million of Senior Subordinated Notes, which were issued in
June 1999 and are due in June 2009 and $103.8 million on a senior secured
revolving credit facility. As of February 25, 2000 availability under the
credit facility was approximately $104.0 million.
The Company has made a significant investment in property and equipment
and plans to make significant additional investments at certain of its
existing properties. In 2000, Argosy expects maintenance capital expenditures
primarily related to the purchase of new gaming product and facility
enhancements to be approximately $20.0 million, and expenditures related to
the Baton Rouge hotel to be approximately $18.0 million.
The Company believes that cash on hand, operating cash flows and
available capacity under its credit facility, will be sufficient to fund its
current operating, capital expenditure and debt service obligations. The
Company's ability to purchase the minority interest in the Indiana
Partnership, in the event that the limited partners exercise their right to
sell their interest to the other partners, is substantially dependent upon
the success of the Lawrenceburg casino. The Company would be required to fund
a portion of the minority interest purchase by obtaining additional debt or
equity financing. No assurance can be given that the Company would be able to
obtain such additional financing on suitable terms.
8
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
MARKET RISK - INTEREST RATE SENSITIVITY
The market risk inherent in the Company's financial instruments is the
potential loss in fair value arising from adverse changes in interest rates.
Currently, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes as the majority of the Company's
indebtedness is financed at fixed rates.
The following table provides information about the Company's debt
obligations that are sensitive to changes in interest rates. The following
table presents principal cash flows and related weighted-average interest
rates by expected maturity dates and estimated fair value of the Company's
debt obligations.
FAIR
VALUE
(dollars in thousands) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
--------------------------------------------------------------------------------------------------------------------------
Fixed Rate Debt $ 22,846 $ 670 $ 743 $ 825 $ 916 $ 202,729 $ 228,729 $ 241,175
Average Interest Rate 13.2% 10.5% 10.5% 10.5% 10.5 10.8%
Variable Rate Debt 9,822 19,675 5,782 9,582 105,783 - 150,644 150,644
Average Interest Rate 12.4% 11.0% 14.5% 12.0% 8.6% -
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The Company expended approximately $1.0 million in connection
with remediating its systems. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its internal systems,
or the services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WHEN USED IN THIS
DOCUMENT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "EXPECT" AND
SIMILAR EXPRESSIONS ARE GENERALLY INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS,
INCLUDING THOSE REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE
COMPANY OR ITS MANAGEMENT, ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND
INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS INCLUDING, BUT NOT LIMITED TO, (I) GENERAL ECONOMIC
CONDITIONS IN THE MARKETS IN WHICH THE COMPANY OPERATES, (II) INCREASED
COMPETITIVE PRESSURES IN THE MARKETS IN WHICH THE COMPANY OPERATES, (III) THE
EFFECT OF FUTURE LEGISLATION OR REGULATORY CHANGES ON THE COMPANY'S
OPERATIONS, AND (IV) OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
SECURITIES AND EXCHANGE COMMISSION FILINGS. THE COMPANY DOES NOT INTEND TO
UPDATE THESE FORWARD-LOOKING STATEMENTS.
9
ARGOSY GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
DECEMBER 31,
---------------------------------
1999 1998
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 47,090 $ 89,857
Restricted cash in escrow 25,244 --
Accounts receivable, net of allowance for doubtful
accounts of $1,328 and $1,936, respectively 3,909 2,375
Income taxes receivable 653 747
Deferred income taxes 18,681 1,471
Other current assets 4,840 4,806
----------- -----------
Total current assets 100,417 99,256
----------- -----------
NET PROPERTY AND EQUIPMENT 405,205 395,920
----------- -----------
OTHER ASSETS:
Deferred finance costs, net of accumulated
amortization of $1,069 and $6,363, respectively 8,782 8,758
Goodwill and other intangible assets, net of accumulated
amortization of $7,409 and $5,353, respectively 49,761 51,817
Other 2,695 7,001
----------- -----------
Total other assets 61,238 67,576
----------- -----------
Total assets $ 566,860 $ 562,752
=========== ===========
See accompanying notes to consolidated financial statements.
10
ARGOSY GAMING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
DECEMBER 31,
---------------------------------
1999 1998
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,894 $ 10,500
Accrued payroll and related expenses 12,174 9,857
Other accrued liabilities 39,178 34,898
Accrued interest 3,176 4,490
Current maturities of long-term debt 32,668 11,640
-------- --------
Total current liabilities 105,090 71,385
-------- --------
LONG-TERM DEBT 346,705 412,360
DEFERRED INCOME TAXES 9,945 1,943
OTHER LONG-TERM OBLIGATIONS 219 201
MINORITY INTERESTS IN EQUITY OF CONSOLIDATED SUBSIDIARIES 46,656 30,660
COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 17) - -
SERIES A CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES
AUTHORIZED, 0 AND 547 SHARES ISSUED AND OUTSTANDING - 5,340
AT DECEMBER 31, 1999 AND 1998, RESPECTIVELY
STOCKHOLDERS' EQUITY:
Common stock, $.01 par; 60,000,000 shares
authorized; 28,325,106 and 25,830,313 shares issued and
outstanding at December 31, 1999 and 1998, respectively 283 258
Capital in excess of par 80,362 74,484
Retained (deficit) earnings (22,400) (33,879)
-------- --------
Total stockholders' equity 58,245 40,863
-------- --------
Total liabilities and stockholders' equity $566,860 $562,752
======== =========
See accompanying notes to consolidated financial statements.
11
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
REVENUES:
Casino $ 559,147 $ 473,505 $ 319,830
Admissions 18,893 16,025 7,895
Food, beverage and other 57,998 51,057 34,836
--------- --------- ---------
636,038 540,587 362,561
Less promotional allowances (41,484) (33,919) (18,478)
--------- --------- ---------
Net revenues 594,554 506,668 344,083
--------- --------- ---------
COSTS AND EXPENSES:
Casino 250,559 221,682 163,935
Selling, general and administrative 117,518 96,550 72,069
Food, beverage and other 41,528 40,550 29,962
Other operating expenses 27,866 26,639 28,695
Depreciation and amortization 34,058 33,436 33,292
Write-down of assets held for sale - - 9,600
--------- --------- ---------
471,529 418,857 337,553
--------- --------- ---------
Income from operations 123,025 87,811 6,530
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 2,870 3,582 5,937
Interest expense (48,594) (57,487) (47,116)
--------- --------- ---------
(45,724) (53,905) (41,179)
--------- --------- ---------
Income (loss) before minority interests, income taxes
and extraordinary item 77,301 33,906 (34,649)
Minority interests (34,975) (26,205) (6,916)
Income tax (expense) benefit (5,900) (1,140) 1,352
--------- --------- ---------
Net income (loss) before extraordinary item 36,426 6,561 (40,213)
Extraordinary loss on extinguishment of debt
(net of income tax benefit of $13,500) (24,920) - -
--------- --------- ---------
Net income (loss) 11,506 6,561 (40,213)
Preferred stock dividends and accretion (27) (820) -
--------- --------- ---------
Net income (loss) attributable to common stockholders $ 11,479 $ 5,741 $ (40,213)
========= ========= =========
Basic net income (loss) per share $ 0.41 $ 0.23 $ (1.65)
========= ========= =========
Diluted net income (loss) per share $ 0.40 $ 0.23 $ (1.65)
========= ========= =========
See accompanying notes to consolidated financial statements.
12
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share and per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,506 $ 6,561 $ (40,213)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 31,393 31,011 31,250
Amortization 4,288 4,329 3,968
Deferred income taxes 4,292 536 (753)
Compensation expense recognized on issuance of stock 113 239 175
Loss on the disposal of equipment 902 789 --
Minority interests 34,975 26,205 6,916
Extraordinary item 24,920 -- --
Write-down of assets held for sale -- -- 9,600
Changes in operating assets and liabilities:
Accounts receivable (1,534) (236) (221)
Other current assets (607) 1,184 3,057
Accounts payable 7,394 (2,070) (2,723)
Accrued liabilities 8,917 12,686 10,637
Income taxes receivable 94 429 9,935
--------- --------- ---------
Net cash provided by operating activities 126,653 81,663 31,628
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term obligations -- (6,583) (13,586)
Purchases of property and equipment (37,162) (34,051) (117,444)
Other long-term assets 18 908 (543)
Restricted cash held by trustees -- 25,545 59,006
--------- --------- ---------
Net cash used in investing activities (37,144) (14,181) (72,567)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 200,000 -- 25,000
Proceeds (net of issuance costs) from sale of
Convertible Preferred Stock and Warrants -- 7,365 --
Proceeds from credit facility 161,800 -- --
Repayment of credit facility (58,000) -- --
Payments on long-term debt and installment contracts (6,830) (7,299) (4,326)
Increase in deferred finance costs (8,736) -- (638)
Repurchase of First Mortgage Notes (241,043) -- --
Redemption of convertible debentures (117,280) -- --
Cash held in escrow (25,244) -- --
Repayment of partner loans (16,285) (21,939) 43,938
Partnership distributions (20,043) (14,496) (2,677)
Other (615) (610) 712
--------- --------- ---------
Net cash (used in) provided by financing activities (132,276) (36,979) 62,009
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (42,767) 30,503 21,070
Cash and cash equivalents, beginning of year 89,857 59,354 38,284
--------- --------- ---------
Cash and cash equivalents, end of year $ 47,090 $ 89,857 $ 59,354
========= ========= =========
See accompanying notes to consolidated financial statements.
13
ARGOSY GAMING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share and per share data)
RETAINED TOTAL
COMMON CAPITAL IN EARNINGS STOCKHOLDERS'
SHARES STOCK EXCESS OF PAR (DEFICIT) EQUITY
--------------- ------------- ------------- ------------- -------------
Balance, December 31, 1996 24,333,333 $ 243 $ 71,865 $ 593 $ 72,701
Restricted stock issued 165,000 2 173 -- 175
Net loss -- -- -- (40,213) (40,213)
---------- ------ -------- -------- ----------
Balance, December 31, 1997 24,498,333 245 72,038 (39,620) 32,663
Restricted stock compensation expense -- -- 239 -- 239
Issuance of Convertible Preferred
Stock and Warrants -- -- (235) -- (235)
Preferred Stock conversion 1,331,980 13 2,442 -- 2,455
Net income -- -- -- 6,561 6,561
Preferred Stock dividends and accretion -- -- -- (820) (820)
---------- ------ -------- -------- ----------
Balance, December 31, 1998 25,830,313 258 74,484 (33,879) 40,863
Restricted stock compensation expense -- -- 113 -- 113
Preferred Stock conversion 2,310,011 23 5,344 -- 5,367
Warrants converted 172,496 2 355 -- 357
Exercise of stock options 11,156 -- 46 -- 46
Convertible debentures converted
into stock 1,130 -- 20 -- 20
Net income -- -- -- 11,506 11,506
Preferred Stock dividends and accretion -- -- -- (27) (27)
---------- ------ -------- -------- ----------
Balance, December 31, 1999 28,325,106 $ 283 $ 80,362 $(22,400) $ 58,245
========== ====== ======== ======== ==========
See accompanying notes to consolidated financial statements.
14
ARGOSY GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--Argosy Gaming Company (collectively with its
subsidiaries, "Argosy" or "Company") is engaged in the business of providing
casino style gaming and related entertainment to the public and, through its
subsidiaries or joint ventures, operates riverboat casinos in Alton,
Illinois; Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana;
and Sioux City, Iowa. Indiana Gaming Company, L.P. ("Indiana Partnership"), a
limited partnership in which the Company is general partner and holds a 57.5%
partnership interest, opened a riverboat casino and related entertainment and
support facilities at a temporary site in Lawrenceburg, Indiana on December
10, 1996. The Partnership opened its permanent pavilion on December 10, 1997,
and its hotel in May 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The
consolidated financial statements include the accounts of Argosy and its
controlled subsidiaries and partnerships. All significant intercompany
transactions have been eliminated. Under certain conditions, subsidiaries are
required to obtain approval from state gaming authorities before making
distributions to Argosy.
Certain 1998 and 1997 amounts have been reclassified to conform to the
1999 presentation.
CASH AND CASH EQUIVALENTS -- The Company considers cash and all highly
liquid investments with an original maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost.
Leasehold improvements are amortized over the life of the respective lease.
Depreciation is computed on the straight-line method over the following
estimated useful lives:
Buildings and shore improvements 5 to 33 years
Riverboats, docks and improvements 5 to 20 years
Furniture, fixtures and equipment 5 to 10 years
IMPAIRMENT OF LONG-LIVED ASSETS--When events or circumstances indicate
that the carrying amount of long-lived assets to be held and used might not
be recoverable, the expected future undiscounted cash flows from the assets
is estimated and compared with the carrying amount of the assets. If the sum
of the estimated undiscounted cash flows is less than the carrying amount of
the assets, an impairment loss is recorded. The impairment loss is measured
by comparing the fair value of the assets with their carrying amount.
Long-lived assets that are held for disposal are reported at the lower of the
assets' carrying amount or fair value less costs related to the assets'
disposition.
DEFERRED FINANCE COSTS -- Deferred finance costs are amortized over the
life of the respective loans using the effective interest method.
GOODWILL AND OTHER INTANGIBLE ASSETS -- Goodwill represents the cost in
excess of fair value of net assets acquired, and is amortized over 40 years.
Other intangible assets, primarily payments to cities, are amortized over the
lives of the respective leases or development agreements including extensions.
15
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. Admissions, hotel and other revenue is recognized at
the time the related service is performed.
The retail value of admissions, hotel rooms, food, beverage and other
items which were provided to customers without charge has been included in
revenues, and a corresponding amount has been deducted as promotional
allowances. The estimated direct cost of providing promotional allowances has
been included in costs and expenses as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Admissions $ 5,895 $ 4,409 $ 1,646
Hotel rooms 1,059 751 --
Food, beverage and other 23,347 22,341 15,628
ADVERTISING COSTS -- The Company expenses advertising costs as incurred.
Advertising expense was $10,527, $9,833 and $12,475 in 1999, 1998 and 1997,
respectively.
DEVELOPMENT AND PREOPENING COSTS -- Development costs incurred in an
effort to identify and develop new gaming locations are expensed as incurred.
Preopening costs are expensed as occurred.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
---------------------------------
1999 1998
--------------- ---------------
Land $ 39,002 $ 39,002
Buildings, leasehold and shore improvements 217,132 216,067
Riverboats, docks and improvements 164,419 148,162
Furniture, fixtures and equipment 109,399 93,868
Construction in progress 2,642 217
-------------- --------------
532,594 497,316
Less accumulated depreciation and amortization (127,389) (101,396)
-------------- --------------
Net property and equipment $ 405,205 $ 395,920
============== ==============
3. ASSETS HELD FOR SALE
The Company recorded a charge of $9,600 to adjust the carrying value of
certain assets held for sale to their estimated fair value in 1997. These assets
include the original riverboat casino the Company utilized in Alton, Illinois
from September 1991 until May 1993 and a barge utilized as a temporary landing
facility in Lawrenceburg, Indiana until December 10, 1997. The estimated fair
value of the assets was determined through discussions with a broker and
comparison to other riverboats and barges currently available for sale. The
adjusted carrying value of the boat and barge of approximately $4,300 was
included in other assets in the accompanying balance sheet at December 31, 1998.
The boat was sold to a third party in 1999. During 1999, the Company determined
the barge held for sale was useable as part of the Alton property's dockside
renovation. The barge was placed back in service during December 1999 and has
been reclassified to property and equipment.
16
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
DECEMBER 31,
---------------------------------
1999 1998
--------------- ---------------
Accrued gaming and admissions taxes $ 17,532 $ 12,020
Slot club liability 4,195 3,667
Accrued insurance expense 6,232 4,529
Other 11,219 14,682
-------------- --------------
$ 39,178 $ 34,898
============== ==============
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------------------
1999 1998
--------------- ---------------
First mortgage notes due June 1, 2004,
interest payable semi-annually at 13.25% $ 22,242 $ 235,000
Convertible subordinated notes due
June 1, 2001, convertible into common
stock at $17.70 per share, interest payable
semi-annually at 12% -- 115,000
Senior secured line of credit, expires June 2004,
interest payable at least quarterly at either LIBOR or
prime plus a margin (from 7.5% to 9.25% at December 31, 1999) 103,800 --
Senior subordinated notes due June 1, 2009, interest
payable semi-annually at 10.75% 200,000 --
Notes payable, principal and interest
payments due quarterly through
September 2015, discounted at 10.5% 6,487 7,097
Notes payable, principal and interest payments due
monthly through December 2001, interest
payable at prime + 1% (9.5% at
December 31, 1999), secured by gaming vessel
and certain equipment 17,933 21,707
Loans from partner, principal due
in annual installments through 2004,
interest payable at prime + 6% (14.5% at
December 31, 1999) 28,911 45,196
--------- ---------
379,373 424,000
Less: current maturities 32,668 11,640
--------- ---------
Long-term debt, less current maturities $ 346,705 $ 412,360
========= =========
17
On June 8, 1999, the Company issued $200,000 of Senior Subordinated
Notes due 2009 ("Subordinated Notes") and entered into a five year $200,000
Senior Secured revolving bank credit agreement ("Credit Facility"). The
Credit Facility is secured by liens on substantially all of the Company's
assets, and the Company's subsidiaries are co-borrowers. The Company's
joint-venture subsidiaries that operate the Argosy Casino & Hotel
Lawrenceburg and the Belle of Sioux City Casino are not co-borrowers nor are
the assets pledged. All of the Company's wholly-owned operating subsidiaries
guarantee the Subordinated Notes. The Company's joint-venture subsidiaries
that operate the Argosy Casino & Hotel Lawrenceburg and the Belle of Sioux
City Casino do not guarantee the Subordinated Notes. The Subordinated Notes
rank junior to all of the senior indebtedness of the Company, including
borrowings under the Credit Facility and the subsidiary guarantees of the
Subordinated Notes rank junior to the senior indebtedness of the subsidiary
guarantors.
The Subordinated Notes and the Credit Facility contain certain
restrictions on the payment of dividends on the Company's common stock and
the occurrence of additional indebtedness, as well as other typical debt
covenants. In addition, the Credit Facility requires the Company to maintain
certain financial ratios. The Credit Facility provides for, within two years,
additional borrowing availability of $75 million to be used for general
corporate purposes and a further $150 million increase to fund the purchase
of all outstanding minority interests in the Lawrenceburg partnership. The
increases in the Credit Facility are subject to a number of contingencies
including lender approval. The Credit Facility is subject to scheduled
reductions of 2.5% to 5.0% per quarter, beginning September 2000, of the
total borrowing availability. The Company has a $1.9 million letter of credit
outstanding at December 31, 1999.
The Company used the net proceeds from the issuance of the Subordinated
Notes, $25,000 in borrowings under the Credit Facility and approximately
$51,000 of cash on hand to tender for and retire approximately $213,000 of
its $235,000 outstanding 13 1/4% First Mortgage Notes due 2004 ("Mortgage
Notes"). Under terms of the Credit Facility, the Company is required to
redeem the remaining $22,242 of untendered Mortgage Notes on June 1, 2000 and
has placed monies in escrow to fund the remaining principal, interest
payments and the June 2000 redemption premium. At December 31, 1999, the
remaining escrow balance of $25,244 is classified as restricted cash in
escrow. On July 7, 1999, the Company redeemed all of its outstanding 12%
Convertible Subordinated Notes due 2001 ("Convertible Notes"). The Company
used borrowings of $105,000 under the Credit Facility and approximately
$13,700 of cash to redeem the Convertible Notes. In connection with the early
extinguishment of the Mortgage Notes and Convertible Notes, the Company
recorded an extraordinary loss of $24,920 net of a tax benefit of $13,500.
Interest expense for the years ended December 31, 1999, 1998, and 1997,
was $48,594 (net of $115 capitalized), $57,487 (net of $1,086 capitalized),
and $47,116 (net of $8,391 capitalized), respectively.
Maturities of long-term debt at December 31, 1999 are as follows:
YEARS ENDED DECEMBER 31,
------------------------
2000 $ 32,668
2001 20,345
2002 6,525
2003 10,407
2004 106,699
Thereafter 202,729
6. CONVERTIBLE PREFERRED STOCK AND WARRANTS
On June 16, 1998, the Company issued $8,000 of Series A Convertible
Preferred Stock ("Preferred Shares"), together with warrants to purchase an
additional 292,612 shares of Common Stock at $3.89 per share. The warrants
expire in 2003.
The Preferred Shares provided for a 4% dividend per annum, payable in
cash and/or in kind, at the time of conversion or maturity, at the Company's
option. Through December 31, 1998, the Preferred Shares had been converted
into 1,331,980 shares of common stock. During the year ended December 31,
1999, the remaining Preferred Shares were converted into 2,310,011 shares of
common stock.
18
This transaction provided for put and call options which, subject to
certain restrictions and limitations, allowed for up to an additional $8,000
of Preferred Shares and Warrants to be issued. In December 1998, the Company
amended its agreement with the holders of the Preferred Shares to terminate
both the holders' right to purchase, and the Company's right to require such
holders to purchase, the additional $8 million tranche of Preferred Shares
and related warrants. The Company paid $625 to amend the agreement, and this
amount is included in preferred stock dividends and accretion in the
accompanying statement of operations for 1998.
During 1999, 201,172 warrants were converted into 172,496 shares of
common stock. No warrants were converted during 1998.
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
DECEMBER 31,
------------------------------------------------------
1999 1998 1997
-------------- ------------- ---------------
NUMERATOR:
Net income (loss) $ 11,506 $ 6,561 $ (40,213)
Preferred stock dividends and accretion (27) (820) --
------------- ---------- ---------
Numerator for basic and diluted earnings per share
Net income (loss) attributable to common
stockholders $ 11,479 $ 5,741 $ (40,213)
============= ========== =========
DENOMINATOR:
Denominator for basic earnings per share -
Weighted-average shares outstanding 27,828,398 24,498,905 24,333,333
Effect of dilutive securities:
Warrants 163,073 -- --
Stock options 569,451 -- --
Preferred stock 264,806 -- --
Restricted stock 94,928 105,580 --
------------- ---------- ---------
Denominator for diluted earnings per share - adjusted
Weighted-average shares and assumed
conversions 28,920,656 24,604,485 24,333,333
============= ========== ==========
Basic earnings (loss) per share - before extraordinary item $ 1.31 $ 0.23 $ (1.65)
Extraordinary item (0.90) -- --
------------- ---------- ---------
Basic earnings (loss) per share - including extraordinary item $ 0.41 $ 0.23 $ (1.65)
============= ========== =============
Diluted earnings (loss) per share - before extraordinary item $ 1.26 $ 0.23 $ (1.65)
Extraordinary item (0.86) -- --
------------- ---------- ---------
Diluted earnings (loss) per share - including extraordinary item $ 0.40 $ 0.23 $ (1.65)
============= ========== ==============
Employee and directors stock options to purchase 156,000 shares of
common stock at prices ranging from $11.50 to $16.75 were not included in the
computation of diluted earnings per share because the options exercise price
was greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive.
19
8. INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 1999, 1998 and
1997, consists of the following:
1999 1998 1997
-------------- ------------- -------------
Current:
Federal $(13,567) $ -- $ --
State (1,541) (604) 866
------------- ------------ ------------
(15,108) (604) 866
------------- ------------ ------------
Deferred:
Federal 9,315 -- --
State (107) (536) 486
------------- ------------ ------------
9,208 (536) 486
------------- ------------ ------------
Income tax benefit (expense) $ (5,900) $ (1,140) $ 1,352
============= ============ ============
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997, differs from that computed at the federal statutory corporate
tax rate as follows:
1999 1998 1997
-------------- -------------- --------------
Federal statutory rate 35.0 % 35.0 % (35.0) %
State income taxes, net of federal benefit 1.4 2.2 (2.6)
Valuation allowance (13.7) (7.8) 38.7
Goodwill amortization 0.3 0.6 0.4
Minority interest in partnership income (15.8) (27.0) (6.7)
Other, net 0.4 0.4 1.3
-------------- -------------- --------------
7.6 % 3.4 % (3.9) %
============== ============== ==============
The tax effects of significant temporary differences representing
deferred tax assets and liabilities at December 31, 1999 and 1998, are as
follows:
1999 1998
----------- -----------
Basis of assets held for sale $ -- $ 3,739
Depreciation (11,783) (14,241)
Preopening 2,825 3,709
Benefit of net operating loss carryforward 19,418 18,357
Other, net 22 575
---------- -----------
10,482 12,139
Valuation allowance (1,746) (12,611)
---------- -----------
Net deferred tax asset (liability) $ 8,736 $ (472)
========== ===========
The valuation allowance relates to state deferred tax assets established
under SFAS 109 for Louisiana net operating loss carryforwards of
approximately $38,600 and $32,700 at December 31, 1999 and 1998,
respectively, and a federal net operating loss carryforward of approximately
$42,400 at December 31, 1998. These loss carryforwards, which will expire
from 2012 through 2019, will be carried forward to future years for possible
utilization. During 1999, the Company recognized a $10,000 tax benefit
representing prior federal income tax net operating losses that are expected
to be utilized in 2000.
20
9. SUPPLEMENTAL CASH FLOW INFORMATION
The Company acquired equipment in the amounts of $2,841 and $4,154 in
1998 and 1997, respectively, which was financed through installment contracts.
The Company paid $48,401, $58,356 and $51,185 for interest, and $1,515,
$784 and $143 for income taxes in 1999, 1998 and 1997, respectively.
The Company issued 2,494,793 and 1,331,980 shares of additional common
stock resulting from the conversion of Preferred Stock, the exercise of stock
options, conversion of debentures and the conversion of warrants during 1999
and 1998, respectively.
10. LEASES
Future minimum lease payments for operating leases with initial terms in
excess of one year as of December 31, 1999, are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2000 $ 2,146
2001 1,084
2002 507
2003 304
2004 272
Thereafter 17,219
Rent expense for the years ended December 31, 1999, 1998 and 1997, was
$5,043, $4,137 and $7,205, respectively.
11. STOCK OPTION PLANS
The Company adopted the Argosy Gaming Company Stock Option Plan, as
amended, ("Stock Option Plan"), which provides for the grant of non-qualified
stock options for up to 2,500,000 shares of common stock to key employees of
the Company. These options expire 10 years after their respective grant dates
and become exercisable over a specified vesting period. At December 31, 1999,
options for 645,024 shares are exercisable under the Stock Option Plan. The
weighted average contractual life of outstanding options at December 31, 1999
is approximately 6.5 years and the weighted average exercise price of options
outstanding is $5.98. The weighted average fair value of options granted
during 1999 was $3.07.
On November 7, 1997 ("Grant Date"), the Company's board of directors
approved a plan that allowed certain employees to exchange their existing
stock options for an amount of options equal to the number of options to be
exchanged multiplied by a fraction: the numerator of which is $4.25 (closing
price on Grant Date) and the denominator of which is the prior option price.
This exchange of options was finalized during 1998, and options for 625,373
shares of stock were exchanged for options for 157,524 shares of stock.
The Company also has adopted the Argosy Gaming Company 1993 Directors
Stock Option Plan ("Directors Option Plan"), which provides for a total of
50,000 shares of common stock to be authorized and reserved for issuance. The
Directors Option Plan provides for the grant of non-qualified stock options
at fair market value to non-employee directors of the Company as of the date
such individuals become directors of the Company. These options expire five
years after their respective grant dates and become exercisable over a
specified vesting period. At December 31, 1999 options for 6,000 shares are
exercisable under the Directors' Option Plan.
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
the Company does not recognize compensation expense when the exercise price
of employee stock options equals or exceeds the market price of the
underlying stock on the date of grant.
21
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock
Based Compensation." Accordingly, no compensation expense has been recognized
for either stock plan. Had the valuation methods under SFAS 123 been used for
the Company's stock option grants, the fiscal 1999 pro forma net income
attributable to common stockholders would have been $11,089 and the pro forma
diluted income per share would have been $0.38. The fair value of each option
was estimated on the date of Grant using the Black-Scholes option pricing
model with the following assumptions: dividend yield of zero; expected
volatility 56.5%; risk-free interest rate of 6%, and expected option life of
three years. The fiscal 1998 pro forma net income attributable to common
stockholders would have been $5,579 and the pro forma diluted income per
share would have been $0.23. The fair value of each option was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of zero; expected volatility 52.7%;
risk-free interest rate of 6% and expected option life of three years. The
fiscal 1997 pro forma net loss would have been $40,336 and the pro forma loss
per share would have been $1.66. The fair value of each option was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of zero; expected volatility 36.5%;
risk-free interest rate of 6.0% and expected option life of five years. These
pro forma amounts may not be representative of future disclosures because the
estimated fair value of the options is amortized to expense over the vesting
period and additional options may be granted in the future.
A summary of stock option activity is as follows:
STOCK OPTION PLAN DIRECTORS OPTION PLAN
------------------------------------------------ ---------------------------------------------
RANGE OF EXERCISE PRICE RANGE OF EXERCISE PRICE
SHARES PER SHARE SHARES PER SHARE
------------------ ----------------------------- ---------------- --------------------------
Outstanding,
December 31, 1996 2,405,253 $ 16.75 -- $ 19.38 21,000 $11.50 - $19.00
Granted 406,000 3.13 -- 3.44 -- --
Forfeited (744,343) 16.75 -- 19.38 -- --
------------------ ----------------------------- ---------------- --------------------------
Outstanding,
December 31, 1997 2,066,910 3.13 -- 19.38 21,000 11.50 - 19.00
Exchange of options (467,849) 4.25 -- 19.38 -- --
Granted 232,156 3.31 -- 3.44 -- --
Forfeited (239,038) 4.25 -- 19.38 (15,000) 19.00
------------------ ----------------------------- ---------------- --------------------------
Outstanding,
December 31, 1998 1,592,179 3.13 -- 16.75 6,000 11.50
Granted 275,000 7.06 -- 7.50 -- --
Exercised (11,156) 4.25 -- --
Forfeited (658,000) 16.75 -- --
------------------ ----------------------------- ---------------- --------------------------
Outstanding,
December 31, 1999 1,198,023 $ 3.13 -- $ 16.75 6,000 $ 11.50
================== ============================= ================ ==========================
22
12. RESTRICTED STOCK
The Company issued 165,000 shares of restricted common stock to certain
new employees in 1997. The value of these shares at their respective grant
dates ranged from $ 3.13 to $3.63. In 1998, 66,000 shares of the restricted
stock vested, and in 2000, 99,000 shares will vest.
Compensation expense of $566 is being amortized over the period from the
date of grant until the respective vesting dates. Compensation expense of
$113, $239 and $175 was recognized in 1999, 1998 and 1997, respectively.
13. EMPLOYEES BENEFIT PLAN
The Company established a 401(k) defined-contribution plan, which covers
substantially all of its full-time employees. Participants can contribute a
portion of their eligible salaries (as defined) subject to maximum limits, as
determined by provisions of the Internal Revenue Code. The Company will match
a portion of participants' contributions in an amount determined annually by
the Company. Expense recognized under the Plan was approximately $1,145,
$1,134 and $2,168 in 1999, 1998 and 1997, respectively.
14. SUBSIDIARY GUARANTORS
The $22,242 outstanding Mortgage Notes are unconditionally guaranteed,
on a joint and several basis, by the following wholly-owned subsidiaries of
the Company: Xxxxx Gaming Company; The Missouri Gaming Company; The St. Louis
Gaming Company; Iowa Gaming Company; Jazz Enterprises, Inc.; Argosy of
Louisiana, Inc.; Catfish Queen Partnership in Commendam; and The Indiana
Gaming Company (the "Guarantors"). The Mortgage Notes are secured, subject to
certain prior liens, by a first lien on (i) substantially all of the assets
of the Company including the assets used in the Company's Xxxxx, Riverside,
Baton Rouge and Sioux City operations, (ii) a pledge of all the capital stock
of, and partnership interests in, the Company's subsidiaries, excluding the
Company's partnership interest in its Sioux City property, (iii) a pledge of
the intercompany notes payable to the Company from its subsidiaries and (iv)
an assignment of the proceeds of the management agreement relating to the
Lawrenceburg casino project. The collateral for the Mortgage Notes does not
include assets of the Indiana Partnership. The Mortgage Notes rank senior in
right of payment to all existing and future indebtedness of the Company.
Pursuant to the Credit Facility, the Company is obligated to redeem the
Mortgage Notes in June 2000 and was required to escrow funds sufficient for
the redemption.
The Credit Facility is secured by a second lien on substantially all of
the Company's assets and the Company's subsidiaries are co-borrowers. The
Company's joint-venture subsidiaries that operate the Argosy Casino
Lawrenceburg and the Belle of Sioux City casino are not co-borrowers. All of
the Company's wholly-owned operating subsidiaries guarantee the Subordinated
Notes. The Company's joint-venture subsidiaries that operate the Argosy
Casino & Hotel Lawrenceburg and the Belle of Sioux City Casino do not
guarantee the Subordinated Notes. The Subordinated Notes rank junior to all
of the senior indebtedness of the Company, including borrowings under the
Credit Facility and the subsidiary guarantees will rank junior to the senior
indebtedness of the subsidiary guarantors.
The following tables present summarized balance sheet information of the
Company as of December 31, 1999 and 1998, and summarized operating statement
information for the years ended December 31, 1999, 1998 and 1997. The column
labeled "Parent Company" represents the holding company for each of the
Company's direct subsidiaries; the column labeled "Guarantors" represents
each of the Company's direct subsidiaries; all of which are wholly owned by
the parent company; and the column labeled "Non-Guarantors" represents the
partnerships which operate the Company's casinos in Sioux City and in
Lawrenceburg. The Company believes that separate financial statements and
other disclosures regarding the Guarantors, except as otherwise required
under Regulation S-X, are not material to investors.
23
Summarized balance sheet information as of December 31, 1999 and 1998, is
as follows:
DECEMBER 31, 1999
-----------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
--------------- ---------------- ------------------ ------------------ ----------------
ASSETS:
Current assets $ 46,723 $ 23,161 $ 34,493 $ (3,960) $ 100,417
Non-current assets 348,036 386,193 220,180 (487,966) 466,443
-------------- ---------------- ------------------- ----------------- ----------------
$ 394,759 $ 409,354 $ 254,673 $ (491,926) $ 566,860
============== ================ =================== ================= ================
LIABILITIES AND EQUITY:
Current liabilities $ 30,159 $ 45,410 $ 56,948 $ (27,427) $ 105,090
Non-current liabilities 306,355 236,263 70,852 (209,945) 403,525
Stockholders' equity 58,245 127,681 126,873 (254,554) 58,245
-------------- ---------------- ------------------- ---------------- ---------------
$ 394,759 $ 409,354 $ 254,673 $ (491,926) $ 566,860
=============== ================ =================== ================ ===============
DECEMBER 31, 1998
-----------------
PARENT
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- -------------- ------------------- ----------------- ----------------
ASSETS:
Current assets $ 55,896 $ 22,236 $ 29,585 $ (8,461) $ 99,256
Non-current assets 347,441 360,354 227,439 (471,738) 463,496
-------------- --------------- -------------------- ---------------- ---------------
$ 403,337 $382,590 $ 257,024 $ (480,199) $ 562,752
============== =============== ==================== ================ ===============
LIABILITIES AND EQUITY:
Current liabilities $ 7,134 $ 47,507 $ 59,116 $ (42,372) $ 71,385
Non-current liabilities 350,000 269,878 111,208 (285,922) 445,164
Convertible preferred stock 5,340 -- -- -- 5,340
Stockholders' equity 40,863 65,205 86,700 (151,905) 40,863
-------------- --------------- -------------------- ----------------- ---------------
$ 403,337 $382,590 $ 257,024 $ (480,199) $ 562,752
=============== =============== ==================== ================= ================
24
Summarized operating statement information for the years ended
December 31, 1999, 1998 and 1997, is as follows:
YEAR ENDED DECEMBER 31, 1999
PARENT ----------------------------
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------- --------------- ------------- -------------
Net revenues $ 3,108 $ 278,771 $ 361,124 $ (48,449) $ 594,554
Costs and expenses 15,144 196,356 263,779 (3,750) 471,529
Net interest (expense) income (32,203) 633 (14,154) -- (45,724)
Net income (loss) attributable
to common stockholders (37,903) 49,018 78,326 (77,962) 11,479
YEAR ENDED DECEMBER 31, 1998
PARENT ----------------------------
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ---------------- -------------- -------------
Net revenues $ 1,988 $ 230,867 $ 308,246 $ (34,433) $ 506,668
Costs and expenses 9,984 183,735 227,451 (2,313) 418,857
Net interest (expense) income (38,356) 4,067 (18,957) (659) (53,905)
Net income (loss) attributable
to common stockholders 5,741 27,832 56,285 (84,117) 5,741
YEAR ENDED DECEMBER 31, 1997
PARENT ----------------------------
COMPANY GUARANTORS NON-GUARANTORS ELIMINATIONS CONSOLIDATED
---------- ------------ --------------- -------------- -------------
Net revenues $ 5,795 $ 189,388 $ 158,696 $ (9,796) $ 344,083
Costs and expenses 23,630 184,818 136,039 (6,934) 337,553
Net interest (expense) income (32,145) 2,366 (6,616) (4,784) (41,179)
Net (loss) income (40,213) 8,696 10,599 (19,295) (40,213)
25
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
December 31, 1999 are as follows:
CARRYING FAIR
AMOUNT VALUE
---------- -----------
ASSETS:
Cash and cash equivalents $ 47,090 $ 47,090
Restricted cash 25,244 25,244
LIABILITIES:
First mortgage notes 22,242 23,688
Senior Secured Line of Credit 103,800 103,800
Senior Subordinated Notes 200,000 211,000
Other long-term debt 53,331 53,331
The fair value of the first mortgage notes and the convertible
subordinated notes are based on quoted market prices. The Company estimates
that the fair value of the remainder of the Company's long-term debt
approximates carrying value.
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
------------ ----------- ----------- ------------
1999:
Net revenues $ 137,391 $ 144,602 $ 156,569 $ 155,992
Income from operations 24,591 29,695 34,553 34,186
Other expense, net 13,227 12,857 10,048 9,592
Net income before extraordinary item 2,921 7,691 14,318 11,496
Net income per share before extraordinary item
Basic 0.11 0.27 0.51 0.41
Diluted 0.10 0.27 0.51 0.40
Net income (loss) attributable to common stockholders (1) 2,894 (27,069) 10,658 24,996
Net income (loss) per share (1)
Basic 0.11 (0.47) 0.38 0.89
Diluted 0.10 (0.47) 0.37 0.86
FIRST SECOND THIRD FOURTH
------------ ----------- ----------- ------------
1998:
Net revenues $ 115,700 $ 124,457 $ 133,533 $ 132,978
Income from operations 15,651 19,390 25,697 27,073
Other expense, net 13,482 13,363 13,694 13,366
Net income (loss) attributable to common stockholders (2,537) 244 4,016 4,018
Net income (loss) per share
Basic (0.10) 0.01 0.17 0.16
Diluted (0.10) 0.01 0.15 0.14
(1) The second and third quarters of 1999 include extraordinary losses related
to the refinancing and were $34.8 million and $3.6 million, respectively.
The fourth quarter of 1999 extraordinary item represents a $13.5 million
tax benefit related to the refinancing which was recognized with the
reversal of deferred tax valuation reserves and the resulting tax
provision.
26
17. COMMITMENTS AND CONTINGENT LIABILITIES
LAWRENCEBURG, INDIANA--Under terms of the Lawrenceburg partnership
agreement, after December 10, 1999, each limited partner has the right to
sell its interest to the other partners (pro rata in accordance with their
respective percentage interests). In the event of this occurrence, if the
partners cannot agree on a selling price, the Indiana Partnership will be
sold in its entirety.
OTHER--A predecessor entity to the Company ("Predecessor"), as a result
of a certain shareholder loan transaction, could be subject to federal and
certain state income taxes (plus interest and penalties, if any) if it is
determined that it failed to satisfy all of the requirements of the
S-Corporation provisions of the Internal Revenue Code relating to the
prohibition concerning a second class of stock. An audit is currently being
conducted by the Internal Revenue Service ("IRS") of the Company's federal
income tax returns for the 1992 and 1993 tax years and the IRS has identified
the S-Corporation status as one of the issues, although the IRS has yet to
make a formal claim of deficiency. If the IRS successfully challenges the
Predecessor's S-Corporation status, the Company would be required to pay
federal and certain state income taxes on the Predecessor's taxable income
from the commencement of its operations until February 25, 1993 (plus
interest and penalties, if any, thereon until the date of payment). If the
Predecessor was required to pay federal and state income taxes on its taxable
earnings through February 25, 1993, such payments could amount to
approximately $14.8 million, including interest through December 31, 1999,
but excluding penalties, if any. While the Company believes the Predecessor
has legal authority for its position that it is not subject to federal and
certain state income taxes because it met the S-Corporation requirements, no
assurances can be given that the Predecessor's position will be upheld. This
contingent liability could have a material adverse effect on the Company's
results of operations, financial condition and cash flows. No provision has
been made for this contingency in the accompanying consolidated financial
statements.
The Company is subject, from time to time, to various legal and
regulatory proceedings, in the ordinary course of business. The Company
believes that current proceedings will not have a material effect on the
financial condition of the Company.
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Argosy Gaming Company
We have audited the accompanying consolidated balance sheets of Argosy
Gaming Company as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Argosy Gaming Company at December 31, 1999 and 1998 and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, Illinois
January 28, 2000
28
