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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C., 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-21122
ARGOSY GAMING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 37-1304247
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
219 PIASA STREET
ALTON, ILLINOIS 62002
(618) 474-7500
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 24,333,333 shares
of Common Stock, $.01 par value per share, as of May 11, 1996
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ARGOSY GAMING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 28,129 $ 16,159
Other current assets . . . . . . . . 12,390 12,333
----------- ------------
Total current assets . . . . . . 40,519 28,492
NET PROPERTY AND EQUIPMENT . . . . . . 263,076 239,480
OTHER ASSETS:
Goodwill . . . . . . . . . . . . . . 23,371 23,519
Other, net . . . . . . . . . . . . . 17,959 18,391
----------- ------------
Total other assets . . . . . . . . . 41,330 41,910
----------- ------------
TOTAL ASSETS . . . . . . . . . . . . . $344,925 $309,882
----------- ------------
----------- ------------
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities . . . . . . . . . . . . $ 28,656 $ 26,941
Other current liabilities. . . . . . 7,170 8,388
----------- ------------
Total current liabilities. . . . . 35,826 35,329
----------- ------------
LONG-TERM DEBT . . . . . . . . . . . . 194,803 169,303
OTHER LONG-TERM OBLIGATIONS . . . . . 17,803 7,710
STOCKHOLDERS' EQUITY:
Common stock, $.01 par; 60,000,000 shares
authorized; 24,333,333 shares issued and
outstanding in 1995 and 1994 . . . 243 243
Capital in excess of par . . . . . . 71,865 71,865
Retained earnings. . . . . . . . . . 24,385 25,432
----------- ------------
Total stockholders' equity. . . . 96,493 97,540
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $344,925 $309,882
----------- ------------
----------- ------------
See accompanying notes to condensed consolidated financial statements.
1
ARGOSY GAMING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Per Share Data)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Casino . . . . . . . . . . . . . . . . . . . $ 58,791 $56,593
Admissions . . . . . . . . . . . . . . . . . 1,995 4,168
Food, beverage and other . . . . . . . . . . 6,055 3,703
----------- -----------
66,841 64,464
----------- -----------
Less: promotional allowances . . . . . . . (4,152) (4,090)
----------- -----------
Net revenues . . . . . . . . . . . . . . . . . 62,689 60,374
----------- -----------
COSTS AND EXPENSES:
Casino . . . . . . . . . . . . . . . . . . . 29,071 28,987
Food, beverage and other . . . . . . . . . . 5,276 4,160
Other operating expenses . . . . . . . . . . 4,368 3,384
Selling, general and administrative. . . . . 14,318 12,577
Depreciation and amortization. . . . . . . . 5,889 4,579
Development and preopening costs . . . . . . 1,855 466
----------- -----------
60,777 54,153
----------- -----------
Income from operations . . . . . . . . . . . . 1,912 6,221
----------- -----------
OTHER INCOME (EXPENSE):
Interest income. . . . . . . . . . . . . . . 90 98
Interest expense . . . . . . . . . . . . . . (4,211) (3,942)
----------- -----------
(4,121) (3,844)
----------- -----------
(Loss) Income before income taxes and
minority interests . . . . . . . . . . . . . (2,209) 2,377
Income tax benefit (expense) . . . . . . . . . 867 (934)
Minority interests . . . . . . . . . . . . . . 295 25
----------- -----------
Net (loss) income. . . . . . . . . . . . . . . $ (1,047) $ 1,468
----------- -----------
NET (LOSS) INCOME PER SHARE. . . . . . . . . . $ (.04) $ .06
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
2
ARGOSY GAMING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. . . . . . . . . . . . . . $(1,047) $ 1,468
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . 6,314 5,026
Minority interests . . . . . . . . . . . . . (295) (25)
Changes in operating assets and liabilities:
Other current assets . . . . . . . . . . (57) (1,746)
Accounts payable and accrued liabilities . 841 9,751
----------- -----------
Net cash provided by operating
activities. . . . . . . . . . . . . . . 5,756 14,474
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits . . . . . . . . . . . . . . . . . . (132) (19)
Increase in notes receivable . . . . . . . . (2,295)
Purchases of property and equipment. . . . . (29,283) (12,559)
----------- -----------
Net cash used in investing activities. . (29,415) (14,873)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit . . . . . . . . 25,500 2,000
Repayments on line of credit . . . . . . . . (2,000)
Payments on long-term debt and
installment contracts . . . . . . . . . . . (345) (1,861)
Capital contributions from partner . . . . . 10,389
Increase in other assets . . . . . . . . . . 85 (1,811)
----------- -----------
Net cash provided by (used in)
financing activities. . . . . . . . . . 35,629 (3,672)
----------- -----------
Net increase (decrease) in cash and cash equivalents 11,970 (4,071)
----------- -----------
Cash and cash equivalents, beginning of period 16,159 18,291
----------- -----------
Cash and cash equivalents, end of period . . . $ 28,129 $ 14,220
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
3
ARGOSY GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In Thousands, Except Share and Per Share Data)
1. 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, operates
riverboat casinos in Alton, Illinois; Riverside, Missouri; Baton Rouge,
Louisiana; and Sioux City, Iowa. Also, Indiana Gaming Company, L.P., a
limited partnership in which the Company is general partner and holds a 57.5%
partnership interest, holds a preliminary certificate of suitability from the
Indiana Gaming Commission and is developing a riverboat casino and related
entertainment and support facilities in Lawrenceburg, Indiana ("Lawrenceburg
Project").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Interim results may not
necessarily be indicative of results which may be expected for any other
interim period or for the year as a whole. For further information, refer to
the financial statements and footnotes thereto for the year ended December
31, 1995, included in the Company's Annual Report on Form 10-K (File No.
0-21122). The accompanying unaudited condensed consolidated financial
statements contain all adjustments which are, in the opinion of management,
necessary to present fairly the financial position and the results of
operations for the periods indicated. Such adjustments include only normal
recurring accruals. Certain 1995 amounts have been reclassified to conform
to the 1996 financial statement presentation.
2. SENIOR SECURED LINE OF CREDIT
On March 8, 1995, the Company entered into a $100 million revolving
secured line of credit, with a group of banks (the "Credit Facility"). The
Credit Facility accrues interest, at the Company's option, at prime + 1 1/4%
or the London Eurodollar lending rate plus 250 basis points and expires on
December 31, 1997. The Credit Facility is secured by substantially all of
the assets of the Company. The Credit Facility is senior to the Company's
12% Convertible Subordinated Notes due 2001.
Terms of the credit facility allow for a $20 million revolving line of
credit, to be used for working capital and general corporate purposes and an
$80 million expansion line of credit to be used for expansion projects.
Availability under the $80 million expansion line decreases beginning January
1, 1997.
The Credit Facility contains restrictions on the payment of dividends on
the Company's common stock and a requirement that any future joint ventures
shall be deemed subsidiaries of the Company and, will therefore, be required
to be additional secured guarantors under the credit agreement, as well as
other covenants customary in a senior secured financing.
On March 8, 1996, the Company obtained a waiver from compliance with
certain financial covenants from the banks participating in the Credit
Facility. The Company anticipates that as of June 30, 1996 it will be unable
to comply with certain covenants. To ensure continued compliance under the
Credit Facility, the Company has requested a waiver of these covenants. The
Company believes that the requisite number of banks participating in the
Credit Facility will agree to waive the Company's non-compliance with
4
ARGOSY GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(In Thousands Except Share and Per Share Data)
these financial covenants. The Company plans, however, to repay all
borrowings outstanding and terminate the Credit Facility with a portion of
the net proceeds from a proposed financing.
3. ACQUISITION OF JAZZ ENTERPRISES, INC.
Effective May 30, 1995 the Company acquired 100% of the stock of Jazz
Enterprises, Inc. ("Jazz"), formerly a 10% partner in the Company's Baton
Rouge, Louisiana riverboat casino. The acquisition was accounted for as a
purchase.
Terms of the transaction allowed the Company to acquire Jazz's 10%
limited partnership interest in the Company's Baton Rouge Casino, all of
Jazz's interest in the Catfish Town real estate development and allowed the
Company to extinguish the external lease fee between the Baton Rouge Casino
and Jazz.
Under terms of the purchase agreement the Company made initial payments
to Jazz totalling $8,500 and is required to make additional payments 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, at the date of acquisition, assuming a discount rate of
10.5%. In addition, the Company forgave loans to Jazz and its principals of
approximately $20,700 and assumed certain construction obligations, ordinary
course accounts payable and other liabilities totalling approximately $7,300
and paid expenses of approximately $900. Under terms of the Purchase
Agreement, substantially all other obligations of Jazz existing at the time
of the purchase remain the responsibility of the former owners of Jazz.
The table below sets forth the pro forma historical operating results of
the Company for the three months ended March 31, 1996 and 1995 giving effect
to the acquisition as if the acquisition occurred on January 1, 1995. The
Company's fiscal year end is December 31 and Jazz's year end is February 28.
The pro forma operating results for the three months ended March 31, 1996 and
1995 were prepared using the Company's and Jazz's historical operating
results for the three months ended March 31, 1996 and 1995 respectively.
THREE MONTHS ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
Net Revenues . . . . . . . . . . . . . $ 62,689 $ 60,402
-------------- --------------
-------------- --------------
Net Income . . . . . . . . . . . . . . (1,047) 1,256
-------------- --------------
-------------- --------------
Earnings per share . . . . . . . . . . (.04) .05
-------------- --------------
-------------- --------------
The unaudited pro forma condensed statements of operations are not
necessarily indicative of either future results of operations or results that
might have been achieved if the foregoing transactions had been consummated
as of the indicated dates.
5
ARGOSY GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
(In Thousands Except Share and Per Share Data)
4. COMMITMENTS AND CONTINGENT LIABILITIES
LAWRENCEBURG, INDIANA DEVELOPMENT -- On June 30, 1995 Indiana Gaming
Company L.P. (the "Indiana Partnership") was awarded a preliminary
suitability certificate from the Indiana Gaming Commission to develop a
riverboat casino project on the Ohio River in Lawrenceburg, Indiana. The
Company is a 57.5% general partner in the Indiana Partnership.
Capital contributions to the Indiana Partnership, up to a total project
cost of $225 million, will be made on the same basis as the partners' equity
ownership with any excess project cost being the responsibility of the
Company. Funding for the Indiana Partnership is expected to be provided by
capital contributions and capital loans by the partners. The partnership's
current estimate for the development and construction costs for the
Lawrenceburg Project is $210 million.
Additionally, under the Lawrenceburg partnership agreement, 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).
This proposed gaming project is subject to the satisfaction of numerous
conditions. Before gaming can commence, the Company must obtain numerous
permits and licenses, including licensing for its employees as well as final
licensing from the gaming commission of the State. In addition, the Company
must construct gaming facilities. There can be no assurance that this
proposed gaming project will become operational.
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 ("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 state
income taxes on its taxable earnings through February 25, 1993, such payments
could amount to approximately $11,600, including interest through March 31,
1996, but excluding penalties, if any. While the Company believes the
Predecessor has legal authority for its position that it is not subject to
federal and certain state income taxes because it met the S-Corporation
requirements, no assurances can be given that the Predecessor's position will
be upheld. This contingent liability could have a material adverse effect on
the Company's results of operations, financial condition and cash flows. No
provision has been made for this contingency in the accompanying condensed
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 these proceedings will not have a material effect on the
financial condition of the Company.
6
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company opened its first riverboat casino, the Alton Belle Casino,
in Alton, Illinois in September 1991. Subsequently, the Company opened the
Argosy Casino in Riverside, Missouri in June 1994; the Belle of Baton Rouge
in Baton Rouge, Louisiana in September 1994; and the Belle of Sioux City in
Sioux City, Iowa in October 1994. In addition, the Company, through its
57.5% equity interest in Indiana Gaming L.P., is developing in Lawrenceburg,
Indiana a casino project which the Company anticipates opening with a
temporary gaming facility in the third quarter of 1996 and with a permanent
gaming facility not later than 12 months thereafter. There can be no
assurance that the projected opening date will be met, as the opening is
subject to numerous conditions, including permitting and construction. The
Company will face increased competition in the St. Louis and Kansas City
areas as new riverboat casinos are expected to open in these markets.
Accordingly, the Company believes that it may be more difficult in the future
to sustain historical levels of operating revenues and profitability at
certain of its properties.
7
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table highlights the results of operations for the
Company's operating subsidiaries (amounts in thousands):
THREE MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
1996 1995
-----------------------
(UNAUDITED) (UNAUDITED)
GROSS REVENUES
Alton Belle Casino . . . . . . . . . . . . . $ 20,290 $ 20,840
Argosy Casino Riverside. . . . . . . . . . . 26,614 26,305
Belle of Baton Rouge Casino/Catfish Town . . 14,470 11,920
Belle of Sioux City Casino . . . . . . . . . 5,217 5,399
--------- --------
Total Properties. . . . . . . . . . . . . . $ 66,591 $ 64,464
--------- --------
--------- --------
NET REVENUE
Alton Belle Casino . . . . . . . . . . . . . $ 19,663 $ 20,140
Argosy Casino Riverside. . . . . . . . . . . 23,904 23,353
Belle of Baton Rouge Casino/Catfish Town . . 13,795 11,574
Belle of Sioux City Casino . . . . . . . . . 5,084 5,311
--------- --------
Total Properties. . . . . . . . . . . . . . $ 62,446 $ 60,378
--------- --------
--------- --------
INCOME (LOSS) FROM OPERATIONS
Alton Belle Casino(1) . . . . . . . . . . . $ 3,919 $ 5,319
Argosy Casino Riverside. . . . . . . . . . . 2,488 6,111
Belle of Baton Rouge Casino/Catfish Town(2). 1,774 (1,396)
Belle of Sioux City Casino(1). . . . . . . . 414 993
--------- --------
Total Properties. . . . . . . . . . . . . . $ 8,595 $ 11,027
--------- --------
--------- --------
EBITDA(3)
Alton Belle Casino(1). . . . . . . . . . . . $ 4,951 $ 6,348
Argosy Casino Riverside. . . . . . . . . . . 4,986 7,672
Belle of Baton Rouge Casino/Catfish Town(2). 3,306 (94)
Belle of Sioux City Casino(1). . . . . . . . 599 1,027
--------- --------
Total Properties. . . . . . . . . . . . . . $ 13,842 $ 14,953
--------- --------
--------- --------
(1) Income from operations and EBITDA for the Belle of Sioux City Casino and
the Alton Belle Casino are presented before consideration of the Company's
management fee and in the case of the Belle of Sioux City before the 30%
minority interest.
(2) Includes operating loss of approximately $535,000 for the three months
ended March 31, 1996, primarily depreciation, amortization and operating
expenses related to the Catfish Town land based development in Baton Rouge.
(3) "EBITDA" is defined as earnings before interest, taxes, depreciation and
amortization and is presented before any management fees paid to Argosy.
EBITDA should not be construed as an alternative to operating income, or
net income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance, or as
an alternative to cash flows generated by operating, investing and
financing activities (as determined in accordance with generally accepted
accounting principles) as an indicator of cash flow or a measure of
liquidity. EBITDA is presented solely as a supplemental disclosure because
management believes that it is a widely used measure of operating
performance in the gaming industry and for companies with a significant
amount of depreciation and amortization. The Company has other significant
uses of cash flows, including capital expenditures, which are not reflected
in EBITDA.
8
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
CASINO-- Casino revenues for the three months ended March 31, 1996
increased to $58.8 million from $56.6 million for the three months ended
March 31, 1995. Alton casino revenues decreased from $19.2 million to $18.5
million due to severe weather conditions in January and February 1996.
Riverside casino revenues increased from $21.0 million to $22.2 million due
to the opening of the Company's permanent land based entertainment pavilion
on January 15, 1996, offset by the severe weather conditions experienced in
January and February 1996. Baton Rouge casino revenues increased $1.9
million from $11.4 million to $13.3 million. Sioux City casino revenues
decreased $.2 million to $4.9 million due to severe weather conditions in
January and February 1996.
Casino expenses remained constant at approximately $29 million for the
three months ended March 31, 1996 as compared to the three months ended March
31, 1995. Gaming taxes and admission taxes increased to $11.4 million and
$4.6 million, respectively for the three month period ended March 31, 1996
from $11.0 million and $4.3 million respectively in 1995 which is
proportionate with the increases in casino revenues and customer boardings.
Other casino operating expenses remained approximately the same in 1996 as in
1995.
FOOD AND BEVERAGE-- Food, Beverage and other revenues increased $2.4
million to $6.1 million for the three month period ended March 31, 1996
primarily due to increased food, beverage and other sales at the expanded
Riverside and Baton Rouge facilities. Riverside revenues increased from $1.1
million to $2.5 million while Baton Rouge revenues increased from $.6 million
to $1.1 million. Alton and Sioux City food, beverage and other revenues
remained stable with the three month period ending March 31, 1995. Food
beverage and other net profit margin improved $1.3 million to $.8 million for
the three months ended March 31, 1996 due primarily to improved operating
efficiencies in the Company's food and beverage operations.
OTHER OPERATING EXPENSES--Other operating expenses increased $1.0
million to $4.4 million for the three months ended March 31, 1996. This
increase is primarily due to the opening of the permanent land based
entertainment pavilion at Riverside, the addition of the restaurant barge in
Sioux City and the additional services needed for the severe weather
conditions in January and February 1996 experienced at the Alton, Riverside
and Sioux City casinos.
SELLING, GENERAL AND ADMINISTRATIVE--Selling, general and administrative
expenses increased $1.7 million to $14.3 million for the three months ended
March 31, 1996. Increases of $.4 million and $.2 million respectively in
Alton and Riverside relate primarily to increased in advertising expenses due
to increased competition and the opening of the Riverside permanent facility.
Additionally the Company recorded a charge of approximately $1.5 million in
professional and other fees related to its response to a Marion County,
Indiana grand jury document subpoena and the related termination of a private
placement of first mortgage notes.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased
$1.3 million from $4.6 million for the three months ended March 31, 1995 to
$5.9 million for the three months ended March 31, 1996. This increase is
primarily due to increased depreciation in Riverside in connection with the
Company's land based entertainment pavilion which opened on January 15, 1996
at an approximate cost of $45 million.
DEVELOPMENT AND PREOPENING COSTS--Development and preopening costs
increased from $.5 million for the
9
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
three month period ending March 31, 1995 to $1.9 million for the three month
period ending March 31, 1996. The primary increase is due to expenses
related to developing the casino in Lawrenceburg, Indiana, which has an
anticipated opening date of the third quarter of 1996.
INTEREST EXPENSE--Net interest expense increased $.3 million to $4.1
million for the three months ended March 31, 1996. The increase is
attributable to interest expense on borrowings on the $100 million revolving
secured line of credit.
COMPETITION
The Company's Alton Casino faces competition from three other riverboat
casinos currently operating in the St. Louis area and expects increasing
levels of competition in the future. An additional casino complex is under
construction which will include two independently owned facilities, each of
which are expected to operate two dockside vessels. This casino complex is
expected to open in the first quarter of 1997. The Company's Riverside
Casino faces competition from two casinos in the Kansas City area that offer
dockside gaming. Two additional casino operators have commenced construction
of gaming facilities in Kansas City, both of which are expected to open in
the second half of 1996. In addition, one existing Kansas City competitor has
commenced construction of expanded facilities, including a second gaming
vessel. 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 Company expects each market in which it participates, both
current and prospective, to be highly competitive.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 1996 the Company generated cash
flows from operating activities of $5.8 million compared to $14.5 million for
the same period in 1995. The decrease in cash flow is primarily attributed
to decreased operating margins and increased preopening and development
expenses in 1996 compared to 1995 and, additionally, to the timing of
expenditures related to operating accounts payable.
In the three months ended March 31, 1996, the Company used cash flows
for investing activities of $29.4 million versus $14.9 million for the three
months ended March 31, 1995. The primary use of funds was the investment of
$29.3 million in property, plant and equipment. Riverside, Lawrenceburg and
the Catfish Town facility at Baton Rouge had capital expenditures of $10.6
million, $9.6 million and $7.5 million, respectively, for the three month
period ended March 31, 1996. The primary use of funds for the three month
period ending March 31, 1995 were increases in notes receivable of $2.3
million and capital expenditures of $12.6 million.
During the three months ended March 31, 1996, the Company generated
$35.6 million in cash flows from financing activities compared to using $3.7
million of cash flows from financing activities for the same period in 1995.
The primary sources of cash flows in 1996 were $25.5 million of proceeds from
the bank line of credit
10
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
and $10.4 million in capital contributions from the Company's partner in
Lawrenceburg.
As of March 31, 1996, the Company had approximately $28.1 million of
cash and cash equivalents and $1.9 million of marketable securities. The
Company has $115 million of Convertible Subordinated Notes outstanding which
were issued in June 1994 and are due June 2001.
On March 8, 1995, the Company entered into a $100 million secured
revolving credit facility (The "Credit Facility"). The Credit Facility
matures on December 31, 1997 and is secured by substantially all of the
assets of the Company and its subsidiaries. Terms of the Credit Facility
allow for a $20 million revolving line of credit, to be used for working
capital and general corporate purposes, and an expansion line of credit to be
used for expansion projects. Availability under the $80 million expansion
line decreases quarterly beginning January 1, 1997. At March 31, 1996, $71
million of borrowings were outstanding under the Credit Facility and the
Company had borrowing capacity of $28.4 million. On March 8, 1996, the
Company obtained a waiver from compliance with certain financial covenants
from the banks participating in the Credit Facility. The Company anticipates
that as of June 30, 1996 it will be unable to comply with certain financial
covenants contained in the Credit Facility. The Company believes that the
requisite number of banks participating in the Credit Facility will agree to
extend the waiver of the Company's non-compliance with these financial
covenants. The Company plans, however, to repay all borrowings outstanding
and terminate the Credit Facility with a portion of the net proceeds from a
proposed financing transaction.
The Company has made a significant investment in property and equipment
and plans to make significant additional investments at its existing
properties and into additional jurisdictions, particularly Lawrenceburg,
Indiana. The Company's current development of its land-based entertainment
pavilion at the Argosy Casino in Riverside has an expected cost to complete
of approximately $4 million as of May 12, 1996. As a result of its June 1995
acquisition of Jazz, the Company is now the developer of the Catfish Town
real estate project in Baton Rouge, Louisiana. The Company estimates that
the completion of the Catfish Town project will cost an additional
approximately $6.2 million (excluding tenant allowance) as of May 12, 1996.
Further, if the Predecessor's status as an S Corporation, which has been
asserted as an issue by the IRS during an ongoing audit, is successfully
challenged, the Company currently estimates that it would require up to
approximately $11.6 million (excluding penalties) to fund the potential
income tax liability.
The Company estimates that the total costs of opening a temporary gaming
facility and completing the permanent Lawrenceburg Casino and entertainment
project is approximately $210 million. As of May 12, 1996, approximately $29
million had been expended by the partnership, on the project. Of the
remaining $181 million in Lawrenceburg construction costs, approximately $25
million is anticipated to be funded through equipment financing from third
party lenders and approximately $156 million will be funded by the Company
and a partner, 57.5% of which will be funded by the Company and 42.5% of
which will be funded by its partner. In the event project costs exceed the
budgeted $210 million total project cost the Company and its partner will
fund such costs on the same percentages to a total project cost of $225
million. Any project costs in excess of $225 million must be funded by the
Company. The Company plans to use approximately $93 million of the net
proceeds of the anticipated financing to finance its share of remaining
Lawrenceburg construction costs including the development and opening of both
the temporary and permanent gaming facilities.
In the event that the anticipated financing does not occur, the Company
will be required to raise additional
11
ARGOSY GAMING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
capital, through debt or equity financings, in order to meet the capital
needs with respect to the Lawrenceburg Project. No assurance can be given
that any such financing will be available, and if available,on terms
favorable to the Company. Further, given the rapidly changing competitive
environment, the Company's future operating results are highly conditional
and could fluctuate significantly.
12
ARGOSY GAMING COMPANY
OTHER INFORMATION
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS -
During the quarter ended March 31, 1996 the following developments
occurred with respect to Legal Proceedings:
MARION COUNTY, INDIANA GRAND JURY DOCUMENT SUBPOENA
On or after March 15, 1996, the Company, its partners in the
Lawrenceburg Casino project and certain other individuals and entities
were served with document request subpoenas issued by the Office of the
Prosecuting Attorney of Marion County, Indiana in connection with a
grand jury investigation entitled : STATE OF INDIANA V. ORIGINAL
INVESTIGATION-OFFICIAL MISCONDUCT. The Company intends to fully comply
with its subpoena, and has been informed by its partners that they will
do the same. Indiana law requires that at the time a target of an
investigation is determined, that entity or person must be so advised by
the Office of the Prosecuting Attorney. On March 23, 1996 the Company
was advised by the Marion County prosecutor that no target subpoenas had
been issued by the grand jury in its investigation as of that date.
However, there can be no assurance that targets will not be identified
as further information and documents are obtained and considered by the
grand jury. Due to the confidential nature of grand jury proceedings,
the Company is not aware of the specific subject matter or matters of
the investigation.
The subpoenas request information regarding the current or prior
ownership interest in the Company and the partners of Indiana Gaming
L.P. by the individuals or entities described below. The subpoenas also
request that the Company and its partners produce a broad category of
documents including documents regarding employment and other agreements,
gifts, payments and correspondence between the Company and any of its
partners on the one hand and several business entities and individuals,
including an Indiana state legislator, certain Indiana lobbyists, and
certain Lawrenceburg, Indiana city officials and businessmen on the
other hand. The Company has learned that this legislator has served as
an employee of a subsidiary of Conseco, Inc., the parent company of the
29% limited partner in Indiana Gaming L.P., since September 1995.
Additionally, the Company has learned that this legislator has served
since September 1993 as a consultant to a major Indiana engineering firm
that is engaged in many state and local government funded construction
projects. That engineering firm also serves as lead engineer for the
Lawrenceburg Casino project. On March 27, 1996, the Indiana House
Ethics Committee filed formal complaints against this legislator
alleging that his employment and consulting arrangements were not
properly reported on his 1993, 1994 and 1995 statements of economic
interests.
The Company believes that neither it nor any entity controlled by or
person employed by the Company has engaged, and has been informed by
representatives of its partners that they have not engaged, in any
unlawful conduct in the pursuit by or granting to Indiana Gaming L.P. of
the Lawrenceburg gaming license. Because the grand jury proceedings are
unlikely to be concluded quickly, on March 25, 1996, a former U.S.
Attorney, and his law firm, were retained to conduct, as special
independent counsel (the "special independent counsel"), an internal
investigation into the activities and actions of the Company and the
entities controlled by and persons employed by the
13
ARGOSY GAMING COMPANY
OTHER INFORMATION
(continued)
Company with respect to (i) the hiring by Conseco, Inc. and the Indiana
engineering firm of the state legislator, (ii) the endorsement of
Indiana Gaming L.P. 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 has been
appointed to supervise and coordinate the special independent counsel's
investigation. The special independent counsel has not investigated
Conseco, Inc. or the other limited partners of Indiana Gaming L.P. The
Company has been advised by Conseco, Inc. that it will utilize its own
counsel in responding to its subpoena and has determined not to
participate in the special independent counsel's investigation.
From March 25 to April 15, 1996, the special independent counsel
conducted its investigation and issued an interim report in which it
concluded that it found no evidence that the Company or any entity
controlled by or person employed by the Company had any involvement in,
or knowledge of, the relationship between the state legislator and
Conseco, Inc. or the Indiana engineering firm, or attempted to
improperly influence any City of Lawrenceburg official, state legislator
or Indiana Gaming Commission member or staff member in connection with
the endorsement of the partnership by the City of Lawrenceburg and the
awarding of the certificate of suitability to Indiana Gaming L.P. 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
Indiana Gaming L.P.
No assurance can be given, however, that the nature and scope of the
investigation conducted by the special independent counsel, which among
other things was conducted under severe time pressure and was limited to
the Company and the entities controlled by and persons employed by the
Company, 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, Indiana Gaming L.P. 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 Indiana Gaming L.P.'s certificate of suitability or, after
issuance, the Indiana gaming license. In the event Conseco or one of
the Company's other partners in the Lawrenceburg Casino project is
determined by the Indiana Gaming Commission to be unsuitable for the
ownership of a gaming license or to have engaged in unlawful conduct,
the terms of Indiana Gaming L.P.'s partnership agreement provide that
Indiana Gaming L.P. shall redeem 100% of such unsuitable partner's
interest in the partnership for an amount equal to such partner's
capital account. In the event that a partner is
14
ARGOSY GAMING COMPANY
OTHER INFORMATION
(continued)
determined by the Indiana Gaming Commission to be unsuitable for
ownership after the issuance of the gaming license, the terms of Indiana
Gaming L.P.'s partnership agreement provide that Indiana Gaming L.P.
shall redeem 100% of such unsuitable partner's interest for an amount
equal to 90% of the "appraised value" of that partner's interest,
determined in accordance with the terms of the partnership agreement.
The purchase price is payable in five annual installments, only from
available cash flow or sale or financing proceeds of the partnership,
and bears interest at "prime." If such event were to occur with respect
to Conseco prior to the completion of the Lawrenceburg Casino project,
the Company would have to fund any remaining construction costs of the
Lawrenceburg Casino project which were to have been funded by Conseco.
No assurance can be given that the Company would be able to obtain
funds, on acceptable terms, sufficient for this purpose. Also, there
can be no assurance that the Indiana Gaming Commission will not take
other actions such as suspending, revoking or failing to renew Indiana
Gaming L.P.'s certificate of suitability, delaying the issuance of or
failing to issue Indiana Gaming L.P. a gaming license or, after
issuance, revoking or suspending such gaming license. Therefore, there
can be no assurance that the grand jury investigation will not lead to
events having a material adverse effect on the Company.
DISPUTE WITH FORMER SHAREHOLDERS OF JAZZ ENTERPRISES, INC.
On March 15, 1996, a judgment for approximately $2.2 million plus
continuing interest, attorney's fees and court costs was rendered
against Jazz in the cause of action entitled MARTHA MYATT BOWLUS ET. AL.
V. JAZZ ENTERPRISES, INC. filed in the Nineteenth Judicial District
Court, Parish of East Baton Rouge, State of Louisiana ("Bowlus
Lawsuit"). The plaintiffs sued Jazz to recover amounts due under a
promissory note issued by Jazz and secured by a mortgage on certain
property owned by Jazz located several miles south of Catfish Town. The
delay for filing for a new trial in the Bowlus Lawsuit has elapsed and
under Louisiana law a suspensive appeal from a judgment must be filed
within 30 days thereafter and any such appeal requires the posting of an
appeal bond in an amount at least equal to the amount of the judgment.
The judgment rendered in the Bowlus Lawsuit has been recorded in the
mortgage records of East Baton Rouge Parish, and therefore the judgment
now constitutes a judicial mortgage on Jazz's immovable property located
in East Baton Rouge Parish.
Pursuant to the definitive acquisition documents any and all amounts due
by Jazz under the Bowlus Lawsuit are the obligations of the Former Jazz
Shareholders. Prior to March 31, 1996, the Company requested, in
writing, that the Former Jazz Shareholders satisfy the obligations and
satisfy the judgment. Thereafter, Jazz was advised that the Former Jazz
Shareholders hoped to settle the Bowlus Lawsuit prior to the expiration
of the suspensive appeal delay and if not so settled, they intended to
suspensively appeal the judgment. As a result of the Former Jazz
Shareholders' obligations, one of the Former Jazz Shareholders, Mr.
Steve Urie, has posted an unsecured personal appeal bond in the amount
of $2,246,187.31, and a suspensive appeal has been filed. Under
Louisiana law, if it is determined that this suspensive appeal is proper
and that the suspensive appeal bond is valid, sufficient and proper,
then after a contradictory hearing the court may order the judgement
cancelled from the mortgage records during the pendency of the
suspensive appeal. The Bowlus plaintiffs have filed pleadings to
contest the validity, sufficiency, and propriety of the suspensive
appeal bond, and Jazz is not able to predict what ruling the court
15
ARGOSY GAMING COMPANY
OTHER INFORMATION
(continued)
may make on that issue. Accordingly, since the Former Jazz Shareholders
have allowed the judgment to be entered against Jazz, and have allowed
said judgment to remain in the mortgage records, such that the judgment
creates a judicial mortgage on Jazz's immovable property, the Company
withheld a scheduled payment of $337,500 to the Former Jazz Shareholders
representing the March 31, 1996 quarterly installment of the deferred
purchase price. The Company believes that withholding such payment, as
well as withholding future payments, until the Former Jazz Shareholders
satisfy the Bowlus Lawsuit is within the Company's rights as provided
for in the definitive acquisition documents.
In response to the Company's withholding of the March 31, 1996 payment,
Mr. Steve Urie has filed an action in District Court of East Baton
Rouge seeking payment of the withheld amount and has threatened, among
other things, to file a class action on behalf of the shareholders of
the Company against the Company and its directors and officers for
mismanagement. The Company believes such threatened claims are without
merit and would vigorously pursue the defense of any lawsuit filed by
the Former Jazz Shareholders.
POTENTIAL CHALLENGE TO CERTIFICATE OF SUITABILITY FOR LAWRENCEBURG
CASINO BY UNSUCCESSFUL APPLICANT
On March 6, 1996 Indiana Gaming Company received a letter from counsel
to Schilling Casino Corporation, d/b/a Empire Casino & Resort ("Empire")
advising the Company that Empire intends to take legal action to seek a
revocation or cancellation of the certificate of suitability issued by
the Indiana Gaming Commission to Indiana Gaming L.P. on June 30, 1995 to
develop and operate the Lawrenceburg Casino. Empire was one of the 10
unsuccessful applicants competing for the Lawrenceburg gaming license.
Empire has advised Indiana Gaming L.P. that it intends to file an
application with the Indiana Gaming Commission seeking revocation of the
certificate of suitability and that if such application is unsuccessful,
Empire has stated that it intends to file a civil action challenging the
Indiana Gaming Commission's authority to issue the certificate of
suitability and finally, if any such civil action is unsuccessful, to
file an appeal from the denial of Empire's application, which denial
Empire deems to occur upon the issuance of the gaming license to Indiana
Gaming L.P. Among the grounds stated by Empire for its actions are:
(i) the application process followed by the Indiana Gaming Commission
did not afford Empire due process; (ii) Indiana Gaming L.P. will not be
able to commence gaming operations prior to June 28, 1996 due to the
failure to obtain the necessary permits and an inability to obtain the
necessary financing for the project; (iii) Indiana Gaming L.P. made
misrepresentations to the Indiana Gaming Commission during the licensing
hearings; and (iv) the endorsement of Indiana Gaming L.P. by the City of
Lawrenceburg was without legal authority.
The Company believes that the grounds alleged by Empire are without
merit and intends with Indiana Gaming L.P. to vigorously challenge any
of the aforementioned actions taken by Empire. Additionally, the
Company and Indiana Gaming L.P. intend to pursue their respective legal
remedies against Empire and its representatives for any damages either
may suffer as a result of any wrongful action of Empire. There can be
no assurances, however, that any actions of Empire will not result in a
delay in the opening of the temporary gaming facility in Lawrenceburg
presently scheduled for the third quarter of 1996 or the opening of the
permanent gaming facility scheduled twelve months later. Any such delay
could have a material adverse effect on the Company. Additionally, the
Company cannot predict the response of the Indiana Gaming Commission or
City of Lawrenceburg to any such actions of Empire.
16
ARGOSY GAMING COMPANY
OTHER INFORMATION
(continued)
H. STEVEN NORTON V. JOHN T. CONNORS, ET AL.
In September, 1993, H. Steven Norton, who was then and is now the
President of the Company, filed a cause of action against John T.
Connors, a significant shareholder of the Company and a former officer
of J. Connors Group Inc., a predecessor entity of the Company ("JCG"),
seeking $50 million in damages. Mr. Norton alleged that Mr. Connors
failed to fulfill his promise made in the summer of 1991 to establish a
partnership with Mr. Norton in which each would have an equal 50%
interest in JCG, which had a 25% partnership interest in the Company's
predecessor entity that owned the Alton Belle casino. As a result of
the reorganization effected immediately prior to its initial public
offering, the Company succeeded to all the rights, properties and
assets, and assumed all the liabilities, of all of its predecessor
entities, including JCG. Subsequent to filing the lawsuit, Mr.
Connors advised the Company that his dealings with Mr. Norton, which are
the subject of the litigation, were in his capacity as an officer of
JCG, and that the Company should assume the defense and reimburse Mr.
Connors for the approximately $130,000 spent to date on legal fees, and
that any liability resulting from the litigation was assumed by the
Company as a result of the Company's reorganization. The company
responded to Mr. Connors that it believed that his actions and dealings
with Mr. Norton were solely in his individual capacity as a shareholder
of JCG, and the Company declined to assume the defense or reimburse him
for previously incurred legal fees, and the Company denied that it has
any liability with respect to such matter. If, however, JCG were to
have been found liable to Mr. Norton as a result of the actions of Mr.
Connors, then the Company could under certain circumstances be liable to
Mr. Norton for any damages awarded against JCG.
In April 1995, the lawsuit was voluntarily dismissed without prejudice.
Accordingly, Mr. Norton may refile the cause of action; however, as part
of the dismissal Connors and Norton agreed that if Norton fails to re-
file such lawsuit within one year of the dismissal Mr. Norton will be
thereafter barred from refiling such lawsuit. The Company has been
informed by Mr. Norton that he has not yet decided whether he will
refile the cause of action.
Item 2. CHANGES IN SECURITIES - None
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
Item 5. OTHER INFORMATION-None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27. Financial Data Schedule
17
ARGOSY GAMING COMPANY
OTHER INFORMATION
(continued)
(b) REPORTS ON FORM 8-K.
1. Report on Form 8-K, dated February 26, 1996, filed with the
Securities and Exchange Commission incorporating the press release
issued by Argosy Gaming Company announcing its proposed offering of
first mortgage notes.
2. Report on Form 8-K, dated March 15, 1996, filed with the Securities
and Exchange Commission incorporating the press release issued by
Argosy Gaming Company concerning the receipt, by the Company, of the
Marion County, Indiana grand jury document subpoena.
3. Report on Form 8-K, dated March 19, 1996, filed with the Securities
and Exchange Commission incorporating the press release issued by
Argosy Gaming Company announcing the termination of its proposed
first mortgage note offering.
18
ARGOSY GAMING COMPANY
SIGNATURES
Pursuant to the requirement 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.
ARGOSY GAMING COMPANY
Registrant
/s/ Joseph G. Uram
------------------------
Date: May 14, 1996 Joseph G. Uram
Executive Vice President
Chief Financial Officer
(Principal Accounting Officer)
19