-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TwFOPcDGtkee7TLO1Q2IKtKxkQvP1LG6qsJ2ApEvn+B9GCxHB2konRAfddjIkUX7 JtstWVjhKCVONuNdd4Tf0g== 0000912145-99-000005.txt : 19990402 0000912145-99-000005.hdr.sgml : 19990402 ACCESSION NUMBER: 0000912145-99-000005 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERISTAR CASINOS INC CENTRAL INDEX KEY: 0000912145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 880304799 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22494 FILM NUMBER: 99582349 BUSINESS ADDRESS: STREET 1: 3773 HOWARD HUGHES PKWY STREET 2: SUITE 490 SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 BUSINESS PHONE: 702-567-7000 MAIL ADDRESS: STREET 1: 3773 HOWARD HUGHES PKWY STREET 2: SUITE 490 SOUTH CITY: LAS VEGAS STATE: NV ZIP: 89109 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-22494 AMERISTAR CASINOS, INC. (Exact Name of Registrant as Specified in Its Charter) NEVADA 88-0304799 (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) No.) 3773 HOWARD HUGHES PARKWAY SUITE 490 SOUTH LAS VEGAS, NEVADA 89109 (Address of Principal Executive Offices) Registrant's Telephone Number: (702) 567-7000 Securities registered pursuant to Section 12(b) of the Act: NONE (Title of Class) Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 1999, 20,360,000 shares of Common Stock of the registrant were issued and outstanding. The aggregate market value of the voting stock of the registrant held by non- affiliates as of March 15, 1999 was approximately $7,979,100, based on the Nasdaq-NMS closing price for the registrant's Common Stock on such date. Portions of the registrant's definitive Proxy Statement for its June 11, 1999 Annual Meeting of Stockholders (which has not been filed as of the date of this filing) are incorporated by reference into Part III. This Report contains certain forward-looking statements, including the plans and objectives of management for the business, operations and economic performance of the Company. These forward-looking statements generally can be identified by the context of the statement or the use of words such as the Company or its management "believes," "anticipates," "intends," "expects," "plans," or words of similar meaning. Similarly, statements that describe the Company's future operating performance, financial results, plans, objectives, strategies or goals are forward-looking statements. Although management believes that the assumptions underlying the forward-looking statements are reasonable, these assumptions and the forward- looking statements are subject to various factors, risks and uncertainties, many of which are beyond the control of the Company. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. In addition to the other cautionary statements relating to certain forward-looking statements throughout this Report, attention is directed to "Item 1.- Business - Cautionary Information Regarding Forward-Looking Statements" below for discussion of some of the factors, risks and uncertainties that could affect the outcome of future results contemplated by forward-looking statements. PART I ITEM 1. BUSINESS INTRODUCTION Ameristar Casinos, Inc. is a multi-jurisdictional gaming company that owns and operates casinos and related hotel, food and beverage, entertainment and other facilities, with five properties in operation in Nevada, Mississippi and Iowa. All of the Company's principal operations are conducted through wholly owned subsidiaries. Unless otherwise indicated, or the context otherwise requires, the term "Ameristar" or "ACI" refers to Ameristar Casinos, Inc., a Nevada corporation, and the term the "Company" refers to Ameristar and its subsidiaries. The Company's properties are: THE JACKPOT PROPERTIES - Cactus Petes Resort Casino ("Cactus Petes") and The Horseshu Hotel & Casino ("The Horseshu"; and collectively with Cactus Petes, the "Jackpot Properties"), were the Company's first two casino-hotels and are located on U.S. Highway 93 in Jackpot, Nevada at the Idaho border. AMERISTAR VICKSBURG - Ameristar Casino Vicksburg is located in Vicksburg, Mississippi, one-quarter mile north of Interstate 20, the main east-west thoroughfare connecting Atlanta and Dallas, approximately 45 miles west of Jackson, Mississippi. Ameristar Vicksburg includes a permanently-moored, dockside casino (the "Vicksburg Casino") and related land-based facilities, including a 150-room hotel which opened in June 1998 (collectively, "Ameristar Vicksburg"). AMERISTAR COUNCIL BLUFFS - Ameristar Casino Hotel Council Bluffs is located near the Nebraska Avenue exit on Interstate 29 in Council Bluffs, Iowa across the Missouri River from Omaha, Nebraska. Ameristar Council Bluffs includes a cruising riverboat casino (the "Council Bluffs Casino"), an Ameristar hotel and other related land-based facilities (collectively, "Ameristar Council Bluffs"). THE RESERVE - The Reserve Hotel Casino ("The Reserve"), featuring an African safari and big game reserve theme that includes statues of elephants, giraffes and other animals, opened on February 10, 1998 at the junction of Lake Mead Drive and Interstate 515 in Henderson, Nevada, a suburb of Las Vegas. BUSINESS AND MARKETING STRATEGIES The Company's business strategy is to (i) emphasize quality dining, lodging, entertainment and other non-gaming amenities at affordable prices to complement and enhance its gaming operations, (ii) promote its properties as entertainment destinations, (iii) construct facilities appropriate to individual markets, (iv) emphasize courteous and responsive service to develop customer loyalty and (v) utilize marketing programs to promote customer retention. The Company believes this strategy will continue to distinguish the Company from its competitors, many of whom outside of Las Vegas have not emphasized non-gaming amenities in their operations to the same extent as the Company. The Company's properties emphasize slot machine play, and the Company periodically invests in new slot equipment to promote customer satisfaction and loyalty. Historically, slot revenues at each property have exceeded 65% of total gaming revenue. All of the Company's properties include table games such as blackjack, craps and roulette. In addition, Cactus Petes and Ameristar Vicksburg offer poker, the Jackpot Properties and The Reserve offer keno and sports book wagering and The Reserve offers bingo. The Company generally emphasizes competitive minimum and maximum betting limits based on each market. The Company's gaming revenues are derived and are expected to continue to be derived from a broad base of customers, and therefore the Company does not depend upon high-stakes players. The Company extends credit to its Nevada and Mississippi gaming customers only in limited circumstances and limited amounts on a short-term basis and in accordance with the credit restrictions imposed by gaming regulatory authorities. The Iowa gaming statutes prohibit the issuance of casino credit. The Company's marketing strategy is to develop a loyal customer base by promoting the quality of the Company's gaming, leisure and entertainment amenities that emphasize high standards of service and customer satisfaction. The Company uses players clubs at each property to identify and retain preferred players and develop promotions and special events to encourage increased gaming activity by these customers. Ameristar has introduced the first self-comping players club to the Las Vegas market at The Reserve. The Company's marketing programs also include a number of promotions, designed primarily to increase the frequency of customer visits within local markets particularly tied to gaming activities, as well as tour and travel promotional packages in certain markets. The Company uses a variety of advertising media to market its properties, including print, television, radio, outdoor and internet advertising and direct mail promotions. The level of marketing and promotional efforts varies among properties based on competitive and seasonal factors in each market. EXPANSION STRATEGY The Company seeks to expand its operations through a variety of means, including entering new North American markets created by the legalization of casino gaming, developing new casinos or buying existing casinos in established North American casino gaming markets and expansion projects through Native American reservations in North America. Although the Company's preference is to own and operate each of its gaming properties, the Company also considers expansion opportunities involving management contracts or joint ventures. The Company also seeks growth in its business through the expansion and improvement of its existing properties. Some restaurant and meeting room enhancements are currently under construction at The Reserve. In addition, Management in considering several projects for The Reserve, Ameristar Council Bluffs and Ameristar Vicksburg, but the Company has not committed to any of these projects as of the date of this Report. Management is currently evaluating the operating performance of each of the Company's properties, the anticipated relative costs and benefits of the projects under consideration, the availability of cash flow and debt financing to fund capital expenditures and competitive and other relevant factors. Management believes that the Company's long-term success in its current markets and expanding into new markets will depend in part on the Company's ability to distinguish its operations from those of its competitors. The Company's strategy of including quality non-gaming amenities in its facilities, such as lodging, dining and entertainment, is intended to provide these competitive distinctions. The scope of non-gaming amenities to be offered at existing properties and future expansion projects will be determined in part by competitive factors within a particular market and the nature of the Company's participation in a particular project. In addition, management believes the selection of attractive expansion markets and quality locations within those markets will continue to be important to the growth of the Company. In selecting expansion opportunities, the Company seeks a strong demographic market with a favorable competitive environment and a site in the market with an attractive, prominent location and ease of access that will support the size and scope of the Company's development plans. The timing, cost and scope of any expansion or capital improvement project of the Company will depend on, among other factors, the Company's operating cash flow and the resulting ability of the Company to apply operating cash flow to capital expenditures and to incur additional indebtedness under the Company's Revolving Credit Facility or other debt instruments. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." PROPERTY PROFILES The following table presents selected statistical and other information concerning the Company's properties as of March 15, 1999. AMERISTAR AMERISTAR CACTUS THE VICKSBURG COUNCIL THE PETES HORSESHU (VICKSBURG, BLUFFS RESERVE (JACKPOT, (JACKPOT, MS) (COUNCIL NV) NV) BLUFFS, (Henderson, IA) NV) OPENING DATE 1956 1956 Feb. 1994 Jan. 1996 Feb. 1998 CASINO SQUARE FOOTAGE (APPROX.) 25,000 3,500 35,000 28,500 41,500 SLOT MACHINES 796 124 1,098 1,098 1,380 TABLE GAMES 38 8 50 43 26 HOTEL ROOMS 299 120 150 300(1) 224 NUMBER OF RESTAURANTS 4/3 1/1 2/4 4/4 4/3 /BARS RESTAURANT /BAR SEATING CAPACITY 460/80 124/40 544/57 975/93 1,057/105 GUEST PARKING SPACES 908 226 1,058 1,441 1,900 OTHER 356-Seat Keno; 364-Seat Kids Quest Sports AMENITIES Showroom; Swimming Showroom; Children's Book; Sports Pool; Gift Shop Activity Keno; Book; General Center(2); Swimming Keno; Store; Meeting Pool; Meeting Service Space; Bingo; Space; Station Indoor Gift Shop Swimming Swimming Pool; Pool & Gift Spa; Gift Shop; Shop; Amusement Amusement Arcade Arcade OPERATING Cactus CPI Ameristar Ameristar Ameristar SUBSIDIARY Pete's, Casino Casino Casino OR Inc. Vicksburg, Council Las SUBSIDI- ("CPI") Inc. Bluffs, Vegas, ARIES ("ACVI") Inc. Inc. and AC ("ACCBI") ("ACLVI") Hotel Corp.(3)
(1) Includes a full service 160-room Ameristar hotel owned and operated by the Company and a limited service 140-room Holiday Inn Suites Hotel owned and operated by a third party under a ground lease from the Company. (2) Operated by a third party. (3) AC Hotel Corp., a wholly owned subsidiary of ACVI, owns the hotel at Ameristar Vicksburg. THE JACKPOT PROPERTIES The Jackpot Properties, which have been operating since 1956, have been designed and developed and are marketed to appeal to three separate markets: budget, quality and luxury. The Company sets its prices for hotel rooms, food and other non- gaming amenities at levels that are affordable to its separate customer bases. The Company's objective is to be perceived by its customers as providing good value and high quality for the price charged. Cactus Petes is promoted by the Company as a destination resort primarily in the northwestern United States and southwestern Canada. The Jackpot Properties are open 24 hours a day, seven days a week. Cactus Petes completed a major expansion project in 1991. Since 1993, Cactus Petes has annually received a Four Diamond rating from the AAA, the highest rating currently awarded to any Nevada hotel. The Horseshu Hotel has a Three Diamond rating from the AAA. The food and beverage operations at the Jackpot Properties include a buffet, a fine dining restaurant, a 24-hour casual dining restaurant, a coffee shop and a snack bar, a showroom that features nationally known entertainment, and cocktail lounges with entertainment. In January 1997, the Company completed a renovation of its slot gaming equipment at the Jackpot Properties, including the introduction of 587 state-of-the-art slot machines in replacement of older models, the linkage of all slot machines at the Jackpot Properties to the Company's player tracking system and improved sensory appeal, including touch screens and enhanced signage, sounds and colors. In addition, the Company substantially completed a remodeling of the casino at The Horseshu in late 1997. Management believes that these renovations have promoted customer satisfaction and have improved the effectiveness of both targeted marketing and general advertising programs. Market. Management believes that approximately 50% of the customer base of the Jackpot Properties consists of residents of Idaho who generally frequent the properties on an overnight or turnaround basis. The balance of the Jackpot Properties' customers come primarily from Oregon, Washington, Montana, northern California and the southwestern Canadian provinces. Although many of the customers from beyond southern Idaho are tourists traveling to other destinations, a significant portion of these customers come to Jackpot as a final destination. Competition. The Company has developed a dominant share of the market capacity in Jackpot. The Jackpot Properties compete with four other hotels and motels (three of which also have casinos). As of March 15, 1999, the Jackpot Properties accounted for approximately 55% of the lodging rooms, 55% of the slot machines and 77% of the table games in Jackpot. Management believes Cactus Petes offers a more attractive environment and a broader and higher quality range of gaming and leisure activities than those of its competitors. Some additional or renovated facilities have been introduced in Jackpot by the Company's competitors since early 1995. The Company is not aware of any additional expansion plans by existing competitors in Jackpot. At least two casinos with video lottery terminals similar to slot machines are operated on Native American land in Idaho, including one with approximately 200 VLT machines near Pocatello that has been in operation for approximately four years. Casino gaming began on Native American lands in both western Washington and northeast Oregon in 1995, and casinos also operate in Alberta, Canada. See "Item 1. - Business - Cautionary Information Regarding Forward-Looking Statements - Competition - The Jackpot Properties." AMERISTAR VICKSBURG Ameristar Vicksburg, which opened in February 1994, represents the Company's first expansion project outside of Jackpot. Management believes Ameristar Vicksburg provides superior and larger facilities than its current competitors in the Vicksburg area and has competitive advantages by virtue of its close proximity to Interstate 20. Nonetheless, Vicksburg is a competitive gaming market and the Ameristar Vicksburg's operations there to date have been dependent to a substantial degree upon a continuous casino marketing and promotional campaign. The permanently moored, dockside Vicksburg Casino is approximately 315 feet long and approximately 120 feet wide. Due to the width of the Vicksburg Casino, the casino, restaurants and showroom have the spacious feel of a land-based facility. The Vicksburg Casino has three levels, which are connected by escalators and elevators. The casino is on the bottom and middle levels and has wide aisles with an open feel that provides a comfortable and inviting atmosphere. The Vicksburg Casino has entrances on both the lower and middle levels, with the lower- level entrance providing access from valet parking and the middle- level entrance providing access from the self-parking area. The Vicksburg Casino is open 24 hours a day, seven days a week. The Vicksburg Casino has two restaurants, four bars (one of which offers live cabaret-style entertainment) and a showroom (which is used on an intermittent basis for entertainment and players club promotions). Ameristar Vicksburg also includes the Delta Point River Restaurant situated on a bluff overlooking the Vicksburg Casino. This restaurant was closed in January 1998. At that time, the Company intended to renovate and reopen the restaurant. However, Management is considering other alternatives, including leasing the restaurant to a third party. Management believes Ameristar Vicksburg's competitive advantages include its location, the size and design of the project and the range and quality of its amenities. The primary locational advantages of Ameristar Vicksburg are its proximity to Interstate 20 and its ease of access. As discussed above, the Vicksburg Casino is significantly wider than typical riverboat casinos. In addition, management believes the overall range and quality of the facilities, food service and entertainment at Ameristar Vicksburg are superior to those available at its existing competitors. As part of a long-term plan to enhance Ameristar Vicksburg, the Company acquired 18 acres across from the main entrance to the Vicksburg Casino for the future development of additional improvements. The Company constructed a 150-room hotel on a portion of this parcel which opened in June 1998. The Delta Point Inn, a 54-room budget motel that pre-existed the development of Ameristar Vicksburg, was taken out of service and demolished in connection with this expansion. The development cost of the hotel was approximately $10.3 million, including capitalized construction period interest. Management funded a substantial portion of these development costs out of draws under a $7.5 million short-term loan facility, with the balance being funded out of operating cash flow. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Market. The primary market for Ameristar Vicksburg is residents of the Jackson and Vicksburg, Mississippi and Monroe, Louisiana areas; tourists coming to Vicksburg primarily to visit the Vicksburg National Military Park; and other traffic traveling on Interstate 20, a major east-west thoroughfare that connects Atlanta and Dallas. Vicksburg, with a population of approximately 30,000 persons, is located 45 miles west of Jackson, the capital of Mississippi. According to the 1990 U.S. Census, the Jackson and Vicksburg metropolitan areas had a total population of approximately 440,000 persons. Approximately 800,000 people live within Ameristar Vicksburg's 17-county primary market area. The Vicksburg National Military Park, located within three miles of Ameristar Vicksburg, draws approximately 900,000 registered visitors a year. Interstate 20 (which connects Atlanta and Dallas) passes directly through Vicksburg. According to the Mississippi Department of Transportation, approximately 7.3 million vehicles drove across the Interstate 20 bridge at Vicksburg during 1998. As of March 15, 1999, Vicksburg had approximately 1,802 lodging rooms. The Vicksburg Chamber of Commerce has estimated that the 1998 average hotel occupancy rate in Vicksburg was approximately 70%. Gaming revenues in Warren County, Mississippi for the 52 weeks ended December 19, 1998, were approximately $202.2 million. Competition. Ameristar Vicksburg is subject to competition from three local competitors, from casinos in Shreveport and Bossier City, Louisiana, and from a Native American casino in Philadelphia, Mississippi. Ameristar Vicksburg has approximately 1,402 gaming positions or 32.8% of the total number of positions in Warren County. Based on available data, Ameristar Vicksburg is currently the market leader in Warren County and generated gaming revenues in 1997 and 1998 representing approximately 32.9% and 31.5%, respectively, of the total market gaming revenues. Management attributes Ameristar Vicksburg's leading market share position to the effectiveness of the Company's marketing and promotional strategy, the property's proximity to and visibility from Interstate 20, its ease of access, the size and design of the facility and the range and quality of the amenities offered. Several potential gaming sites still exist in Warren County and Vicksburg and from time to time potential competitors propose the development of additional casinos in or near Vicksburg. The Company is involved in legal proceedings in which it is alleged that the Company and certain other parties engaged in conduct to oppose the development of a casino between Vicksburg and Jackson in violation of Mississippi's antitrust and gaming regulatory laws. See "Item 1. - Business - Cautionary Information Regarding Forward-Looking Statements - Competition - Ameristar Vicksburg." and "Item 3. - Legal Proceedings." AMERISTAR COUNCIL BLUFFS The Company opened Ameristar Council Bluffs in January 1996 under one of three gaming licenses currently issued for Pottawattamie County, Iowa. On the bank of the Missouri River across from Omaha, Nebraska, Ameristar Council Bluffs is adjacent to the Nebraska Avenue exit on Interstate 29 immediately north of the junction of Interstate 29 and Interstate 80. The Company designed Ameristar Council Bluffs as a destination resort intended to serve as an entertainment centerpiece of the region. Ameristar Council Bluffs features architecture reminiscent of a gateway river town in the late 1800s. The design complements existing characteristics of Council Bluffs while giving the facility its own distinctive personality. Ameristar Council Bluffs opened in stages during 1996 and early 1997. The approximately 50-acre Ameristar Council Bluffs site is large enough to accommodate future land-based expansion under consideration by the Company. See "Item 7. - Management's' Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Council Bluffs Casino is an approximately 40,000 square foot, two-level riverboat measuring 272 feet long by 98 feet wide. By building the vessel with only two levels that have high ceilings and making it 98 feet wide, the casino has the spacious feel of a land-based facility. Both levels of the riverboat are connected by escalators and an elevator. The casino is open 24 hours a day, seven days a week and is required to make a two-hour cruise a minimum of 100 days within the "excursion season," which is defined as April 1 through October 31. If the riverboat fails to satisfy this cruising requirement, it will not be allowed to operate during the balance of the year. However, the Company believes that the Iowa Racing and Gaming Commission would grant a release from this requirement should dangerous cruising conditions preclude the riverboat from making the minimum number of cruises. Guests enter the riverboat from shore via an enclosed ramp from the 68,000-square foot Main Street Pavilion. The Main Street Pavilion is a self-contained complex featuring an Ameristar hotel, restaurants and entertainment options for children and adults. The interior of the Pavilion is designed to replicate a Victorian-era main street. The main level of the Pavilion includes a buffet, a 24-hour casual dining restaurant, a steak house and a sports bar cabaret, all of which are operated by the Company. Rising above the Pavilion is a five-story, 160-room, full-service Ameristar hotel that offers a panoramic view of the Missouri River and the Council Bluffs Casino. The Main Street Pavilion also includes a children's activity center operated by New Horizon Kids Quest, Inc. and owned by a joint venture between that company and Ameristar Council Bluffs. The Company has leased a portion of the Ameristar Council Bluffs site to an entity controlled by Iowa-based Kinseth Hotel Corporation for a 140-room, limited-service Holiday Inn Suites hotel that opened on March 31, 1997. The Kinseth entity developed and operates this hotel. The Holiday Inn Suites hotel and the Main Street Pavilion are connected by a climate-controlled walkway that also connects to the indoor pool, spa and an exercise room. Market. Council Bluffs has a population of approximately 54,300 people. Council Bluffs forms part of the greater Omaha, Nebraska/Council Bluffs, Iowa metropolitan area, which according to the 1990 U.S. Census had a population of approximately 640,000. Approximately 1.1 million people live within a 50-mile radius, and approximately 1.6 million people live within a 100- mile radius, of Council Bluffs. The median household income of the greater metropolitan area is approximately $40,000, with an unemployment rate of approximately 2.1%. Based on available data, Council Bluffs is currently the strongest gaming market in Iowa. Gaming revenues in Pottawattamie County, Iowa for the 12 months ended February 28, 1999, were $297.4 million, an increase of $25.2 million over the prior 12-month period. Competition. Three gaming licenses have been issued for Pottawattamie County, Iowa to Iowa West Racing Association. ACCBI operates the Council Bluffs Casino pursuant to an operating agreement with Iowa West Racing Association. The other casinos operating under these licenses are Harveys Casino Resorts ("Harveys"), which operates a riverboat casino in close proximity to Ameristar Council Bluffs, and Bluffs Run, a year-round dog track owned by Iowa West Racing Association that has a gaming license limited to the operation of reel-style and video slot machines that meet the definition of "games of chance" under the Iowa statutes. Bluffs Run, which opened in March 1995, has approximately 1,200 slot machines, a restaurant, buffet and lounge entertainment. The Company believes that Bluffs Run will continue to provide significant competition due to its advantage of being the only land-based facility in the market. Management believes Harveys also provides serious competition for Ameristar Council Bluffs. The Harveys casino opened on January 1, 1996, and substantially all the other Harveys facilities opened in May 1996, except for a restaurant that opened in May 1997. The average monthly market share of gaming revenues of Ameristar Council Bluffs was approximately 28.9% during March 1998 through February 1999, approximately 7.3 and 6.1 percentage points behind Bluffs Run and Harveys, respectively. See also "Item 1. - Business - Cautionary Information Regarding Forward- Looking Statements - Competition - Ameristar Council Bluffs." THE RESERVE The Reserve, featuring an African safari and big game reserve theme that includes statues of elephants, giraffes and other animals, opened on February 10, 1998, at the southeast corner of the junction of Lake Mead Drive and Interstate 515 in Henderson, Nevada. The Company acquired The Reserve under construction on October 9, 1996. In connection with the acquisition, the Company redesigned The Reserve to expand and enhance the project. The Reserve, which is open 24 hours a day, seven days a week, includes approximately 42,000 square feet of casino space (with approximately 1,380 slot machines and approximately 26 table games), 224 hotel rooms, four restaurants (a buffet, a 24- hour casual diningrestaurant, a steak house and an Italian restaurant), three bars and lounges, a sports book, keno, bingo, approximately 1,900 surface parking spaces, back-of-house facilities and a swimming pool. The Company is currently remodeling the Italian restaurant, expanding the 24-hour casual dining restaurant and adding two fast food outlets. Meeting rooms are also being added. The food and beverage operations and back-of- house facilities will support future expansion of The Reserve. The Company's total acquisition and construction budget for The Reserve, including capitalized construction period interest, preopening costs, design costs (including those for a contemplated Phase II addition) and acquisition costs was $135.0 million. The ultimate master plan has been designed for phased expansions of the gaming areas, additional hotel towers, multi- level parking, and other amenities such as additional restaurants. However, the Company currently does not have any plans for further expansion of The Reserve. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" for additional information concerning the potential expansion of The Reserve. Market. The gaming market in the greater metropolitan Las Vegas area includes segments for local residents and visitors, and both segments of this market are subject to intense and dynamic competition. The Reserve competes primarily for local customers in the Henderson-Green Valley suburban community. The Company also markets The Reserve to visitors, including persons driving to and from Arizona via Interstate 515, persons driving between California and Lake Mead and other visitors to the Las Vegas area who desire lodging in Henderson-Green Valley. The Las Vegas metropolitan area was the fastest growing metropolitan area, and Henderson was the fastest growing city in the United States during the first half of the 1990s, with population increases of 26% and 57%, respectively. According to the 1998 Las Vegas Perspective, the population of Clark County increased by 6.1% from 1996 to 1997 and the population of Henderson increased by 12.0% for the same period. In February 1997, the Nevada State Demographer's Office estimated the population of Clark County, Nevada was 1.1 million, and the population of Henderson and Boulder City (a community south of Henderson) was 144,800. The Henderson Building Department reports that building permits were issued in 1998 for 6,286 new single and multi-family residential housing units in Henderson. According to the Nevada Department of Transportation, approximately 110,000 vehicles per day currently pass through the junction of Interstate 515 and Lake Mead Drive, the site of The Reserve. No assurance can be given that the Las Vegas metropolitan area and Henderson-Green Valley will continue to experience population growth or that growth will continue for any particular period of time or at the same rates as in the recent past. Competition. In June 1997, Station Casinos, Inc. opened Sunset Station, a casino-hotel approximately 3.5 miles north of The Reserve site along Interstate 515. There are two other large local-market casino hotels within 11 miles of The Reserve. Management believes that additional competing casino-hotels will be developed in Henderson-Green Valley, and plans have been announced for the development of two casino-hotels within a 3.5 mile radius of The Reserve. In addition, The Reserve competes to a lesser extent with a number of small, limited service casinos that currently operate within a five-mile radius. Additional competition in this area is anticipated over time. See "Item 1. - Business - Cautionary Information Regarding Forward-Looking Statements - Competition - The Reserve." EMPLOYEES As of March 15, 1999, the Company employed approximately 3,897 full-time employees and 329 part-time employees. None of the Company's current employees is employed pursuant to collective bargaining or other union arrangements. Management believes its employee relations are good. CAUTIONARY INFORMATION REGARDING FORWARD- LOOKING STATEMENTS COMPETITION General. The Company competes for customers primarily on the basis of the location and quality of its properties, the quality, range and pricing of non-gaming amenities such as hotels, restaurants and entertainment and the strength of its marketing and promotional campaigns. Some of the Company's known or future competitors in various markets have or may have greater name recognition and financial and marketing resources than the Company. In addition, each of the Company's currently operating properties is located in a jurisdiction that restricts gaming to certain areas and/or borders a state that prohibits or restricts gaming operations, which restrictions and prohibitions provide substantial benefits to the Company's business and its ability to attract and retain customers. The legalization or expanded legalization or authorization of gaming within a market area of one of the Company's properties could have an adverse effect, which may be material, on the Company's business, financial condition and results of operations. The Jackpot Properties. In addition to local casinos, the Jackpot Properties are subject to existing and potentially expanded competition from casinos in other portions of the Pacific Northwest, including existing casinos on Native American lands near Pocatello, Idaho and in western Washington, northeastern Oregon and Alberta, Canada. Management believes that the currently operating casinos in the outer market negatively impacted the performance of the Jackpot Properties beginning in 1996. Although the Company responded to the increased competition by renovating its slot equipment at the Jackpot Properties, remodeling the casino at The Horseshu and increasing marketing efforts, which steps management believes have demonstrated initial success, no assurances can be given with respect to the future competitive effects on the Jackpot Properties of these casinos. The expansion of casino gaming on Native American lands in southern Idaho, eastern Oregon or eastern Washington could have a material adverse effect on the Jackpot Properties and the Company. Notwithstanding a 1992 Idaho constitutional amendment that prohibits all forms of casino gaming and the Indian Gaming Regulatory Act of 1988 ("IGRA"), which restricts gaming operations on Native American land to those allowed under state law, video lottery terminal ("VLT") casinos, including the one near Pocatello, are currently being operated on Native American lands in Idaho. While these VLT casinos may be in violation of IGRA, federal officials have not taken any enforcement action against these operations. The failure of the federal government to take such enforcement action could lead to the expansion of casino gaming on Native American lands in Idaho. The Shoshone-Paiute Tribes recently signed a compact with the governor which had a declaratory judgment to determine what forms of gaming are legal. The compact was not ratified by the legislature. However, the U.S. attorney has indicated in written correspondence to the legislature that she will begin pursuing legal action against the tribes. Increased competition in Jackpot resulting from the renovation or expansion of existing casinos or the development of new casinos, none of which are currently contemplated by any party to the knowledge of the Company, could also have a material adverse effect on the Jackpot Properties and the Company. Ameristar Vicksburg. Ameristar Vicksburg is subject to competition from three local competitors, from casinos in Shreveport and Bossier City, Louisiana, and from a Native American casino in Philadelphia, Mississippi. Due to the intensity of competition in the Vicksburg market, Ameristar Vicksburg's business to date has been dependent upon continuous and aggressive marketing and promotional efforts. Management believes that competition from the casinos in Shreveport and Bossier City, Louisiana and Philadelphia, Mississippi has resulted in a recent shrinkage in the territorial size of the Vicksburg gaming market. Several potential gaming sites still exist in Warren County and Vicksburg, and from time to time potential competitors propose the development of additional casinos in or near Vicksburg. Accordingly, no assurance can be given that additional competitors will not enter the market. Additional competition in Vicksburg could have a material adverse effect on Ameristar Vicksburg and the Company. In addition, the Company is aware of potential sites on the Big Black River near Interstate 20 between Jackson and Vicksburg, which, if developed, would provide a significant competitive advantage over Ameristar Vicksburg and other gaming operations in Warren County due to their closer proximity to Jackson. However, there currently is no exit off Interstate 20 in the vicinity of these sites, the area surrounding these sites is undeveloped and lacks any infrastructure and these sites may not meet the navigable waterway requirements of Mississippi law for the development of a casino. In December 1996, the Mississippi Gaming Commission rejected an application for the development of a casino at one of these sites, which denial was appealed by an adjoining landowner and the license applicant. In December 1997, a Mississippi circuit court issued an order reversing the decision of the Mississippi Gaming Commission and remanded the application to the Mississippi Gaming Commission for further proceedings. The Mississippi Gaming Commission has appealed this court order. In addition, the Company is involved in legal proceedings in which it is alleged that the Company and certain other parties engaged in conduct to oppose this application in violation of Mississippi's antitrust and gaming regulatory laws. See "Item 3. - Legal Proceedings." The development of a casino on the Big Black River likely would have a material adverse effect on Ameristar Vicksburg and the Company. If Mississippi law were amended to permit gaming in Jackson, the development of one or more casinos there would materially impact Ameristar Vicksburg and the Company. Management is not aware of any current proposals that would permit such an expansion of gaming in Mississippi. Ameristar Council Bluffs. Ameristar Council Bluffs currently competes in Council Bluffs with two other casinos. One of these casinos, at the Bluffs Run dog-racing track, has a significant competitive advantage as a land-based facility and has been the local market leader in gaming revenues each month through October 1998, despite operating under a license that limits its gaming operations to reel-style and video slot machines that meet the definition of "games of change". Management believes that the other competitor in Council Bluffs, a riverboat casino operated by Harveys Casino Resorts, also provides and will continue to provide serious competition for Ameristar Council Bluffs. In September 1998, the Iowa Racing and Gaming Commission passed a regulation limiting the number of gaming licenses in the State of Iowa to those currently issued. Unless legislative action is taken to overrule or modify that regulation, there will be no more licenses granted in the State of Iowa. A ballot initiative was proposed in 1996 that would have authorized slot machines and casino gaming at certain locations in Nebraska, including Omaha, which is across the Missouri River from Council Bluffs. This initiative was not placed on the ballot due to the determination of the Nebraska Secretary of State that an insufficient number of petition signatures were obtained. Although no assurances can be given, management believes it is unlikely that any further legislative action or voting referendum that would authorize casino gaming in Nebraska will be acted upon prior to 2000. The introduction of casino gaming in Nebraska, especially in the Omaha area, likely would have a material adverse effect on the Company. The Reserve. In June 1997, Station Casinos, Inc. opened Sunset Station, a casino-hotel approximately 3.5 miles north of The Reserve along Interstate 515. Sunset Station is larger than The Reserve, and Station Casinos, Inc. has operated casinos aimed at local Las Vegas residents for many years. Two other large local-market casino hotels are located within 11 miles of The Reserve. Plans have also been announced for the development of a casino-hotel approximately 3.5 miles west of The Reserve, near the junction of Green Valley Parkway and Lake Mead Drive. Management is aware of several sites in Henderson-Green Valley that have been zoned for casino-hotel and believes it is likely additional casino resorts ultimately will be developed in Henderson-Green Valley and other portions of the southeastern Las Vegas metropolitan area. To date, no meaningful announcements have been made related to any future casino development in the immediate market in which The Reserve operates. Interstate 215 is expected to be extended from the West to intersect Interstate 515 adjacent to The Reserve. This interchange is currently in the design stages, and the design is expected to affect The Reserve. In addition, construction of Interstate 215 which is currently ongoing, has affected and will continue to affect traffic flow on Lake Mead Drive. SUBSTANTIAL LEVERAGE AND ABILITY TO SATISFY DEBT OBLIGATIONS The Company has substantial fixed debt service in addition to operating expenses. Such indebtedness requires substantial annual debt-service payments, including some principal payments. The degree to which the Company is leveraged could have important consequences to the holders of its securities, including the following: (i) the Company's ability to make scheduled payments of principal of, or premium (if any) or interest on, or to refinance, its indebtedness may be impaired, (ii) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other purposes may be impaired, (iii) the Company's flexibility in planning for or reacting to changes in market conditions may be limited and (iv) the Company may be vulnerable in the event of a downturn in its business. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Company's principal long-term debt instruments contain, and future long-term debt instruments may contain, certain restrictive covenants including, among other things, limitations on the ability of the Company to incur additional indebtedness, to create liens and other encumbrances, to make certain payments and investments, to enter into transactions with affiliates to sell or otherwise dispose of assets and to merge or consolidate with another entity. Although the covenants are subject to various exceptions that are intended to allow the Company to operate without undue restraint in certain anticipated circumstances, there can be no assurance that such covenants will not adversely affect the Company's ability to finance future operations or capital needs or to engage in other activities that may be in the interest of the Company. In addition, the Company's long-term debt requires it to maintain certain financial ratios and future credit facilities may contain similar restrictions. The Company's ability to comply with such provisions will be dependent upon its future performance, which will be affected by prevailing economic conditions and financial, business, competitive, regulatory and other factors, many of which are beyond the Company's control. Accordingly, no assurance can be given that the Company will maintain a level of operating cash flow that will permit it to service its obligations and to satisfy applicable financial covenants. A breach of any of these covenants or the inability of the Company to comply with the required financial ratios could result in an inability to obtain additional borrowings, and thereby limit the Company's ability to improve or expand its existing properties or to develop new properties, under existing debt facilities or a default under one or more of the Company's long-term debt instruments. CONSTRUCTION AND DEVELOPMENT RISKS; RISKS OF NEW VENTURES General Construction and Development Risks. Construction and expansion projects under consideration for the Company's properties entail significant risks, including shortages of materials (including slot machines or other gaming equipment) or skilled labor, unforeseen construction scheduling, engineering, environmental or geological problems, work stoppages, weather interference, floods, fires, other casualty losses, and unanticipated cost increases. The anticipated costs and construction periods for construction projects of the Company are based upon budgets, conceptual design documents and construction schedule estimates prepared by the Company in consultation with its architects and contractors, and no assurance can be given that any project will be completed on time, if at all, or on budget or that the Company will be able to fund any budget overrun amounts. Variances in construction time periods or budgets could be substantial. The completion date of any construction project of the Company may differ significantly from initial expectations for construction- related or other reasons. In connection with certain construction projects undertaken by the Company, the Company employs "fast-track" design and construction methods, which involve the design of future stages of construction while earlier stages of construction are underway. Although management believes that the use of fast- track design and construction methods can reduce the overall construction time, these methods may not always result in such reductions, may involve additional construction costs than otherwise would be incurred and may increase the risk of disputes with contractors. Construction Dependent upon Available Financing and Operations. The availability of funds under the Company's principal credit facility at any time is dependent upon the amount of EBITDA (as defined) of Ameristar and its principal subsidiaries during the preceding four full fiscal quarters. Since the future operating performance of the Company will be subject to financial, economic, business, competitive, regulatory and other factors, many of which are beyond the control of the Company, no assurances can be given with respect to the level of the Company's future consolidated EBITDA or the resulting availability of operating cash flow or borrowing capacity of the Company to undertake or complete future construction projects. See "Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Risks of Cost Overruns. The cost of any construction project undertaken by the Company may vary significantly from initial current expectations, and the Company may have a limited amount of capital resources to fund cost overruns on any project. If the Company cannot finance such cost overruns on a timely basis, the completion of one or more projects may be delayed until adequate cash flow from operations or other financing is available. General Risks of New Ventures. As a result of operating risks, including those described in this section, and other risks associated with a new venture, there can be no assurance that, once completed, any development project will increase the Company's operating profits or operating cash flow. CONTROL BY CURRENT STOCKHOLDER AND EFFECTS OF CHANGE IN CONTROL; DEPENDENCE ON KEY PERSONNEL Craig H. Neilsen, the Company's president and chief executive officer, owns approximately 86.9% of the outstanding shares of Common Stock of Ameristar. As a result, Mr. Neilsen has the power to control the management and daily operations of the Company. The Company is dependent on the continued performance of Mr. Neilsen and his management team. The loss of the services of Mr. Neilsen or any other executive officer of the Company may have a material adverse effect on the Company. In addition, the death of Mr. Neilsen could result in the need for his estate, heirs or devisees to sell a substantial number of shares of the Common Stock to obtain funds to pay inheritance tax liabilities. Certain changes in control of the Company could result in the acceleration of the Company's principal long-term credit facilities. AVAILABILITY OF OPERATING AND CORPORATE MANAGEMENT PERSONNEL The Company has experienced and expects to continue to experience strong competition in hiring and retaining qualified operating and corporate management personnel. Management believes that a number of factors have contributed to the Company's difficulties in attracting and retaining qualified management personnel, including the recent and continuing proliferation of gaming facilities throughout the United States, the additional burdens on the Company's existing management personnel due to the lack of depth in other positions, the reluctance of the Company to match or exceed compensation packages offered by some of its competitors, and the locations of some of the Company's operations (particularly Jackpot and Vicksburg). GAMING LICENSING AND REGULATION The ownership and operation of casino gaming facilities are subject to extensive state and local regulation. The States of Iowa, Mississippi and Nevada and the applicable local authorities require various licenses, findings of suitability, registrations, permits and approvals to be held by the Company and its subsidiaries. The Iowa Racing and Gaming Commission, the Mississippi Gaming Commission and the Nevada Gaming Commission may, among other things, limit, condition, suspend, revoke or not renew a license or approval to own the stock of any of Ameristar's Iowa, Mississippi or Nevada subsidiaries, respectively, for any cause deemed reasonable by such licensing authority. Gaming licenses require periodic renewal currently every two years in Mississippi, and annually in Iowa. Substantial fines or forfeiture of assets for violations of gaming laws or regulations may be levied against Ameristar, such subsidiaries and the persons involved. The suspension, revocation or non-renewal of any of the Company's licenses or the levy on the Company of substantial fines or forfeiture of assets would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is subject to substantial gaming taxes and fees imposed by various governmental authorities, which are subject to increase. To date, the Company has obtained all governmental licenses, findings of suitability, registrations, permits and approvals necessary for the operation of its currently operating gaming activities. However, gaming licenses and related approvals are deemed to be privileges under Iowa, Mississippi and Nevada law, and no assurances can be given that any new licenses, permits and approvals that may be required in the future will be given or that existing ones will be maintained or extended. In addition, changes in law could restrict or prohibit gaming operations of the Company in any jurisdiction, and certain jurisdictions, including Iowa, require the periodic reauthorization of gaming activities. No assurance can be given that gaming operations of the type conducted by the Company will continue to be authorized in any jurisdiction. Such a change in law or failure to reauthorize gaming activities could substantially diminish the value of the Company's assets in such a jurisdiction and otherwise have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1. -Business - Government Regulations." MISSISSIPPI ANTI-GAMING INITIATIVES In Mississippi, two referenda were proposed in 1998 which, if approved, would have amended the Mississippi Constitution to ban gaming in Mississippi and would have required all currently- legal gaming operations to cease two years thereafter. A Mississippi State Circuit Court judge ruled that the first of the proposed referenda was invalid because, among other reasons, if failed to include required information regarding its anticipated effect on government revenues. Proponents of the referendum filed an appeal with the Mississippi Supreme Court, and the Supreme Court affirmed the Circuit Court ruling on procedural and other grounds. The second referendum proposal included the same language on government revenues as the first referendum and was struck down by another Mississippi State Circuit Court judge on the same grounds as the first. Any such referendum must be approved by the Mississippi Secretary of State and signatures of approximately 98,000 registered voters must be gathered and certified in order for the proposal to be included on a statewide ballot for consideration by the voters. The next election for which the proponents could attempt to place such a proposal on the ballot would be in November 2000. It is likely at some point that a revised initiative will be filed which will address adequately the issues regarding the effect on government revenues of a prohibition on gaming in Mississippi. LOSS OF RIVERBOAT AND DOCKSIDE FACILITIES FROM SERVICE The Company's riverboat and dockside facilities in Mississippi and Iowa could be lost from service due to casualty, mechanical failure, extended or extraordinary maintenance, floods or other severe weather conditions. Cruises of the Council Bluffs Casino are subject to risks generally incident to the movement of vessels on inland waterways, including risks of casualty due to river turbulence and severe weather conditions. In addition, United States Coast Guard regulations set limits on the operation of vessels, require that vessels be operated by a minimum complement of licensed personnel and require a hull inspection at a United States Coast Guard approved dry docking facility for all cruising riverboats at five-year intervals. Less stringent inspection requirements apply to permanently moored dockside vessels like the Vicksburg Casino. The Council Bluffs Casino is not scheduled for re-inspection by the United States Coast Guard until November 2000. The Ameristar Vicksburg site has experienced some instability that has required periodic maintenance and improvements. The Company is currently in the process of reinforcing the cofferdam basin in which the vessel floats and is monitoring the site to evaluate what further steps, if any, may be necessary to stabilize the site to permit operations to continue. A site failure would require Ameristar Vicksburg to limit or cease operations. The loss of a riverboat or dockside facility from service for any period of time likely would adversely affect the Company's operating results and borrowing capacity under its long-term debt facilities and could result in the occurrence of an event of a default under one or more credit facilities or contracts. ENVIRONMENTAL RISKS AND REGULATION As is the case with any owner or operator of real property, the Company is subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by government agencies or courts of law which could adversely affect operations. The Company does not have environmental liability insurance to cover most such events, and the environmental liability insurance coverage it maintains to cover certain events includes significant limitations and exclusions. In addition, if the Company discovers any significant environmental contamination affecting any of its properties, the Company could face material remediation costs or additional development costs for future expansion activities. See "Item 2. - Properties." YEAR 2000 RISKS The Company uses computers extensively to assist its employees in providing good service to its guests and to assist management in monitoring the Company's operations. The Company's hotel front desks, for example, are highly computerized so as to expedite check-in and check-out of guests. Similarly, the Company uses computers in the back-of-the-house to facilitate purchasing and maintaining inventory records. In the casino, computers are used to monitor gaming activity and maintain customer records, such as credit availability and points earned by members of the Company's slot clubs. Computers on occasion fail, irrespective of the Year 2000 issue. For this reason, where appropriate, the Company maintains paper and magnetic back-ups and the Company's employees are trained in the use of manual procedures. When the front desk computer fails, for example, the Company's employees continue to check guests in and out using manual methods. However, the risks to the Company from the Year 2000 issue could be substantial. Most of the Company's guest rooms, for example, are easily accessed only by elevator, and most elevators incorporate some computer technology. Likewise, the Company's heating, ventilation, life safety and air conditioning systems are highly computerized and, of course, critical to the Company's operations. The Company is also exposed to the risk that one or more of its vendors or suppliers could experience Year 2000 problems that may impact their ability to provide goods and services. Although this is not considered as significant a risk with respect to the suppliers of goods due to the availability of alternative suppliers, the disruption of certain services, in particular utilities and financial services, could, depending upon the extent of the disruption, have a material adverse impact on the Company's operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information on the Company's Year 2000 strategies and costs of achieving Year 2000 readiness. GOVERNMENT REGULATIONS The ownership and operation of casino gaming facilities are subject to extensive state and local regulations. The Company is required to obtain and maintain gaming licenses in each of the jurisdictions in which the Company conducts gaming. The limitation, conditioning or suspension of gaming licenses could (and the revocation or non-renewal of gaming licenses, or the failure to reauthorize gaming in certain jurisdictions, would) materially adversely affect the operations of the Company in that jurisdiction. In addition, changes in law that restrict or prohibit gaming operations of the Company in any jurisdiction could have a material adverse effect on the Company. NEVADA. The ownership and operation of casino gaming facilities in Nevada are subject to (i) the Nevada Gaming Control Act and the regulations promulgated thereunder (collectively, "Nevada Act"); and (ii) various local regulations. The Company's operations are subject to the licensing and regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the Nevada State Gaming Control Board ("Nevada Board"), and, in the case of the Jackpot Properties, the Liquor Board of Elko County. The Company's operations at The Reserve are subject to the licensing and regulatory control of the City of Henderson. The Nevada Commission, the Nevada Board, the City of Henderson and the Liquor Board of Elko County are collectively referred to in this section as the "Nevada Gaming Authorities." The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things, (i) the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) the establishment and maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, (iii) providing reliable record keeping and requiring the filing of periodic reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and fraudulent practices; and (v) providing a source of state and local revenues through taxation and licensing fees. Change in such laws, regulations and procedures could have an adverse effect on the Company's gaming operations. CPI, which operates the Jackpot Properties, and ACLVI, which operates The Reserve, are required to be licensed by the Nevada Gaming Authorities. The gaming licenses require the periodic payment of fees and taxes and are not transferable. Ameristar is registered by the Nevada Commission as a publicly traded corporation (a "Registered Corporation") and has been found suitable to own the stock of CPI and ACLVI, which are corporate licensees ("Corporate Licensee") under the terms of the Nevada Act. As a Registered Corporation, Ameristar is required periodically to submit detailed financial and operating reports to the Nevada Commission and furnish any other information which the Nevada Commission may require. No person may become a stockholder of, or receive any percentage of profits from, a Corporate Licensee without first obtaining licenses and approvals from the Nevada Gaming Authorities. The Company, CPI and ACLVI have obtained from the Nevada Gaming Authorities the various registrations, findings of suitability, approvals, permits and licenses currently required in order to engage in gaming activities in Nevada. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, CPI, ACLVI or Ameristar in order to determine whether such individual is suitable or should be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees of CPI and ACLVI must file applications with the Nevada Gaming Authorities and may be required to be licensed or found suitable by the Nevada Gaming Authorities. Officers, directors and key employees of Ameristar who are actively and directly involved in gaming activities of CPI or ACLVI may be required to be reviewed or found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities may deny an application for licensing for any cause which they deem reasonable. A finding of suitability is comparable to licensing, and both require submission of detailed personal and financial information followed by a thorough investigation. The applicant for licensing or a finding of suitability must pay all the costs of the investigation. Changes in licensed positions must be reported to the Nevada Gaming Authorities, and in addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a change in a corporate position. If the Nevada Gaming Authorities were to find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with CPI, ACLVI or Ameristar, the companies involved would have to sever all relationships with such person. In addition, the Nevada Commission may require CPI, ACLVI or Ameristar to terminate the employment of any person who refuses to file appropriate applications. Determinations of suitability or of questions pertaining to licensing are not subject to judicial review in Nevada. CPI, ACLVI and Ameristar are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all material loans, leases, sales of securities and similar financing transactions by Ameristar, CPI and ACLVI must be reported to, or approved by, the Nevada Commission. If it were determined that the Nevada Act was violated by CPI or ACLVI, the gaming licenses it holds or has applied for could be limited, denied, conditioned, suspended or revoked, subject to compliance with certain statutory and regulatory procedures. In addition, CPI, ACLVI, Ameristar and the persons involved could be subject to substantial fines for each separate violation of the Nevada Act at the discretion of the Nevada Commission. Further, a supervisor could be appointed by the Nevada Commission to operate CPI's or ACLVI's gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of the premises) could be forfeited to the State of Nevada. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and denial or revocation of any gaming license would) materially adversely affect Ameristar's gaming operations. Any beneficial holder of Ameristar's voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his suitability as a beneficial holder of Ameristar's voting securities determined if the Nevada Commission has reason to believe that such ownership would otherwise be inconsistent with the declared policy of the State of Nevada. The applicant must pay all costs of investigation incurred by the Nevada Gaming Authorities in conducting any such investigation. The Nevada Act requires any person who acquires beneficial ownership of more than 5% of a Registered Corporation's voting securities to report the acquisition to the Nevada Commission. The Nevada Act requires that beneficial owners of more than 10% of a Registered Corporation's voting securities apply to the Nevada Commission for a finding of suitability within thirty days after the Chairman of the Nevada Board mails the written notice requiring such filing. Under certain circumstances, an "institutional investor", as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of a Registered Corporation's voting securities may apply to the Nevada Commission for a waiver of such finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the board of directors of the Registered Corporation, any change in the Registered Corporation's corporate charter, bylaws, management, policies or operations of the Registered Corporation, or any of its gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding the Registered Corporation's voting securities for investment purposes only. Activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include (i) voting on all matters voted on by stockholders; (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations; and (iii) such other activities as the Nevada Commission may determine to be consistent with such investment intent. If the beneficial holder of voting securities who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. The applicant is required to pay all costs of investigation. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or the Chairman of the Nevada Board, may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Any stockholder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock of a Registered Corporation beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a criminal offense. Ameristar is subject to disciplinary action if, after it receives notice that a person is unsuitable to be a stockholder or to have any other relationship with Ameristar, CPI or ACLVI, Ameristar, (i) pays that person any dividend or interest upon voting securities of Ameristar, (ii) allows that person to exercise, directly or indirectly, any voting right conferred through securities held by the person, (iii) pays remuneration in any form to that person for services rendered or otherwise, or (iv) fails to pursue all lawful efforts to require such unsuitable person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities by Ameristar, for cash at fair market value. Additionally, the Liquor Board of Elko County and the City of Henderson have the authority to approve all persons owning or controlling the stock of any corporation controlling a gaming license within their jurisdictions. The Nevada Commission may, at its discretion, require the holder of any debt security of a Registered Corporation to file applications, be investigated and be found suitable to own the debt security of a Registered Corporation if it has reason to believe that such holder's acquisition of such ownership would otherwise be inconsistent with the declared policy of the State of Nevada. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the Nevada Act, the Registered Corporation can be sanctioned, including the loss of its approvals, if without the prior approval of the Nevada Commission, it (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. Ameristar is required to maintain a current stock ledger in Nevada which may be examined by the Nevada Gaming Authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Nevada Gaming Authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Ameristar is also required to render maximum assistance in determining the identity of the beneficial owner. The Nevada Commission has the power to require Ameristar stock certificates to bear a legend indicating that the securities are subject to the Nevada Act. However, to date, the Nevada Commission has not imposed such a requirement on Ameristar. Ameristar may not make a public offering of its securities without the prior approval of the Nevada Commission if the securities or the proceeds therefrom are intended to be used to construct, acquire or finance gaming facilities in Nevada, or to retire or extend obligations incurred for such purposes. In addition, restrictions on the transfer of an equity security issued by a Corporate Licensee, and agreements not to encumber such securities (collectively, "Stock Restrictions") are ineffective without the prior approval of the Nevada Commission. Any such approvals do not constitute a finding, recommendation or approval by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of the prospectus or the investment merits of the securities offered. Any representation to the contrary is unlawful. The Company has obtained all such approvals required to date. Changes in control of Ameristar through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he obtains control, may not occur without the prior approval of the Nevada Commission. Entities seeking to acquire control of a Registered Corporation must satisfy the Nevada Board and Nevada Commission in a variety of stringent standards prior to assuming control of such Registered Corporation. The Nevada Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Nevada legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and corporate defense tactics affecting Nevada Corporate Licensee gaming licensees, and Registered Corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Nevada Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to (i) assure the financial stability of Corporate Licensees and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Nevada Commission before the Registered Corporation can make exceptional repurchases of voting securities above the current market price thereof and before a corporate acquisition opposed by management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by the Registered Corporation's Board of Directors in response to a tender offer made directly to the Registered Corporation's stockholders for the purposes of acquiring control of the Registered Corporation. License fees and taxes, computed in various ways depending on the type of gaming or activity involved, are payable to the State of Nevada and to the counties and cities in which the Nevada licensee's respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon either (i) a percentage of the gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of table games operated. A casino entertainment tax is also paid by casino operations where entertainment is furnished in connection with the selling or serving of food and refreshments, or the selling of merchandise. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively, "Licensees"), and who proposes to become involved in a gaming venture outside of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation of the Nevada Board of their participation in such foreign gaming. The revolving fund is subject to increase or decrease at the discretion of the Nevada Commission. Thereafter, Licensees are required to comply with certain reporting requirements imposed by the Nevada Act. Licensees are also subject to disciplinary action by the Nevada Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation, fail to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, engage in activities or enters into associations that are harmful to the State of Nevada or its ability to collect gaming taxes and fees, or employs, contracts with or associates with a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. MISSISSIPPI. The ownership and operation of casino facilities in Mississippi are subject to extensive state and local regulation, but primarily the licensing and regulatory control of the Mississippi Gaming Commission (the "Mississippi Commission") and the Mississippi State Tax Commission. The Mississippi Gaming Control Act (the "Mississippi Act"), which legalized dockside casino gaming in Mississippi, is similar to the Nevada Gaming Control Act. The Mississippi Commission has adopted regulations which are also similar in many respects to the Nevada gaming regulations. The laws, regulations and supervisory procedures of Mississippi and the Mississippi Commission seek to (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity; (ii) establish and maintain responsible accounting practices and procedures; (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and safeguarding of assets and revenues, providing reliable record keeping and making periodic reports to the Mississippi Commission; (iv) prevent cheating and fraudulent practices; (v) provide a source of state and local revenues through taxation and licensing fees; and (vi) ensure that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Commission. Changes in Mississippi law or regulations could have an adverse effect on the Company and the Company's Mississippi gaming operations. The Mississippi Act provides for legalized dockside gaming at the discretion of the 14 eligible counties that border either the Mississippi Gulf Coast or the Mississippi River, but only if the voters in such counties have not voted to prohibit gaming in that county. Certain amendments to the Mississippi Constitution have been proposed for adoption through the initiative and referendum process which, if a sufficient number of signatures are gathered to place the matter on the ballot and if adopted by the voters of the state, would prohibit gaming in Mississippi. See "Risk Factors - Mississippi Anti-Gaming Referendums". As of March 1, 1999, dockside gaming was permissible in nine of the 14 eligible counties in the State and gaming operations had commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington counties. Under Mississippi law, gaming vessels must be located on the Mississippi River or on navigable waters in eligible counties along the Mississippi River, or in the waters of the State of Mississippi lying south of the State in eligible counties along the Mississippi Gulf Coast. In December 1996, the Mississippi Commission rejected an application for the development of a casino on a site off the Big Black River in Warren County near Interstate 20 between Jackson and Vicksburg, which was appealed by an adjoining landowner and the license applicant. In December 1997, a Mississippi circuit court issued an order reversing the decision of the Mississippi Commission and remanded the application to the Mississippi Commission for further proceedings. The decision of the court has been appealed by the Mississippi Commission to the Mississippi Supreme Court. The Mississippi Commission has also adopted a regulation that prohibits gaming on the Big Black River; however, the Mississippi Commission has taken the position that the Mississippi Commission may be prohibited from applying the regulation to the existing applicant which appealed the initial siting decision. In addition, the Company is involved in legal proceedings in which it is alleged that the Company and certain other parties engaged in conduct to oppose this application in violation of Mississippi's antitrust and gaming regulatory laws. See "Item 3 - Legal Proceedings." The law permits unlimited stakes gaming on permanently moored vessels on a 24-hour basis and does not restrict the percentage of space which may be utilized for gaming. The Mississippi Act permits substantially all traditional casino games and gaming devices and, on August 11, 1997, a Mississippi lower court ruled that the Mississippi Act also permits race books on the premises of licensed casinos. The Mississippi Commission has appealed that decision to the Mississippi Supreme Court. Ameristar, and each subsidiary of Ameristar that operates a casino in Mississippi (a "Gaming Subsidiary"), is subject to the licensing and regulatory control of the Mississippi Gaming Authorities. Ameristar is registered as a publicly traded holding company of ACVI under the Mississippi Act. Ameristar is required periodically to submit detailed financial and operating reports to the Mississippi Commission and furnish any other information which the Mississippi Commission may require. If Ameristar is unable to continue to satisfy the registration requirements of the Mississippi Act, Ameristar and its Gaming Subsidiaries cannot own or operate gaming facilities in Mississippi. Each Gaming Subsidiary must obtain a gaming license from the Mississippi Commission to operate casinos in Mississippi. A gaming license is issued by the Mississippi Commission subject to certain conditions, including continued compliance with all applicable state laws and regulations and physical inspection of the casinos prior to opening. There are no limitations on the number of gaming licenses which may be issued in Mississippi. Gaming licenses are not transferable, are issued for a two- year period and must be renewed periodically thereafter. ACVI was granted a renewal of its gaming license by the Mississippi Commission on December 18, 1997. The gaming license for ACVI must be renewed in January 2000. No person may become a stockholder of or receive any percentage of profits from a gaming licensee subsidiary of a holding company without first obtaining licenses and approvals from the Mississippi Commission. Ameristar has obtained such approvals in connection with ACVI's gaming license. Certain officers and employees of Ameristar and the officers, directors and certain key employees of each Gaming Subsidiary must be found suitable or be licensed by the Mississippi Commission. The Company believes it has obtained or applied for all necessary findings of suitability with respect to such persons associated with Ameristar or ACVI, although the Mississippi Commission, in its discretion, may require additional persons to file applications for findings of suitability. Employees associated with gaming must obtain work permits that are subject to immediate suspension under certain circumstances. In addition, any person having a material relationship or involvement with the Company may be required to be found suitable or licensed, in which case those persons must pay the costs and fees associated with such investigation. The Mississippi Commission may deny an application for a license for any cause that it deems reasonable. Changes in certain licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for a license, the Mississippi Commission has jurisdiction to disapprove a change in a licensed position. The Mississippi Commission has the power to require any Gaming Subsidiary or Ameristar to suspend or dismiss officers, directors and other key employees or sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities. At any time, the Mississippi Commission has the power to investigate and require the finding of suitability of any record or beneficial stockholder of Ameristar. Mississippi law requires any person who acquires more than 5% of Ameristar's common stock to report the acquisition to the Mississippi Commission, and such person may be required to be found suitable. Also, any person who becomes a beneficial owner of more than 10% of Ameristar's common stock, as reported to the Securities and Exchange Commission, must apply for a finding of suitability by the Mississippi Commission and must pay the costs and fees that the Mississippi Commission incurs in conducting the investigation. The Mississippi Commission has generally exercised its discretion to require a finding of suitability of any beneficial owner of more than 5% of a public company's common stock. However, the Mississippi Commission has adopted a policy that permits certain institutional investors to own beneficially up to 10% of a public company's common stock without a finding of suitability. If a stockholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information including a list of beneficial owners. Any person who fails or refuses to apply for a finding of suitability or a license within thirty (30) days after being ordered to do so by the Mississippi Commission may be found unsuitable. The same restrictions apply to a record owner if the record owner, after request, fails to identify the beneficial owner. Management believes that compliance by Ameristar with the licensing procedures and regulatory requirements of the Mississippi Commission will not affect the marketability of its securities. Any person found unsuitable and who holds, directly or indirectly, any beneficial ownership of the securities of Ameristar beyond such time as the Mississippi Commission prescribes, may be guilty of a misdemeanor. Ameristar is subject to disciplinary action if, after receiving notice that a person is unsuitable to be a stockholder or to have any other relationship with Ameristar or its Gaming Subsidiaries, Ameristar: (i) pays the unsuitable person any dividend or other distribution upon the voting securities of Ameristar; (ii) recognizes the exercise, directly or indirectly, of any voting rights conferred by securities held by the unsuitable person; (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances; or (iv) fails to pursue all lawful efforts to require the unsuitable person to divest himself of the securities, including, if necessary, the immediate purchase of the securities for cash at a fair market value. Ameristar may be required to disclose to the Mississippi Commission, upon request, the identities of debt security holders. In addition, the Mississippi Commission under the Mississippi Act may, in its discretion, (i) require holders of debt securities of Ameristar to file applications, (ii) investigate such holders, and (iii) require such holders to be found suitable to own such debt securities or receive distributions thereon. If the Mississippi Commission determines that a person is unsuitable to own such security, then the issuer may be sanctioned, including the loss of its approvals, if without the prior approval of the Mississippi Commission, it (i) pays to the unsuitable person any dividend, interest, or any distribution whatsoever; (ii) recognizes any voting right by such unsuitable person in connection with such securities; (iii) pays the unsuitable person remuneration in any form; or (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation, or similar transaction. Although the Mississippi Commission generally does not require the individual holders of obligations such as notes to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to, a default, or where the holder of the debt instrument exercises a material influence over the gaming operations of the entity in question. Any holder of debt securities required to apply for a finding of suitability must pay all investigative fees and costs of the Mississippi Commission in connection with such an investigation. ACVI must maintain a current stock ledger in its principal office in Mississippi and Ameristar must maintain a current list of stockholders in the principal office of ACVI which must reflect the record ownership of each outstanding share of any class of equity security issued by Ameristar. The stockholder list may thereafter be maintained by adding reports regarding the ownership of such securities that it receives from Ameristar's transfer agent. The ledger and stockholder lists must be available for inspection by the Mississippi Commission at any time. If any securities of Ameristar are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to the Mississippi Commission. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Ameristar must also render maximum assistance in determining the identity of the beneficial owner. The Mississippi Act requires that the certificates representing securities of a publicly traded corporation that has a Gaming Subsidiary bear a legend to the general effect that such securities are subject to the Mississippi Act and the regulations of the Mississippi Commission. Ameristar has received an exemption from this legend requirement from the Mississippi Commission. The Mississippi Commission has the power to impose additional restrictions on the holders of Ameristar's securities at any time. Substantially all loans, leases, sales of securities and similar financing transactions by a Gaming Subsidiary must be reported to or approved by the Mississippi Commission. A Gaming Subsidiary may not make a public offering of its securities but may pledge or mortgage casino facilities. Ameristar may not make an issuance or a public offering of its securities without the prior approval of the Mississippi Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi or to retire or extend obligations incurred for one or more such purposes. Such approval, if given, does not constitute a recommendation or approval of the investment merits of the securities subject to the offering. Any representation to the contrary is unlawful. Under the regulations of the Mississippi Commission, a Gaming Subsidiary may not guarantee a security issued by an affiliated company pursuant to a public offering, or pledge its assets to secure payment or performance of the obligations evidenced by the security issued by the affiliated company, without the prior approval of the Mississippi Commission. The pledge of the stock of a Gaming Subsidiary and the foreclosure of such a pledge is ineffective without the prior approval of the Mississippi Commission. Moreover, restrictions on the transfer of an equity security issued by a Gaming Subsidiary and agreements not to encumber such securities (the "Stock Restrictions") are ineffective without the prior approval of the Mississippi Commission. The Company has obtained all such necessary approvals required to date. Changes in control of Ameristar through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover, and certain recapitalizations and stock repurchases by Ameristar, cannot occur without the prior approval of the Mississippi Commission. Entities seeking to acquire control of a registered corporation must satisfy the Mississippi Commission in a variety of stringent standards prior to assuming control of such registered corporation. The Mississippi Commission may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction. The Mississippi legislature has declared that some corporate acquisitions opposed by management, repurchases of voting securities and other corporate defense tactics that affect corporate gaming licensees in Mississippi and corporations whose stock is publicly traded that are affiliated with those licensees, may be injurious to stable and productive corporate gaming. The Mississippi Commission has established a regulatory scheme to ameliorate the potentially adverse effects of these business practices upon Mississippi's gaming industry and to further Mississippi's policy to (i) assure the financial stability of corporate gaming operations and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of corporate affairs. Approvals are, in certain circumstances, required from the Mississippi Commission before Ameristar may make exceptional repurchases of voting securities above the current market price of its common stock (commonly called "greenmail") or before a corporate acquisition opposed by management may be consummated. Mississippi's gaming regulations will also require prior approval by the Mississippi Commission if Ameristar adopts a plan of recapitalization proposed by its Board of Directors opposing a tender offer made directly to the stockholders for the purpose of acquiring control of Ameristar. Neither Ameristar nor any subsidiary may engage in gaming activities in Mississippi while also conducting gaming operations outside of Mississippi without approval of the Mississippi Commission or a waiver of such approval. The Mississippi Commission may require determinations that, among others, there are means for the Mississippi Commission to have access to information concerning the out-of-state gaming operations of the Company and its affiliates. Ameristar has previously obtained a waiver of foreign gaming approval from the Mississippi Commission for operations in Nevada and Iowa and will be required to obtain the approval or a waiver of such approval from the Mississippi Commission prior to engaging in any additional future gaming operations outside of Mississippi. If the Mississippi Commission decides that a Gaming Subsidiary violated a gaming law or regulation, the Mississippi Commission could limit, condition, suspend or revoke the license of the Gaming Subsidiary. In addition, a Gaming Subsidiary, Ameristar and the persons involved could be subject to substantial fines for each separate violation. Because of such a violation, the Mississippi Commission could seek to appoint a supervisor to operate the casino facilities. Limitation, conditioning or suspension of any gaming license or the appointment of a supervisor could (and revocation of any gaming license would) materially adversely affect Ameristar's and the Gaming Subsidiary's gaming operations. License fees and taxes, computed in various ways depending on the type of gaming involved, are payable to the State of Mississippi and to the counties and cities in which a Gaming Subsidiary's respective operations will be conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly or annually and are based upon (i) a percentage of the gross gaming revenues received by the casino operation, (ii) the number of slot machines operated by the casino or (iii) the number of table games operated by the casino. The license fee payable to the State of Mississippi is based upon "gaming receipts" (generally defined as gross receipts less payouts to customers as winnings) and equals 4% of gaming receipts of $50,000 or less per month, 6% of gaming receipts over $50,000 and less than $134,000 per month, and 8% of gaming receipts over $134,000 per month. The foregoing license fees are allowed as a credit against the Company's Mississippi income tax liability for the year paid. The gross revenue fee imposed by the City of Vicksburg equals approximately 4% of the gaming receipts. The Mississippi Commission's regulations require as a condition of licensure or license renewal that an existing licensed gaming establishment's plan include a 500-car parking facility in close proximity to the casino complex and infrastructure facilities which amount to at least 25% of the casino cost. The Company believes that ACVI is in compliance with this requirement with the opening of a 150-room hotel at Ameristar Vicksburg in June 1998. IOWA. The Company's Council Bluffs operations are conducted by ACCBI and are subject to Chapter 99F of the Iowa Code and the regulations promulgated thereunder. The Company's gaming operations are subject to the licensing and regulatory control of the Iowa Racing and Gaming Commission (the "Iowa Gaming Commission"). Under Iowa law, wagering on a "gambling game" is legal, when conducted by a licensee on an "excursion gambling boat." An "excursion gambling boat" is a self-propelled excursion boat. "Gambling game" means any game of chance authorized by the Iowa Gaming Commission. The excursion season must be from April 1st through October 31st of each calendar year. The vessel must operate at least one excursion each day for 100 days during the excursion season to operate during the off season. Each excursion must consist of a minimum of two hours. The Council Bluffs Casino satisfied the requirements of Iowa law for the conduct of off- season operations during each of 1996, 1997 and 1998. The legislation permitting riverboat gaming in Iowa authorizes the granting of licenses to "qualified sponsoring organizations." A "qualified sponsoring organization" is defined as a person or association that can show to the satisfaction of the Iowa Gaming Commission that the person or association is eligible for exemption from federal income taxation under sec. 501(c)(3), (4), (5), (6), (7), (8), (10) or (19) of the Internal Revenue Code (hereinafter "not-for-profit corporation"). The not- for-profit corporation is permitted to enter into operating agreements with persons qualified to conduct riverboat gaming operations. Such operators must be approved and licensed by the Iowa Gaming Commission. On January 27, 1995, the Iowa Gaming Commission authorized the issuance of a license to conduct gambling games on an excursion gambling boat to the Iowa West Racing Association, a not-for-profit corporation organized for the purpose of facilitating riverboat gaming in Council Bluffs, Iowa (the "Association"). The Association entered into an agreement with ACCBI authorizing ACCBI to operate riverboat gaming operations in Council Bluffs under the Association's gaming license (the "Operator's Contract"). This contract was approved by the Iowa Gaming Commission. The term of the Operator's Contract runs until December 31, 2002, with two five- year renewal options. The current license awarded by the Iowa Gaming Commission for the Council Bluffs Casino expires on March 31, 1999 and has been renewed to March 31, 2000. Under Iowa law, a license to conduct gambling games may be issued in a county only if the county electorate has approved such gambling games. Although the electorate of Pottawattamie County, which includes the City of Council Bluffs, approved by referendum the gambling games conducted by ACCBI, a reauthorization referendum must be submitted to the electorate in the general election to be held in 2002 and each eight years thereafter. Each such referendum requires the vote of a majority of the persons voting thereon. If any such reauthorization referendum is defeated, Iowa law provides that any previously issued gaming license will remain valid and subject to periodic renewal for a total of nine years from the date of original issuance, subject to earlier revocation as discussed below. The original issuance date of the gaming license for Ameristar Council Bluffs was January 27, 1995. Various bills affecting gaming are currently under consideration in the Iowa legislature. One of these bills would impose a moratorium on the issuance of any new gaming licenses, which would positively impact the Company. Other proposed bills would prohibit existing casinos from expanding their operations, require the removal or relocation of automatic teller machines at casino facilities and increase the amounts required to be reimbursed by casinos to the State of Iowa for law enforcement activities. Substantially all of ACCBI's material transactions are subject to review and approval by the Iowa Gaming Commission. All contracts or business arrangements, verbal or written, with any related party or in which the term exceeds three years or the total value of the contract exceeds $50,000 must be submitted in advance to the Iowa Gaming Commission for approval. Additionally, contracts negotiated between ACCBI and a related party must be accompanied by economic and qualitative justification. ACCBI is required to notify the Iowa Gaming Commission of the identity of each director, corporate officer and owner, partner, joint venturer, trustee or any other person who has a beneficial interest of five percent (5%) or more, direct or indirect, in ACCBI. The Iowa Gaming Commission may require ACCBI to submit background information on such persons. The Iowa Gaming Commission may request ACCBI to provide a list of persons holding beneficial ownership interests in ACCBI of less than five percent (5%). For purposes of these rules, "beneficial interest" includes all direct and indirect forms of ownership or control, voting power or investment power held through any contract, lien, lease, partnership, stockholding, syndication, joint venture, understanding, relationship, present or reversionary right, title or interest, or otherwise. The Iowa Gaming Commission may suspend or revoke the license of a licensee in which a director, corporate officer or holder of a beneficial interest includes or involves any person or entity which is found to be ineligible as a result of want of character, moral fitness, financial responsibility, professional responsibility or due to failure to meet other criteria employed by the Iowa Gaming Commission. ACCBI must submit detailed financial, operating and other reports to the Iowa Gaming Commission. ACCBI must file monthly gaming reports indicating adjusted gross receipts received from gambling games and the total number and amount of money received from admissions. Additionally ACCBI must file annual financial statements covering all financial activities related to its operations for each fiscal year. ACCBI must also keep detailed records regarding its equity structure and owners. Iowa has a graduated wagering tax equal to five percent (5%) of the first one million dollars of adjusted gross receipts, ten percent (10%) on the next two million dollars of adjusted gross receipts and twenty percent (20%) on adjusted gross receipts over three million dollars. In addition, the state charges other fees on a per customer basis. Additionally, ACCBI pays to the City of Council Bluffs a fee equal to $0.50 per passenger. Under the Operator's Contract, ACCBI also pays the Association an admissions fee of $1.50 per passenger. ACCBI has interpreted the Operator's Contract to mean that a person may leave and re-enter Council Bluffs Casino (for example, to visit the restaurants at Ameristar Council Bluffs) without ACCBI being obligated to pay an additional admissions fee to the Association. ACCBI received a letter from the Association in August 1996 in which the Association asserted that an additional fee is due each time a person enters the Council Bluffs Casino, including re- entries. The Company has been advised by the Association that the board of directors of the Association discussed a proposal to settle this dispute at an October 1997 meeting but declined to take any action either to approve the proposed settlement or to pursue the previously threatened claim. Accordingly, the Association has advised ACCBI that it does not currently intend to pursue this claim, but the Association has not formally waived or released the claim. If the Iowa Gaming Commission decides that a gaming law or regulation has been violated, the Iowa Gaming Commission has the power to assess fines, revoke or suspend licenses or to take any other action as may be reasonable or appropriate to enforce the gaming rules and regulations. REGULATORY REQUIREMENTS APPLICABLE TO OWNERS OF CERTAIN NOTES. A record or beneficial owner of the promissory notes issued by the Company in connection with the acquisition of The Reserve (the "Gem Notes") could be required by one or more gaming regulatory authorities to be found suitable, and such owner would be required to apply for a finding of suitability within 30 days after request of such gaming authority or within such other time period prescribed by such gaming authority. If such a record or beneficial owner is required to be found suitable and is not found suitable by such gaming regulatory authority, such owner may be required by law to dispose of the Gem Notes. If any gaming regulatory authority determines that a person is unsuitable to own the Gem Notes, then the Company may be subject to sanctions, including the loss of its regulatory approvals, if, without the prior approval of the applicable gaming regulatory authorities, it (i) pays interest on the Gem Notes to the unsuitable person, (ii) pays the unsuitable person remuneration in any form or (iii) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction. In denying applications for findings of suitability for certain purposes in early 1997 submitted by the persons to whom the Gem Notes were issued, the Nevada Commission did not find either of them to be unsuitable to hold any debt obligations of Ameristar, and, as of the date of this report, no gaming regulatory authority has required either of such persons to apply for a finding of suitability to own the Gem Notes. However, one or more gaming regulatory authorities could require a holder of the Gem Notes to submit such an application in the future. These regulatory requirements are applicable with respect to other debt securities issued by the Company, including the Company's Senior Subordinated Notes. However, unlike the Gem Notes, the Senior Subordinated Notes include provisions requiring a holder who is found to be unsuitable to dispose of its Senior Subordinated Notes. In certain circumstances, the Company is permitted to redeem Senior Subordinated Notes of an unsuitable holder. OTHER JURISDICTIONS. The Company expects to be subject to similar rigorous regulatory standards in each jurisdiction in which it seeks to conduct gaming operations. There can be no assurance that regulations adopted or taxes imposed by other jurisdictions will permit profitable operations by the Company. FEDERAL REGULATION OF SLOT MACHINES. The Company is required to make annual filings with the U.S. Attorney General in connection with the sale, distribution or operation of slot machines. All requisite filings for the most recent year and the current year have been made. CURRENCY TRANSACTION REPORTING REQUIREMENTS. Pursuant to a 1985 agreement between the State of Nevada and the United States Department of the Treasury (the "Treasury"), the Nevada Commission and the Nevada Board have authority to enforce their own cash transaction reporting laws applicable to casinos, which substantially parallel the Federal Bank Secrecy Act. Under the Money Laundering Suppression Act of 1994, which was passed by Congress, the Secretary of the Treasury retained the ability to permit states, including Nevada, to continue to enforce their own cash transaction reporting laws applicable to casinos. The Nevada Act and related regulations require most gaming licensees to file reports with respect to various gaming-related and other cash transactions if such transactions aggregate more than $10,000 in a 24-hour period. Casinos are required to monitor receipts and disbursements of currency in excess of $10,000 and report them to the Treasury. Although it is not possible to quantify the full impact of these requirements on the Company's business, the changes are believed to have had some adverse effect on results of operations since inception. On November 28, 1994, the Treasury enacted amendments (effective December 1, 1994) to the federal regulations under the Bank Secrecy Act. The amendments require casinos subject to the Bank Secrecy Act to implement written programs no later than June 1, 1995 to assure and monitor compliance with the Bank Secrecy Act. Such programs must include "know your customer" and suspicious transaction reporting components. Although Nevada casinos are exempt from Title 31, the Nevada Commission has adopted regulations under the Nevada Act that parallel in several respects the amendments to the Bank Secrecy Act. In June 1998, ACVI received a letter from the Financial Crimes Enforcement Network ("FinCEN") of the Department of Treasury identifying 26 alleged currency transaction reporting failures or errors that were discovered in an audit by the Internal Revenue Service covering an approximately 13-month period following the opening of Ameristar Vicksburg. ACVI has responded to the FinCEN letter and has implemented various steps intended to improve compliance with the currency transaction reporting requirements. ACVI is expected to meet with FinCEN officials in the near future concerning this matter, which Management anticipates will be resolved without a material adverse effect on the Company or its results of operations or financial condition. POTENTIAL CHANGES IN TAX AND REGULATORY REQUIREMENTS. From time to time, federal and state legislators and officials have proposed changes in tax law, or in the administration of such laws, affecting the gaming industry. Recent proposals have included a federal gaming tax and increases in state or local gaming taxes. They have also included limitations on the federal income tax deductibility of the cost of furnishing complimentary promotional items to customers, as well as various measures which would require withholding on amounts won by customers or on negotiated discounts provided to customers on amounts owed to gaming companies. It is not possible to determine with certainty the likelihood of possible changes in tax law or in the administration of such law. Such changes, if adopted, could have a materially adverse effect on the Company's financial results. The United States Congress has passed legislation which creates a national gaming study commission (the "National Gaming Commission"). The National Gaming Commission generally has the duty to conduct a comprehensive legal and factual study of gambling in the United States and existing federal, state and local policies and practices with respect to the legalization or prohibition of gambling activities, to formulate and propose changes in such policies and practices and to recommend legislation and administrative actions for such changes. It is not possible to predict the future impact of these proposals on the Company and its operations. Any such proposals could have a material adverse affect on the Company's business. NON-GAMING REGULATIONS. The sale of alcoholic beverages by the Company is subject to the licensing, control and regulation in Jackpot by the Liquor Board of Elko County, in Henderson by the City of Henderson, in Vicksburg by both the City of Vicksburg and the Alcoholic Beverage Control Division of the Mississippi State Tax Commission, and in Council Bluffs by the Alcoholic Beverage Division of the Iowa Department of Commerce (collectively, the "Liquor License Authorities"). In Mississippi, Ameristar Vicksburg has been designated as a special resort area, which allows ACVI to serve alcoholic beverages on a 24-hour basis. In Nevada, the applicable liquor laws allow 24-hour service of alcoholic beverages without any additional permits. In Iowa, the applicable liquor laws allow the sale of liquor during legal hours which are Monday through Saturday from 6 a.m. to 2 a.m. and Sunday from 8 a.m. to 2 a.m. All licenses are revocable and not transferable. The Liquor License Authorities have the full power to limit, condition, suspend or revoke any such license or to place a liquor licensee on probation with or without conditions. Any such disciplinary action could (and revocation would) have a material adverse effect upon the operations of the Company's business. Certain officers and managers of ACVI and ACLVI must be investigated by the applicable Liquor License Authorities in connection with ACVI's and ACLVI's liquor permits. Changes in licensed positions must be approved by the applicable Liquor License Authorities. All cruising vessels operated by the Company must comply with U.S. Coast Guard requirements as to safety and must hold a Certificate of Inspection. These requirements set limits on the operation of the vessel and require that each vessel be operated by a minimum complement of licensed personnel. Loss of the vessel's Inspection Certificate would preclude its use as a riverboat. Every five years, vessels must be dry-docked for an inspection of the outside of the hull resulting in a loss of service that may have an adverse effect on the Company. Less stringent rules apply to permanently moored vessels. In order to comply with the federal Merchant Marine Act of 1936, as amended, and the federal Shipping Act of 1916, as amended, and applicable regulations thereunder, the Company's Bylaws contain provisions designed to prevent persons who are not citizens of the United States from holding, in the aggregate, more than 24.9% of the Company's outstanding common stock. All shipboard employees of the Company employed on U.S. Coast Guard-approved vessels, even those who have nothing to do with the actual operations of the vessel, such as dealers, waiters and security personnel, may be subject to the Jones Act, which, among other things, exempts those employees from state limits on workers' compensation awards. The Company is also required to comply with various environmental regulations. See "Item 2. - Properties." ITEM 2. PROPERTIES JACKPOT. Cactus Petes is located on a 35-acre site and The Horseshu is located on a 30-acre site. The Cactus Petes and The Horseshu sites are across from each other on U.S. Highway 93. The Company also owns 204 housing units in Jackpot, including 90 units in two apartment complexes developed as United States Department of Agriculture Rural Economic and Community Development Services Multi-Family Housing Program ("USDA") projects. These housing units support the primary operations of the Jackpot Properties. The Jackpot Properties are subject to deeds of trust securing the Revolving Credit Facility, and the USDA housing projects are subject to mortgage loans in favor of the USDA. The Company owns a gas station adjacent to Highway 93 in Jackpot, which it operates under a franchise from Chevron. Management believes that this facility is in material compliance with applicable environmental and other regulatory requirements. The Company has previously operated two other gas stations at the Jackpot Properties, one of which was abandoned prior to the adoption of modern environmental abandonment standards. Although management believes that all tanks for this gas station were removed in the mid-1970s, the Company has not conducted tests for the presence of any environmental contamination from this gas station. Management believes that the likelihood of a material unfavorable outcome with respect to potential environmental liabilities relating to this former gas station is remote. VICKSBURG. In connection with the development of Ameristar Vicksburg, the Company has acquired seven parcels in Vicksburg along Washington Street near Interstate 20. These parcels comprise approximately 43.4 acres, approximately 30 of which are developable. Of the seven parcels, three have been acquired by direct purchase and four have been acquired by lease. The Company has exercised a option to purchase one of the leasehold parcels for $50,000, which is expected to close in the near future. The aggregate monthly rent under the remaining leases at March 1, 1999 was approximately $53,000. Each lease provides for the Company to be responsible for all taxes, insurance premiums, utilities and other ownership and operating costs associated with the property during the entire term of the lease. Each lease includes options for the Company to purchase the applicable parcels, for an aggregate price which decreases over time from approximately $5.9 million to approximately $2.0 million. A substantial portion of the purchase prices may be paid in installments with interest at stated rates. The Company plans to exercise the option on one of the other parcels within the next year. The Vicksburg Casino, the Company's leasehold interests relating to the Ameristar Vicksburg site and substantially all of that portion of the Ameristar Vicksburg site owned by the Company serve as collateral for the Company's obligations under the Revolving Credit Facility. The hotel at Ameristar Vicksburg and the underlying property are subject to a deed of trust securing a loan to fund a portion of the hotel construction costs. In addition, the Company has developed a 20-acre mobile home park with 30 single- and 20 double-wide mobile homes. This mobile home park is located seven miles from Ameristar Vicksburg and sites are available for rent by employees and other persons. The mobile home park rental rates are competitive with the local market. COUNCIL BLUFFS. Ameristar Council Bluffs is on an approximately 50-acre site along the bank of the Missouri River and adjacent to the Nebraska Avenue exit on Interstate 29 immediately north of the junction of Interstates 29 and 80. The Company owns approximately 27 acres of this site and has rights to use the remaining portion of the site that is owned by the State of Iowa for a 50- year term. The Company has leased approximately 0.623 acres of the Ameristar Council Bluffs site to Kinseth Hotel Corporation for the development and operation by Kinseth of a 140-room limited service Holiday Inn Suites Hotel that opened on March 31, 1997. All of the Company's interests in Ameristar Council Bluffs are subject to collateral security instruments securing the Revolving Credit Facility and other indebtedness. THE RESERVE. The Reserve is at the southeastern corner of the junction of Lake Mead Drive and Interstate 515 in Henderson, Nevada on a site containing approximately 53 acres, of which approximately 46 acres are developable. The Company currently owns 33 acres of the site and has options to acquire the remainder of the site. Each option exercise must be for at least five acres and a minimum of five acres of the option land must be acquired each year or the remaining options expire. The Company exercised an option for five acres of the site in April 1997. A second five-acre option was exercised in January 1999. The option exercise prices, which increase at the rate of 8% per annum from October 1, 1995, are $217,800 per acre for the first 17 acres and $152,460 per acre for each remaining acre, in each case plus 8% per annum from October 1, 1995 through the date of exercise. Construction of a contemplated second phase of The Reserve would also require the Company to acquire additional land, the area of which has not yet been determined. The Reserve site was previously used for surface waste disposal activities for approximately 50 years. Prior to 1994, the site had large areas of debris, rubble and some stained soils resulting from these waste activities. Site studies revealed asbestos, lead and pesticide concentrations in the surface soils. Following a surface remediation program by a third party in 1994, the Nevada Division of Environmental Protection approved a closure of the remediation and indicated that no further work was required. A 1995 Phase I environmental assessment on 23 acres of the site now owned by the Company showed that some rubble remained on portions of the property, but that all hazardous material had been removed. A 1997 Phase I environmental assessment on the 30 acres of The Reserve site under option or subsequently acquired by the Company indicated the property does not appear to have been adversely impacted since the completion of the 1994 remediation program. Phase I environmental assessments involve the conduct of limited procedures and may not identify the existence or extent of actual environmental conditions. OTHER. The Company leases approximately 21,200 square feet of office space in Las Vegas, Nevada for its executive offices, which the Company occupied in March 1997. ITEM 3. LEGAL PROCEEDINGS Bryan K. and Dawn H. Hafen v. Steven W. Rebeil, et al. This lawsuit was filed in the Clark County District Court as case number A347722. A named defendant in the amended complaint, filed on January 29, 1996, action is Gem Gaming, Inc. ("Gem"). ACLVI is the successor-in-interest by merger to Gem. The case arises out of the purchase of land in Mesquite, Nevada by Steven W. Rebeil, a former Gem stockholder, pursuant to which a jointly owned corporation was to develop real property contributed by the plaintiffs as a hotel- casino. The plaintiffs allege that Gem's former stockholders and their controlled entities (including Gem) engaged in a conspiracy to defraud the plaintiffs in connection with the plaintiff's contribution of the land and its subsequent sale to a third party. The plaintiffs allege violations of Nevada's racketeering statutes, fraud and unjust enrichment. The plaintiffs do not allege any improper conduct by Gem following its acquisition by The Company. The complaint seeks an unspecified amount of damages, although the plaintiffs have otherwise claimed total compensatory damages of approximately $10 million. Gem's former stockholders are contractually required to indemnify ACLVI against the claims in the Hafen litigation. E. L. Pennebaker, Jr., et. al. v. ACI, et. al. On February 23, 1998, E. L. Pennebaker, Jr. filed a complaint in the Circuit Court of Pike County, Mississippi against ACI, Harrah's Vicksburg, Inc., Riverboat Corporation of Mississippi-Vicksburg, and Deposit Guaranty National Bank. The matter is pending as case number 98-0047-B. The complaint was amended on February 27, 1998, to add James F. Belisle, Multi Gaming Management, Inc. and Multi Gaming Management of Mississippi, Inc. as additional plaintiffs. The plaintiffs are property owners or have rights to acquire property along the Big Black River in Warren County, Mississippi. They allege they would have profited if the Mississippi Gaming Commission had found suitable for a casino a location along that river that was controlled by plaintiffs Belisle, Multi Gaming Management, Inc. and Multi Gaming Management of Mississippi, Inc. The plaintiffs further allege that the defendants entered into an agreement to hinder trade and restrain competition in the gaming industry in violation of the antitrust laws and the gaming laws of Mississippi. Specifically, the plaintiffs allege the defendants conducted an aggressive campaign in opposition to the application of Horseshoe Gaming, Inc. for a gaming site on the Big Black River. The plaintiffs allege compensatory damages of $38 million and punitive damages of $200 million. ACI has answered the complaint and is vigorously defending this suit. Mr. Pennebaker has also filed a petition with the Mississippi Gaming Commission requesting that the Mississippi Gaming Commission order ACI, Harrah's Vicksburg, Inc., and Riverboat Corporation of Mississippi-Vicksburg to stop opposing the approval and construction of a casino on the Big Black River and for such other corrective and punitive action that the Mississippi Gaming Commission might find appropriate. ACI has been advised that no action is required by it in connection with this petition unless requested by the Mississippi Gaming Commission. See also "Item 1. - Business - Government Regulations - Mississippi." PCL Construction Services, Inc. et al. v. Ameristar Casino Las Vegas, Inc. This suit was filed in the District Court of Clark County, Nevada on October 14, 1998 as case number A394783. The complaint was served on ACLVI on February 4, 1999. An amended complaint was filed on February 19, 1999 and served on ACLVI on March 1, 1999. The plaintiffs are PCL Construction Services, Inc., Tri-Star Theme Builders, Inc. and a joint venture comprised of these two firms. The joint venture was the contractor for certain of the interior work at The Reserve pursuant to a construction contract dated November 14, 1997. The contract, as amended through change orders, provided for a guaranteed maximum price not to exceed $25,482,532, inclusive of fees to the contractor. The plaintiffs have alleged that ACLVI is obligated to pay them $5,621,098, plus interest, in excess of the guaranteed maximum price for additional labor costs they have invoiced to ACLVI. The complaint does not state a specific theory for recovery. Settlement negotiations are ongoing, and ACLVI has answered the complaint. If this case is not resolved through the current settlement negotiations, ACLVI intends to vigorously defend this case. Clothe H. James, et al. v. Ameristar Casinos, Inc., Ameristar Casino Vicksburg, Inc., et al. On January 18, 1996, the plaintiffs commenced a lawsuit against ACI, ACVI, and Riverboat Corporation of Mississippi, d/b/a Isle of Capri Casino. The suit was filed in the Circuit Court of the First Judicial District of Hinds County, Mississippi, as Civil Action No. 251-96- 54CN. The plaintiffs filed an amended complaint on February 6, 1996. The plaintiffs sought $5.0 million in actual damages and $7.5 million in punitive damages. This case involved alleged wrongful death and personal injuries to four persons. The plaintiffs alleged that ACVI and the Isle of Capri Casino each negligently served alcohol to a visibly intoxicated person who later crashed his vehicle. Two persons were killed and two persons were severely injured. In October 1998, the plaintiffs, ACI and ACVI entered into a confidential settlement agreement under which ACI and ACVI were released by the plaintiffs from all further liability in exchange for certain payments from the Company and its liability insurance carrier. The settlement will not have a material effect on the Company or its results of operations or financial condition. Other Legal Proceedings and Claims. From time to time, the Company is a party to litigation which arises in the ordinary course of business. Except for the matters described or referred to above, the Company is not currently a party to any litigation that management believes would be likely to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Ameristar's Common Stock is traded on the Nasdaq National Market System ("Nasdaq-NMS") under the symbol "ASCA." The following table sets forth, for the fiscal quarter indicated, the high and low sale prices for the Common Stock, as reported by Nasdaq: High Low 1997 First Quarter $ 7.25 $ 4.88 Second Quarter 6.25 4.63 Third Quarter 7.13 4.75 Fourth Quarter 5.88 4.75 1998 First Quarter $ 6.50 $ 4.88 Second Quarter 5.75 5.00 Third Quarter 5.13 2.63 Fourth Quarter 3.25 1.88
On March 15, 1999, there were 308 holders of record of Ameristar's Common Stock. No dividends on Ameristar's Common Stock have been declared during the last two fiscal years. The Company intends to retain all earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's Revolving Credit Facility and Senior Subordinated Notes obligate the Company to comply with certain financial covenants that may restrict or prohibit the payment of dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from the audited financial statements of the Company and should be read in conjunction with those statements, certain of which are included in this Report. AMERISTAR CASINOS, INC. CONSOLIDATED SELECTED FINANCIAL DATA For For For For For the the the the the year year year year year INCOME STATEMENT ended ended ended ended ended DATA: 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- (amounts in thousands, except per share data) REVENUES: Casino $ 90,882 $ 99,364 $161,338 $173,077 $216,345 Food and beverage 17,494 19,303 24,250 30,672 45,745 Rooms 7,580 7,861 7,641 9,685 14,434 Other 7,822 7,756 7,760 8,275 9,966 -------- -------- -------- -------- -------- 123,778 134,284 200,989 221,709 286,490 Less: Promotional allowances 9,425 10,417 12,524 15,530 22,071 -------- -------- -------- -------- -------- Net revenues 114,353 123,867 188,465 206,179 264,419 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Casino 40,347 44,503 75,685 78,733 105,331 Food and beverage 12,469 11,747 16,773 19,784 31,506 Rooms 2,249 2,404 2,368 3,130 5,791 Other 8,412 8,211 7,054 7,546 8,592 Selling, general and administrative 28,462 29,197 47,758 51,958 75,147 Depreciation and amortization 7,062 9,721 14,135 16,358 24,191 Abandonment loss - - - 646 - Preopening costs 5,408 - 7,379 - 10,611 -------- -------- -------- -------- -------- Total costs and expenses 104,409 105,783 171,152 178,155 261,169 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS 9,944 18,084 17,313 28,024 3,250 OTHER INCOME (EXPENSE): Interest income 86 205 354 445 378 Interest expense (3,379) (3,958) (8,303) (12,107) (22,699) Other (5) - (77) (35) (7) -------- -------- -------- -------- -------- Income (loss) before income tax provision (benefit) 6,646 14,331 9,287 16,327 (19,078) Income tax provision (benefit) 2,426 5,236 3,390 5,959 (6,363) -------- -------- -------- -------- -------- Income (loss) before extraordinary loss and cumulative effect of a change in accounting principle 4,220 9,095 5,897 10,368 (12,715) Extraordinary loss on early retirement of debt, net of income tax benefit of $353 and $387, respectively - (657) - (673) - -------- -------- -------- -------- -------- NET INCOME (LOSS) $ 4,220 $ 8,438 $ 5,897 $ 9,695 $(12,715) ======== ======== ======== ======== ========
AMERISTAR CASINOS, INC. CONSOLIDATED SELECTED FINANCIAL DATA (CONTINUED) For For For For For the the the the the year year year year year INCOME STATEMENT DATA ended Ended ended ended ended (CONTINUED): 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- (amounts in thousands, except per share data) EARNINGS PER SHARE: Income (loss) before extraordinary item Basic and diluted $ 0.21 $ 0.45 $ 0.29 $ 0.51 $ (0.62) ======== ======== ======== ======== ======== Net income (loss) Basic and diluted $ 0.21 $ 0.42 $ 0.29 $ 0.48 $ (0.62) ======== ======== ======== ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING 20,360 20,360 20,360 20,360 20,360 BALANCE SHEET AND as of as of as of as of as of OTHER DATA: 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 -------- -------- -------- -------- -------- Cash $ 9,169 $ 14,787 $ 10,724 $ 13,031 $ 18,223 Total assets 125,347 202,220 270,052 336,186 350,797 Total notes payable and long-term debt, net of current maturities 45,399 101,869 143,893 193,113 230,399 Stockholders' equity 56,609 65,047 70,944 80,639 67,924 Capital expenditures 33,329 64,783 76,388 76,634 39,492 The Vicksburg Casino and certain other portions of Ameristar Vicksburg opened in late February 1994. The remaining Ameristar Vicksburg facilities were completed and opened through May 1994. The Ameristar Vicksburg hotel opened in June 1998. The Council Bluffs Casino opened in mid-January 1996. Portions of the land- based facilities at Ameristar Council Bluffs opened in June, November and December 1996. Ameristar Council Bluffs' remaining land-based facilities opened in February and March 1997. The Reserve opened February 10, 1998. No dividends were paid in 1994, 1995, 1996, 1997 and 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included in this Report. The information in this section and in this Report generally includes forward-looking statements. See "Item 1. - Business - Cautionary Information Regarding Forward-Looking Statements." OVERVIEW Ameristar Casinos, Inc. ("Ameristar" or "ACI") owns and operates five casino-hotels in four markets through its wholly owned subsidiaries. Ameristar and its subsidiaries are collectively referred to herein as the "Company." The Company's properties consist of the following: Cactus Petes Resort Casino and The Horseshu Hotel & Casino (collectively, the "Jackpot Properties"), two casino- hotels that have been operating in Jackpot, Nevada at the Idaho border since 1956. Ameristar Casino Vicksburg ("Ameristar Vicksburg"), located in Vicksburg, Mississippi, a riverboat-themed dockside casino and related land-based facilities, including a hotel which opened in June 1998. The remainder of Ameristar Vicksburg opened in February and May 1994. Ameristar Casino Hotel Council Bluffs ("Ameristar Council Bluffs"), a riverboat casino and related land-based hotel and other facilities in Council Bluffs, Iowa across the Missouri River from Omaha, Nebraska. The casino opened on January 19, 1996, portions of the land-based Main Street Pavilion opened on June 17, 1996, the hotel opened on November 1, 1996, and the remainder of Ameristar Council Bluffs opened in early 1997. The Reserve Hotel Casino ("The Reserve"), in Henderson, Nevada at the intersection of Interstate 515 and Lake Mead Drive, which opened on February 10, 1998. The Company acquired The Reserve on October 9, 1996 through a merger of the initial developer of the property into a subsidiary of Ameristar. Certain of the Company's operations are seasonal in nature. In particular, in Jackpot, the months of March through October are the strongest. As a result, the second and third calendar quarters typically produce a disproportionate amount of the income from operations of the Jackpot Properties. In addition, adverse weather conditions may adversely affect the business of the Jackpot Properties, and operations during the winter months typically vary from year to year based on the severity of the winter weather conditions in the northwestern United States. To date, operations in Vicksburg have experienced some seasonality, with August and the winter months being the slower periods. To date, operations at Ameristar Council Bluffs have not experienced any material seasonality, and management does not expect operations at The Reserve to be subject to any significant seasonality. The Company's quarterly and annual operating results may be affected by competitive pressures, the timing of the commencement of new gaming operations, the amount of preopening costs incurred by the Company, construction at existing facilities and general weather conditions. Consequently, the Company's operating results for any quarter or year are not necessarily comparable and may not be indicative of results to be expected for future periods. The following table highlights the consolidated cash flow information and results of operations of Ameristar's operating subsidiaries for its principal properties:
Year Ended December 31, 1996 1997 1998 -------- -------- -------- Consolidated cash flow information: Cash flow from operations $ 33,177 $ 33,641 $ 23,137 Cash flow used for investing (53,746) (63,417) (53,863) Cash flow from financing 16,506 32,083 35,918 Net revenues: Jackpot Properties $ 51,904 $ 54,455 $ 54,719 Ameristar Vicksburg 66,190 63,961 68,458 Ameristar Council Bluffs 70,331 87,763 97,667 The Reserve - - 43,575 Corporate and other 40 - - -------- -------- -------- Consolidated net revenues $188,465 $206,179 $264,419 ======== ======== ======== Adjusted operating income (1): Jackpot Properties $ 9,124 $ 10,308 $ 9,638 Ameristar Vicksburg 13,827 13,165 13,480 Ameristar Council Bluffs 8,432 14,251 17,448 The Reserve - - (16,092) Corporate and other (6,691) (9,054) (10,613) -------- -------- -------- Consolidated operating income $ 24,692 $ 28,670 $ 13,861 ======== ======== ======== Adjusted operating income margins (1): Jackpot Properties 17.6% 18.9% 17.6% Ameristar Vicksburg 20.9% 20.6% 19.7% Ameristar Council Bluffs 12.0% 16.2% 17.9% The Reserve - - (36.9%) Consolidated operating income margin 13.1% 13.9% 5.2% EBITDA (2): Jackpot Properties $ 11,764 $ 13,208 $ 13,163 Ameristar Vicksburg 20,287 19,350 20,150 Ameristar Council Bluffs 13,296 21,090 24,540 The Reserve - - (9,519) Corporate and other (6,520) (8,621) (10,282) -------- -------- -------- Consolidated EBITDA $ 38,827 $ 45,027 $ 38,052 ======== ======== ======== EBITDA Margins (2): Jackpot Properties 22.7% 24.3% 24.1% Ameristar Vicksburg 30.6% 30.3% 29.4% Ameristar Council Bluffs 18.9% 24.0% 25.1% The Reserve - - (21.8%) Consolidated EBITDA margin 20.6% 21.8% 14.4%
____________________________ (see following page for footnotes) (1) Adjusted operating income is income from operations (as reported) before Ameristar Council Bluffs preopening costs in 1996, an abandonment loss at Ameristar Vicksburg in 1997 related to the demolition of an existing budget motel for the construction of a hotel and The Reserve preopening costs in 1998. (2) EBITDA consists of income from operations plus depreciation and amortization. EBITDA Margin is EBITDA as a percentage of net revenues. EBITDA information 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 should not be construed as an alternative to income from operations (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance, or as an alternative to cash flow from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. The Company has significant uses of cash flows, including capital expenditures and debt principal repayments, that are not reflected in EBITDA. It should also be noted that not all gaming companies that report EBITDA information calculate EBITDA in the same manner as the Company. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997 SUMMARY The completion of The Reserve in early 1998 brought another year of record growth in Ameristar's consolidated net revenues and presented challenges in operations. Consolidated net revenues increased by 28.2% to $264.4 million in 1998 compared to $206.2 million in 1997. Income from operations was $13.9 million in 1998 before the $10.6 million charge for preopening costs associated with the opening of The Reserve. This is a decline of $14.8 million or 51.7% from income from operations in 1997 before the abandonment loss and is due to an operating loss of $16.1 million before preopening costs at The Reserve. Income from operations after preopening costs was $3.3 million in 1998. Total operating expenses as a percentage of net revenues were 86.4% in 1997 versus 98.8% (94.8% before The Reserve preopening costs) in 1998. The decline in this margin is primarily a result of operating inefficiencies associated with the opening of The Reserve and lower than expected revenues in the intensely competitive "locals" market in which it operates. On a year-to-year comparable basis (i.e., before an extraordinary charge in 1997 and preopening costs in 1998), net income decreased $16.0 million to a loss of $5.6 million in 1998 compared to net income of $10.4 million in 1997. After the extraordinary charge and preopening costs, net loss for the year ended December 31, 1998 was $12.7 million versus net income for the year ended December 31, 1997 of $9.7 million. Loss per share before preopening costs was $0.28 for 1998 ($0.62 after preopening costs). Earnings per share were $0.48 for 1997 after an extraordinary charge of $0.03 per share for the refinancing of the Company's credit line. REVENUES Ameristar Council Bluffs had total net revenues of $97.7 million in 1998 compared to $87.8 million in 1997, an increase of 11.3%. This represents growth in the market share of Ameristar Council Bluffs and in the Council Bluffs gaming market in general. Net revenues for Ameristar Vicksburg were $68.5 million for the year ended December 31, 1998 compared with $64.0 million for the prior year, an increase of 7.0%. This increase in revenues in 1998 compared to 1997 is due to an increase in casino revenue of $3.4 million and a $1.2 million increase in hotel revenue due to the new hotel facility. Management believes Ameristar Vicksburg maintained and will continue to hold its leading position in the Vicksburg market through effective promotional strategies and by continuing to provide customers with superior service and quality gaming and non-gaming products. The Jackpot Properties produced stable net revenues of $54.7 million and $54.5 million for the years ended December 31, 1998 and 1997, respectively. A 2.0% increase in casino revenue in 1998 was offset by minimal decreases in food and beverage, rooms and other revenues. The Reserve produced net revenues of $43.6 million in 1998 in its first year of operations (325 days). COSTS AND EXPENSES The operating expense ratio for 1998 increased to 98.8% (94.8% before preopening) compared to 86.4% of net revenues in 1997. The increase in this ratio is primarily a result of the initial operating performance of The Reserve. Excluding the $70.3 million in operating expenses at The Reserve, operating expenses were 86.3% of net revenue, which is comparable to 1997. Casino costs and expenses increased by $26.6 million or 33.8% from $78.7 million in 1997 to $105.3 million in 1998. As a percentage of casino revenues, casino expenses increased to 48.7% in 1998 compared to 45.5% in 1997. The majority of the increase in expense ($19.4 million) was associated with the opening of The Reserve and an increase of $4.6 million in expenses at Ameristar Council Bluffs associated with additional gaming revenue of $8.4 million. The Company's food and beverage costs and expenses increased $11.7 million in 1998 compared to 1997 primarily due to the opening of The Reserve and partially offset by improvements in this area at the Jackpot Properties and Ameristar Vicksburg. The Company's food and beverage expense-to-revenue ratio increased to 68.9% in 1998 compared to 64.5% in 1997. This increase is directly related to the startup operational inefficiencies experienced in 1998 at The Reserve. Rooms expenses increased by $2.7 million from $3.1 million in 1997 to $5.8 million in 1998. The increase was the result of seven months of operations of the new hotel in Vicksburg and almost 11 months of operations at The Reserve. Selling, general and administrative costs and expenses (including utilities and maintenance and business development costs) increased $23.2 million or 44.6% from 1997 to 1998. Most of the increase was a result of the opening of The Reserve and additional expenses associated with salaries, marketing and professional fees at the corporate level. Depreciation expense increased $7.8 million or 47.9% from 1997 to 1998 as the Company's depreciable base increased with the opening of The Reserve and the Ameristar Vicksburg hotel. Preopening costs of $10.6 million were expensed during 1998 related to the opening of The Reserve. Interest expense, net of capitalized interest of $4.7 million in 1997 and $1.4 million in 1998, increased $10.6 million or 87.5% from 1997. This increase primarily reflects the additional debt outstanding to finance the Company's expansion and higher interest rates on those borrowings. With the opening of The Reserve in February 1998 and the Ameristar Vicksburg Hotel in June 1998, the capitalization of interest on funds borrowed to construct these projects was discontinued. Subsequent interest costs were reflected as an expense on the statement of operations rather than as an additional cost of the projects on the balance sheet. Interest was capitalized on borrowings to construct The Reserve and the Ameristar Vicksburg hotel during 1997 and 1998 until the projects commenced operations. The Company's average borrowing rate was 10.25% in 1998 compared to 9.9% in 1997. The borrowing rate increased due to the issuance of $100 million in Senior Subordinated Notes in mid-1997 and an increase in LIBOR. (See "- Liquidity and Capital Resources."). The Company's effective Federal tax rate on income was 36.5% in 1997 and the tax benefit on losses was 33.3% in 1998 versus the Federal statutory rate of 35%. The differences from the statutory rates are due to the effects of certain expenses incurred by the Company which are not deductible for Federal income tax purposes. YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996 SUMMARY The completion of Ameristar Council Bluffs in early 1997 contributed to another year of record growth in Ameristar's consolidated net revenues and income from operations before preopening costs. Consolidated net revenues increased by 9.4% from $188.5 million in 1996 to $206.2 million in 1997. Income from operations rose 13.5% to $28.0 million in 1997 compared to $24.7 million in 1996 before the $7.4 million charge for preopening costs associated with the opening of Ameristar Council Bluffs. Income from operations after preopening costs was $17.3 million in 1996. Total operating expenses as a percentage of net revenues were 86.4% in 1997 versus 90.8% (86.9% before the Ameristar Council Bluffs preopening costs) in 1996. This improvement was a result of increased revenues in casino, food and beverage and rooms due to the completion of Ameristar Council Bluffs combined with a smaller increase in the expenses for these departments. A slight decrease in operating expenses at the Jackpot Properties was offset by a similar increase in operating expenses at Ameristar Council Bluffs. On a year-to-year comparable basis (i.e., before preopening costs in 1996 and an extraordinary charge in 1997), net income decreased $0.2 million to $10.4 million in 1997 from $10.6 million in 1996. After preopening costs and extraordinary charge, net income for the year ended December 31, 1997 was $9.7 million versus net income for the year ended December 31, 1996 of $5.9 million. Earnings per share before preopening costs were $0.52 for 1996 ($0.29 after preopening costs). Earnings per share were $0.48 for 1997 after an extraordinary charge of $0.03 per share for the refinancing of the Company's credit line. REVENUES During 1997, Ameristar Council Bluffs was one of the top riverboat gaming revenue producers in the State of Iowa, while both Ameristar Vicksburg and the Jackpot Properties remained market share leaders in their areas. With a full year of casino operations and most of the non- gaming operations, Ameristar Council Bluffs had total net revenues of $87.8 million in 1997 compared to $70.3 million for 1996, an increase of 24.8%. Ameristar Council Bluffs was the leader in both casino and total revenues among the Company's four operating casino properties. In addition to the completion of the Ameristar Council Bluffs facility, management attributes the increased revenues to a 5.9% increase in the Council Bluffs' gaming market from 1996 to 1997. Net revenues for Ameristar Vicksburg were $64.0 million for the year ended December 31, 1997 compared with $66.2 million for the prior year, a decrease of 3.4%. Despite this decrease in revenues, due in part to a decline in the size of the market, management believes Ameristar Vicksburg was able to maintain its leading position in the Vicksburg market through effective promotional strategies and by continuing to provide customers with superior service and quality gaming and non-gaming products. The Jackpot Properties produced net revenues of $54.5 million, a 4.9% increase from the $51.9 million produced in 1996. Management believes that the increase is primarily the result of the installation of approximately 587 state-of-the-art slot machines, the renovation of the casino at The Horseshu, an enhanced slot player tracking system and an aggressive marketing strategy. The improvement is also due to harsher weather conditions during 1996 and below-average table games win percentages in the second quarter of 1996. COSTS AND EXPENSES The operating expense ratio for 1997 decreased to 86.4% from 86.9% of net revenues in 1996 before preopening due to improved operating performance during the second year of operations at Ameristar Council Bluffs. The improvement in this area was partially offset by increased corporate overhead related to the Company's relocation of its executive office to Las Vegas and increased corporate staffing levels. Casino costs and expenses increased from $75.7 million in 1996 to $78.7 million in 1997. As a percentage of casino revenues, casino expenses decreased from 46.9% in 1996 to 45.5% in 1997. The majority of the increase in expense was associated with Ameristar Council Bluffs, which had higher expenses but also increased revenue, thus increasing the casino department's overall profitability. An increase in casino expenses at the Jackpot Properties was partially offset by a decrease in expenses at Ameristar Vicksburg. The Company's food and beverage costs and expenses increased $3.0 million in 1997 mostly as a result of the opening of the steak house at Ameristar Council Bluffs in March 1997. The Company's food and beverage expense-to-revenue ratio decreased from 69.2% in 1996 to 64.5% in 1997. This decrease is directly related to the improved performance of the Ameristar Council Bluffs restaurant operations in 1997 compared to the startup operational inefficiencies experienced in 1996. Rooms expenses increased by $0.7 million from $2.4 million in 1996 to $3.1 million in 1997. The increase was the result of 12 months of operations at the Ameristar Council Bluffs hotel in 1997 compared to two months in 1996, partially offset by the demolition of the 54-room budget hotel at Ameristar Vicksburg that was taken out of service in April 1997 for construction of the new hotel. Selling, general and administrative costs and expenses (including utilities and maintenance and business development costs) increased $4.2 million or 8.8% from 1996 to 1997. Most of the increase was a result of higher property taxes at Ameristar Council Bluffs and legal expenses related to the arbitration of a contract dispute relating to the construction of Ameristar Council Bluffs partially offset by reduced marketing expenses. Expenses were also higher at the corporate level as additional staffing and overhead expenses were incurred due to the growth and relocation of the Corporate offices. Depreciation expense increased $2.2 million or 15.7% from 1996 to 1997 as the Company's depreciable base increased with the opening in stages of Ameristar Council Bluffs throughout 1996 and early 1997. No preopening costs were expensed during 1997. Interest expense, net of capitalized interest of $2.3 million in 1996 and $4.7 million in 1997, increased $3.8 million or 45.8% from 1996. This increase primarily reflects the additional debt outstanding to finance the Company's expansion and higher interest rates on those borrowings. In addition, as Ameristar Council Bluffs' facilities were completed during 1996, the capitalization of interest on funds borrowed to construct the project was discontinued and subsequent interest costs were reflected as an expense on the income statement rather than as an additional cost of the project on the balance sheet. Interest was capitalized on borrowings to construct The Reserve and the Ameristar Vicksburg hotel during 1997. The Company's average borrowing rate was 9.9% in 1997 compared to 8.9% in 1996. The borrowing rate increased due to the issuance of $100 million in Senior Subordinated Notes. (See "- Liquidity and Capital Resources.") The Company's effective Federal tax rate on income was 36.5% in both 1996 and 1997 versus the Federal statutory rate of 35%, due to the effects of certain expenses incurred by the Company which are not deductible for Federal income tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations was $23.1 million for the year ended December 31, 1998, as compared to $33.6 million for the year ended December 31, 1997. The Company had unrestricted cash of approximately $18.2 million as of December 31, 1998 compared to $13.0 million at December 31, 1997. This increase in cash resulted from a net increase in borrowings of $35.9 million during the year and the $23.1 million of cash flow from operations, partially offset by capital expenditures related to The Reserve and the Ameristar Vicksburg hotel and other capital improvement projects. The Company's current assets increased by approximately $8.5 million from December 31, 1997 to December 31, 1998. This was primarily the result of an increase in cash on hand, inventories, deferred taxes and prepaid expenses offset by decreases in receivables. The Company historically has funded its daily operations through net cash provided by operating activities and its significant capital expenditures primarily through bank debt and other debt financing. The Company's cash flow used for investing activities decreased $9.5 million from $63.4 million in 1997 to $53.9 million in 1998. This was primarily a result of completing The Reserve and Ameristar Vicksburg hotel construction in the first half of 1998 and making final payments on construction payables related to these projects. Cash flow from financing activities increased from $32.1 million in 1997 to $35.9 million in 1998 as a result of additional borrowings to complete The Reserve and Ameristar Vicksburg hotel construction. On July 15, 1997, the Company refinanced its long-term debt through a new $125 million revolving bank credit facility with Wells Fargo Bank, N.A. ("WFB") and a syndicate of banks (the "Revolving Credit Facility") and the sale of $100 million aggregate principal amount of 10-1/2% Senior Subordinated Notes due 2004 (the "Senior Subordinated Notes"). The Revolving Credit Facility was entered into on July 8, 1997, pursuant to a Credit Agreement among Ameristar and its principal subsidiaries (the "Borrowers"), a syndicate of bank lenders and WFB as Agent Bank, Arranger and Swingline Lender. The Borrowers do not include AC Hotel Corp., which owns the hotel at Ameristar Vicksburg, and a purchasing subsidiary. The Borrowers made an initial draw of $114.5 million under the Revolving Credit Facility on July 15, 1997, which was used to repay $94.5 million in borrowings outstanding under a prior bank credit facility and a $20.0 million short-term loan from WFB. The Senior Subordinated Notes were issued by Ameristar at par in a private placement to certain initial purchasers for resale to qualified institutional buyers pursuant to the exemption provided by Rule 144A of the Securities and Exchange Commission. In December 1997, the Company completed the exchange of the initial series of the Senior Subordinated Notes, which were restricted securities, for a series of substantially identical Senior Subordinated Notes that are not restricted securities. The net proceeds from the sale of the Senior Subordinated Notes were used to repay $82.4 million in borrowings and interest under the Revolving Credit Facility, $13.1 million in other indebtedness and $800,000 in loan fees for the Revolving Credit Facility. Following the application of the net proceeds from the sale of the Senior Subordinated Notes, the Company made additional draws under the Revolving Credit Facility during 1997 and 1998 of $53.5 million to fund a portion of the capital expenditures for the development of The Reserve. At December 31, 1998, the outstanding principal balance of the Revolving Credit Facility was $90.0 million. Until Phase I of The Reserve was completed in February 1998, draws under the Revolving Credit Facility could only be used to fund construction of The Reserve and certain other specified expenditures. Following the completion of Phase I of The Reserve, the Revolving Credit Facility proceeds may be used only for working capital purposes of the Borrowers and funding ongoing capital expenditures for existing facilities. The Borrowers and the lenders amended the Revolving Credit Facility effective June 30, 1998. Under the amended Revolving Credit Facility, borrowings under the Revolving Credit Facility may not exceed 2.75 times the Borrowers' rolling four quarter EBITDA, and the Borrowers' total funded debt may not exceed the Borrowers' rolling four-quarter EBITDA multiplied by a factor as follows: 5.25 commencing June 30, 1998; 5.5 commencing September 30, 1998; 5.25 commencing June 30, 1999; 4.75 commencing December 31, 1999; 4.5 commencing March 31, 2000; and 4.0 commencing September 30, 2000. For purposes of the Revolving Credit Facility, the Borrowers' EBITDA is generally defined as net income before interest expense, income taxes, depreciation and amortization, preopening costs and certain extraordinary and non-cash items. As of December 31, 1998, the total funded debt of the Borrowers was 5.498 times the Borrowers' rolling four- quarter EBITDA. The maximum amount available under the Revolving Credit Facility reduces semi-annually commencing July 1, 1999 on a sliding scale (ranging from $2.5 million to $10.0 million in reductions) with a final reduction of $75.0 million at maturity on June 30, 2003. The Revolving Credit Facility, as amended, requires the Borrowers to maintain a gross fixed charge coverage ratio of 1.25 to 1.0 until September 30, 1999, and 1.50 to 1.0 thereafter. For purposes of these covenants, principal payments on the Gem Notes (as defined below) will be included only to the extent actually paid in the applicable period. The Revolving Credit Facility prohibits Ameristar from making any dividend or other distribution on its capital stock during any period in which the Borrowers' rolling four-quarter ratio of total funded debt to EBITDA is greater than 2.0 to 1.0. The amended Revolving Credit Facility also limits the Borrower's aggregate capital expenditures in each year to an amount equal to 5% of their consolidated net revenue for the preceding year and prohibits the Borrowers from incurring any additional secured indebtedness without the approval of the lenders. The amended Revolving Credit Facility also requires the Borrowers to maintain a tangible net worth of at least $56,000,000, plus 90% of net income (without any reduction for net losses) as of the end of each quarter beginning September 30, 1998 plus 90% of the net proceeds of certain future equity offerings. As of March 31, June 30, September 30 and December 31, 1998, the Company has been in non-compliance with the tangible net worth requirement. In each instance of non-compliance, the Company has obtained a waiver of the violation from the lenders. As of December 31, 1998, the Company's tangible net worth was $2.8 million less than required by this covenant. The waiver for this violation also amended the Revolving Credit Facility minimum to reduce the minimum tangible net worth requirement commencing March 31, 1999 to $50.0 million, plus 90% of net income (without any reduction for net losses) as of the end of each quarter beginning March 31, 1999, plus 90% of the net proceeds of certain future equity offerings. Under the terms of the Revolving Credit Facility, concurrent with each loan draw, the Borrowers may select the interest rate based on either the London Interbank Offering Rate ("LIBOR") or WFB's prime interest rate. The maximum number of outstanding draws at any time using LIBOR is five, with a minimum draw amount of $5.0 million per draw. A LIBOR draw can be for a one-, two-, three- or six-month term with interest accruing monthly and due at the end of the term, but in no event less frequently than quarterly. The interest rate is fixed throughout the term of a LIBOR-based draw and, as amended, ranges from LIBOR plus 1.5 percentage points to LIBOR plus 4.0 percentage points. On a prime interest rate draw, the interest rate is variable and, as amended, ranges from a minimum of prime plus 0.25 percentage points to a maximum of prime plus 2.75 percentage points with interest payable monthly in arrears. As of December 31, 1998, the Borrowers have taken LIBOR draws totaling $90.0 million with an average interest rate of approximately 9.25 percent per annum. The applicable margins for both LIBOR draws and prime interest rate draws adjust semiannually based on the ratio of the Company's consolidated total debt to consolidated cash flows, as measured by an EBITDA formula. The Company has entered into an interest rate collar agreement with WFB to manage interest expense, which is subject to fluctuation due to the variable-rate nature of the debt under the Company's Revolving Credit Facility. Under the agreement, which covers $50.0 million of the borrowings on the Revolving Credit Facility, the Company has a LIBOR floor rate of 5.39 percent and a LIBOR ceiling rate of 6.75 percent, plus the applicable margin. As of December 31, 1998, the Company had paid approximately $10,000 in additional interest as a result of this agreement. The agreement terminates on June 30, 2003 to coincide with the maturity of the Revolving Credit Facility. The Revolving Credit Facility is secured by liens on substantially all of the real and personal property of the Borrowers. The Revolving Credit Facility prohibits any future secondary liens on these properties without the prior written approval of the lenders. Certain changes in control of Ameristar may constitute a default under the Revolving Credit Facility. The Revolving Credit Facility binds the Borrowers to a number of additional affirmative and negative covenants, including promises to maintain certain financial ratios and tests within defined parameters. As of December 31, 1998, the Company was in compliance with these covenants, except as indicated above. The Borrowers paid various fees and other loan costs upon the closing of the Revolving Credit Facility that are being amortized over the term of the Revolving Credit Facility. In addition, commencing in July 1998, the Borrowers are required to pay quarterly commitment fees at an annual rate of 0.50% or 0.375% of the unused portion of the Revolving Credit Facility. The Company's prior credit facility was terminated early in connection with entering into the Revolving Credit Facility. As a result, the Company incurred a $1.1 million pre-tax non-cash extraordinary charge ($673,000 or $0.03 per share on an after-tax basis) during 1997 to reflect the accelerated write-off of unamortized deferred financing costs. The Senior Subordinated Notes were issued under an Indenture dated July 15, 1997 (the "Indenture"). In addition to Ameristar and the trustee, all of Ameristar's subsidiaries (the "Guarantors") are parties to the Indenture for the purpose of guaranteeing (the "Guarantees") payments on the Senior Subordinated Notes. The Senior Subordinated Notes will mature on August 1, 2004. Interest is payable semiannually on February 1 and August 1, commencing February 1, 1998, at the per annum rate of 10.5%. The Senior Subordinated Notes and the Guarantees are not secured and are subordinate to all existing and future Senior Indebtedness (as defined), which includes the Revolving Credit Facility. Ameristar may redeem the Senior Subordinated Notes, in whole or in part, at any time on or after August 1, 2001, at redemption prices that decline over time from 105.25% to 101.75%. Senior Subordinated Notes may also be redeemed if the holder or beneficial owner thereof is required to be licensed, qualified or found suitable under applicable Gaming Laws (as defined) and is not so licensed, qualified or found suitable. Ameristar may also be required to redeem a portion of the Senior Subordinated Notes in the event of certain asset sales or the loss of a material gaming license, and each holder of the Senior Subordinated Notes will have the right to require Ameristar to redeem such holder's Senior Subordinated Notes upon a Change of Control (as defined) of Ameristar. The Senior Subordinated Notes are not subject to any mandatory redemption or sinking fund obligations. The Indenture includes covenants that restrict the ability of Ameristar and the Restricted Subsidiaries (as defined and which includes all Guarantors) from incurring future Indebtedness (as defined); provided, however, that Ameristar or any Guarantor may incur Indebtedness if the incurrence thereof would not result in the Consolidated Coverage Ratio (as defined) being greater than 2.0 to 1.0 on a rolling four-quarter basis. The Indenture also permits Ameristar or a Restricted Subsidiary to incur Indebtedness without regard to the Consolidated Coverage Ratio test in certain circumstances, including borrowings of up to $140 million under the Revolving Credit Facility, as amended or replaced from time to time, up to $15.0 million in recourse furniture, fixtures and equipment financings, up to $7.5 million in borrowings for the construction of the hotel at Ameristar Vicksburg and up to $5.0 million of other Indebtedness. The Indenture also includes certain covenants that, among other things, limit the ability of Ameristar and its Restricted Subsidiaries to pay dividends or other distributions (excluding dividends and distributions from a Restricted Subsidiary to Ameristar or a Guarantor), make investments, repurchase subordinated obligations or capital stock, create certain liens (except those securing Senior Indebtedness), enter into certain transactions with affiliates, sell assets, issue or sell subsidiary stock, create or permit restrictions on distributions from subsidiaries or enter into certain mergers and consolidations. The Company constructed a 150-room hotel at Ameristar Vicksburg, which cost approximately $10.3 million, including capitalized construction period interest and preopening costs. The Company has obtained a nonrecourse loan facility for $7.5 million with a private lender for the purpose of funding a portion of the construction costs, with the balance provided out of operating cash flow. The loan matured on July 1, 1998 but was amended to mature on December 31, 1999 and requires periodic interest payments at the rate of 15% per annum. The Company is required to pay a non-usage fee at the rate of 3% per annum on the undrawn loan balance, and draws are subject to the satisfaction of various conditions typically applicable to construction loans. As of December 31, 1998, the outstanding balance on the loan was $7.5 million. On June 20, 1997 and as part of the consideration for the acquisition of The Reserve, Ameristar issued unsecured subordinated promissory notes to the former stockholders of Gem Gaming, Inc., the original developer of The Reserve, in an aggregate principal amount of $28.7 million (the "Gem Notes"). The per annum interest rate on the Gem Notes is 8%, subject to increases up to a maximum of 18% per annum, following one or more failures to make payments under the Gem Notes by scheduled dates. Any interest not paid when scheduled will thereafter accrue interest as principal. The Gem Notes require annual principal reduction payments ranging from $2.0 million to $3.0 million commencing in November 1998. The Gem Notes mature on December 31, 2004 and may be prepaid in whole or in part without penalty at any time. The Gem Notes are not subject to acceleration or other collection efforts upon failure to make a scheduled payment prior to maturity, and the only remedy for such a failure to make a scheduled payment is an increase in interest rate as described above. The Gem Notes are subordinate to the Revolving Credit Facility, the Senior Subordinated Notes and other long-term indebtedness of Ameristar specified by Ameristar up to a maximum of $250 million. At December 31, 1998, the Company had other indebtedness in an aggregate principal amount of $18.6 million. No assurance can be given that the Company will be able to satisfy, when necessary, the financial covenants under the Revolving Credit Facility, the Senior Subordinated Notes or other debt instruments for purposes of incurring additional debt, including additional draws under the Revolving Credit Facility. In addition, a failure to satisfy the financial covenants under the Revolving Credit Facility could either require the Company to reduce the outstanding balance of the Revolving Credit Facility, which requirements could adversely affect or exceed the Company's liquidity, or result in an event of default under one or more debt instruments. Adverse changes in the Company's operations or operating cash flow may affect the ability of the Company to satisfy these financial covenants. Capital expenditures for the year ended December 31, 1998 were approximately $39.2 million, including approximately $23.2 million relating to development of The Reserve, $6.6 million relating to the development of the Ameristar Vicksburg hotel and approximately $9.4 million for normal capital improvement projects at the Jackpot Properties, Ameristar Vicksburg and Ameristar Council Bluffs. The Company funded these capital expenditures primarily from net cash provided by operating activities and borrowings. The Company intends to make minimum capital expenditures of approximately $10.6 million in 1999. Management believes that the above-described minimum capital expenditure requirements will be funded out of draws under the Revolving Credit Facility, cash on hand, operating cash flow and purchase money and lease financing related to the acquisition of furniture, fixtures and equipment (including gaming equipment). Management is currently considering several potential capital expenditure projects at Ameristar Council Bluffs and Ameristar Vicksburg and is presently remodeling certain dining and meeting room areas at The Reserve. In evaluating these projects, management intends to consider the operating performance of each of the Company's properties, the anticipated relative costs and benefits of the various projects, and competitive and other relevant factors, including the availability of operating cash flow and debt financing to fund capital expenditures. Because the amount of borrowings permitted to be drawn at any time under the Revolving Credit Facility is determined in part by the Company's rolling four-quarter EBITDA (as defined), the Company's anticipated borrowings under the Revolving Credit Facility to fund a portion of any capital expenditure project will be dependent upon the level of the Company's aggregate operating cash flow. Material increases in operating cash flow are anticipated to be primarily dependent upon the operating performance of The Reserve. No assurances can be given with respect to the amount of operating cash flow of the Company for any future period, whether the Company will proceed with any of the capital expenditure projects currently under consideration, or the timing, cost or scope of any project undertaken by the Company. At the present time, the Company does not anticipate undertaking capital expenditure projects during 1999 that could not be funded out of amounts anticipated to be available through anticipated internally generated cash flow and the Company's borrowing capacity under the Revolving Credit Facility. Ameristar has not declared any dividends on its Common Stock during the last two fiscal years, and the Company intends for the foreseeable future to retain all earnings for use in the development of its business instead of paying cash dividends. In addition, as described above, the Revolving Credit Facility obligates the Company to comply with certain financial covenants that may restrict or prohibit the payment of dividends. YEAR 2000 READINESS DISCLOSURE BACKGROUND In the past, many computer software programs were written using two digits rather than four to define the applicable year. As a result, date-sensitive computer software may recognize a date using "00" as the year 1900 rather than the year 2000. This is generally referred to as the "Year 2000 issue." If this situation occurs, the potential exists for computer system failures or miscalculations by computer programs, which could disrupt operations. RISK FACTORS The Company is in many ways involved in a low-technology business. Casino employees, for example, do not require computers to deal blackjack or spin a roulette wheel. Likewise, a chef does not require computers to prepare a meal and a maid does not require a computer to clean and prepare a guest room. Slot machines are a type of computer, but there is no date embodied in their basic operation of choosing a random sequence and determining the appropriate payout. Nevertheless, the Company does use computers extensively to assist its employees in providing good service to its guests and to assist management in monitoring the Company's operations. The Company's hotel front desks, for example, are highly computerized so as to expedite check-in and check-out of guests. Similarly, the Company uses computers in the back-of-the-house to facilitate purchasing and maintaining inventory records. In the casino, computers are used to monitor gaming activity and maintain customer records, such as credit availability and points earned by members of the Company's players clubs. Computers on occasion fail, irrespective of the Year 2000 issue. For this reason, where appropriate, the Company maintains paper and magnetic back-ups and the Company's employees are trained in the use of manual procedures. When the front desk computer fails, for example, the Company's employees continue to check guests in and out using manual methods. This is not to imply that there is no risk to the Company from the Year 2000 issue. The risks could be substantial. Most of the Company's guest rooms, for example, are easily accessed only by elevator, and most elevators incorporate some computer technology. Likewise, the Company's heating, ventilation, life safety and air conditioning systems are highly computerized and, of course, critical to the Company's operations. The Company is also exposed to the risk that one or more of its vendors or suppliers could experience Year 2000 problems that may impact their ability to provide goods and services. Although this is not considered as significant a risk with respect to the suppliers of goods due to the availability of alternative suppliers, the disruption of certain services, in particular utilities and financial services, could, depending upon the extent of the disruption, have a material adverse impact on the Company's operations. STRATEGY The Company has evaluated its front- and back-of-the-house computer operations. Most of the casino and hotel systems are already Year 2000 compliant according to the vendors. Those that are not will be upgraded with Year 2000 compliant systems within the next six months. The back-of-the house accounting systems have been evaluated and at least the payroll system and possibly all financial software programs will be upgraded within the next six months. Where important to the Company's business, inquiries are also being made of third parties with whom the Company does significant business, such as vendors and suppliers, as to their Year 2000 readiness. The Company used Year 2000 compliance as one of its criteria in choosing the computer systems for The Reserve. Some of these same systems have been or will be installed at the Company's other properties. The Company has not developed a comprehensive contingency plan, although as previously mentioned a number of its critical hotel and casino systems are currently backed up by manual procedures that have been utilized during times of system malfunctions. The Company will continue to assess the need for a comprehensive contingency plan as implementation of its corrective action plan continues. COSTS It is difficult to calculate the cost to the Company of ensuring that its systems are Year 2000 compliant, in part because there are many different solutions to various Year 2000 situations. In the case of the Company's elevators, for example, the Company has requested that the third parties with whom it contracts for its elevator maintenance inspect each elevator system, as part of its normal maintenance, for any Year 2000 issues. The Company has estimated that total hardware and software for the back-of-the house accounting system could cost approximately $750,000 on a companywide basis. The overall costs of addressing the Year 2000 issue have not been and are not expected to be material to the Company's financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Except for the Revolving Credit Facility, under which $90.0 million was outstanding at December 31, 1998, and certain other long-term debt outstanding at December 31, 1998 in the aggregate amount of $5.5 million (collectively, the "Variable Rate Debt"), all of the Company's other long-term debt bears interest at fixed rates. The Variable Rate Debt bears interest equal to the WFB prime interest rate or LIBOR in effect from time to time, in each case plus an applicable margin determined by the ratio of the Company's consolidated total debt to consolidated cash flows, as measured by an EBITDA formula. At December 31, 1998, the average interest rate applicable to the Revolving Credit Facility and the other Variable Rate Debt was 9.25%. An increase of one percentage point in the average interest rate applicable to the Variable Rate Debt outstanding at December 31, 1998, would increase the Company's annual interest costs by approximately $955,000. The Company has entered into an interest rate collar agreement with WFB to manage the effects of fluctuations in the interest rate applicable to LIBOR draws under the Revolving Credit Facility. Although the Company manages its short-term cash assets with a view to maximizing return with minimal risk, the Company does not invest in market rate sensitive instruments for trading or other purposes, including so-called derivative securities, and the Company is not exposed to foreign currency exchange risks or commodity price risks in its portfolio transactions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of the Company's Independent Public Accountants appears at page F-1 hereof, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company appear at pages F-2 through F-29 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is set forth under the captions "Item 1 - Election of Directors - Information Concerning the Nominees" and "- Directors and Executive Officers" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is set forth under the caption "Item 1 - Election of Directors - Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is set forth under the caption "Certain Transactions" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following are filed as part of this Report: (a)1. Financial Statements Report of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 1997 and 1998. Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998. Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998. Notes to Consolidated Financial Statements. (a)2. Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under related instructions or are inapplicable and therefore have been omitted. (a)3. Exhibits The following exhibits listed are filed or incorporated by reference as part of this Report. Certain of the listed exhibits are incorporated by reference to previously filed reports of the registrant under the Securities Exchange Act of 1934, as amended, including Forms 10-K, 10-Q and 8-K. These reports have been filed with the Securities and Exchange Commission under file number 0-22494. EXHIBI T DESCRIPTION OF EXHIBIT METHOD OF FILING NUMBER 3.1 Articles of Incorporation of Incorporated by reference Ameristar Casinos, Inc. to Exhibit 3.1 to ("ACI"). Registration Statement on Form S-1 filed by ACI under the Securities Act of 1933, as amended (File No. 33-68936) (the "Form S-1"). 3.2 Bylaws of ACI. Incorporated by reference to Exhibit 3.2 to ACI's Annual Report on Form 10- K for the year ended December 31, 1995 (the "1995 10-K"). 4.1 Specimen Common Stock Incorporated by reference Certificate. to Exhibit 4 to Amendment No. 2 to the Form S-1. 4.2(a) Credit Agreement, dated as of Incorporated by reference July 8, 1997, among ACI, to Exhibits 4.1 and 99.1 Cactus Pete's, Inc. ("CPI"), to the Current Report on Ameristar Casino Vicksburg, Form 8-K of ACI filed on Inc. ("ACVI"), Ameristar July 30, 1997 (the "July Casino Council Bluffs, Inc. 1997 8-K"). ("ACCBI") and Ameristar Casino Las Vegas, Inc. ("ACLVI"), as Borrowers, the Lenders named therein, and Wells Fargo Bank, National Association ("WFB") as Arranger, Agent Bank and Swingline Lender, together with a list describing omitted schedules and exhibits thereto. 4.2(b) First Amendment to Credit Filed electronically Agreement, dated as of herewith September 9, 1998, among ACI, CPI, ACVI, ACCBI, ACLVI, the lenders named therein and WFB, as Swingline Lender and Agent Bank. 4.2(c) Interest Rate Collar Filed electronically Agreement dated August 10, herewith 1998, between ACI and WFB. 4.3(a) Indenture, dated as of Incorporated by reference July 15, 1997, among ACI, to Exhibit 4.2 to the ACLVI, ACVI, A.C. Food July 1997 8-K. Services, Inc. ("ACFSI"), AC Hotel Corp. ("ACHC"), ACCBI and First Trust National Association, including the forms of Notes and Subsidiary Guarantees issued thereunder. 4.3(b) Registration Rights Incorporated by reference Agreement, dated as of to Exhibit 4.3 to the July 15, 1997, among ACI, July 1997 8-K. ACCBI, ACFSI, ACHC, ACLVI, ACVI, CPI, Bear, Stearns & Co. Inc., BT Securities Corporation and First Chicago Capital Markets, Inc. 4.3(c) Supplemental Indenture, dated Incorporated by reference as of October 24, 1997, among to Exhibit 4.1(c) to ACI, CPI, ACLVI, ACVI, ACFSI, Amendment No. 1 to ACHC, ACCBI and First Trust Registration Statement on National Association. Form S-4 filed by ACI, CPI, ACVI, ACCBI, ACLVI, ACFSI and ACHC under the Securities Act of 1933, as amended (File No. 333- 34381) (the "Form S-4"). 4.4 Other Long-Term Debt. See Exhibits 10.8(e)-(h) See Exhibits 10.8(e)-(h) and and 99.1. 99.1. *10.1( Employment Agreement, dated Incorporated by reference a) November 15, 1993, between to Exhibit 10.1(a) to ACI and Thomas M. Steinbauer. ACI's Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K"). *10.2 Ameristar Casinos, Inc. 1993 Incorporated by reference Non-Employee Director Stock to Exhibit 10.2 to ACI's Option Plan, as amended and Quarterly Report on Form restated. 10-Q for the quarter ended June 30, 1994. *10.3 Ameristar Casinos, Inc. Incorporated by reference Management Stock Option to Exhibit 10.3 to ACI's Incentive Plan, as amended Quarterly Report on Form and restated. 10-Q for the quarter ended September 30, 1996 (the "September 1996 10- Q"). *10.4 Form of Indemnification Incorporated by reference Agreement between ACI and to Exhibit 10.33 to each of its directors and Amendment No. 2 to the officers. Form S-1. *10.5 Housing Agreement, dated Incorporated by reference November 15, 1993 between CPI to Exhibit 10.17 to the and Craig H. Neilsen. 1994 10-K. 10.6 Plan of Reorganization, dated Incorporated by reference November 15, 1993, between to Exhibit 2.1 to the ACI and Craig H. Neilsen in 1994 10-K. his individual capacity and as trustee of the testamentary trust created under the last will and testament of Ray Neilsen dated October 9, 1963. 10.7 Excursion Boat Sponsorship Incorporated by reference and Operations Agreement, to Exhibit 10.15 to the dated September 15, 1994, 1995 10-K. between Iowa West Racing Association and ACCBI. 10.8(a) Merger Agreement, dated as of Incorporated by reference May 31, 1996, among Gem to Exhibits 10.1 and 99.1 Gaming, Inc. ("Gem"), ACI, to ACI's Quarterly Report ACLVI, Steven W. Rebeil on Form 10-Q for the ("Rebeil") and Dominic J. quarter ended June 30, Magliarditi ("Magliarditi"), 1996 (the "June 1996 10- together with a list Q"). describing omitted schedules and exhibits thereto. 10.8(b) First Amendment to Merger Incorporated by reference Agreement, dated July 2, to Exhibit 10.5 to the 1996, among Gem, ACI, ACLVI, June 1996 10-Q. Rebeil and Magliarditi. 10.8(c) Second Amendment to Merger Incorporated by reference Agreement, dated as of to Exhibits 10.3 and 99.1 September 27, 1996, among to ACI's Current Report Gem, ACI, ACLVI, Rebeil and on Form 8-K filed on Magliarditi, together with a October 24, 1996 (the list describing omitted "October 1996 8-K"). schedules and exhibits thereto. 10.8(d) Settlement Agreement, dated Incorporated by reference as of May 3, 1997, among ACI, to Exhibit 10.1 to ACI's ACLVI, Rebeil, Magliarditi, Quarterly Report on Form Gem Air, Inc. and NVAGAIR. 10-Q for the quarter ended March 31, 1997. 10.8(e) Promissory Note, dated as of Incorporated by reference June 1, 1997, made by ACI to Exhibit 10.8(k) to the payable to the order of Form S-4. Rebeil in the original principal amount of $13,232,146. 10.8(f) Promissory Note, dated as of Incorporated by reference June 1, 1997, made by ACI to Exhibit 10.8(l) to the payable to the order of Form S-4. Magliarditi in the original principal amount of $417,854. 10.8(g) Non-Negotiable Promissory Incorporated by reference Note, dated as of June 1, to Exhibit 10.8(m) to the 1997, made by ACI payable to Form S-4. the order of Rebeil in the original principal amount of $14,540,820. 10.8(h) Non-Negotiable Promissory Incorporated by reference Note, dated as of June 1, to Exhibit 10.8(n) to the 1997, made by ACI payable to Form S-4. the order of Magliarditi in the original principal amount of $459,180. 10.9(a) Lease, dated September 8, Incorporated by reference 1992, between Magnolia Hotel to Exhibit 10.2 to the Company and ACVI as the Form S-1. assignee of Craig H. Neilsen. 10.9(b) First Amendment to Agreement, Incorporated by reference dated July 14, 1993, between to Exhibit 10.2(b) to the Magnolia Hotel Company and 1995 10-K. ACVI as the assignee of Craig H. Neilsen. 10.9(c) Second Amendment to Lease Incorporated by reference Agreement, dated June 1, to Exhibit 10.2(c) to the 1995, between Magnolia Hotel 1995 10-K. Company and ACVI. 10.10(a)Lease, dated September 18, Incorporated by reference 1992, between R.R. Morrison, to Exhibit 10.3 to the Jr. and ACVI as the assignee Form S-1. of Craig H. Neilsen. 10.10(b)First Amendment to Lease Incorporated by reference Agreement, dated June 1, to Exhibit 10.3 to the 1995, between R.R. Morrison & 1995 10-K. Son, Inc. and ACVI. 10.11(a)Lease, dated December 11, Incorporated by reference 1992, between Martha Ker to Exhibit 10.4 to the Brady Lum et. Al. and ACVI as Form S-1. the assignee of Craig H. Neilsen. 10.11(b)First Amendment to Lease Incorporated by reference Agreement, dated June 1, to Exhibit 10.4(b) to the 1995, between Lawrence O. 1995 10-K. Branyan, Jr., as trustee of the Brady-Lum Family Trust dated May 15, 1993 and ACVI. 10.12 Settlement, Use and Incorporated by reference Management Agreement and DNR to Exhibits 10.12 and Permit, dated May 15, 1995, 99.1 to ACI's Annual between the State of Iowa Report on Form 10-K for acting through the Iowa the year ended Department of Natural December 31, 1996 (the Resources and ACCBI as the "1996 10-K"). assignee of Koch Fuels, Inc. 10.13 Option Agreement, dated July Incorporated by reference 11, 1995, between Levy Realty to the Exhibit 10.13 to Trust and ACLVI as the the 1996 10-K. successor to Gem. 21.1 Subsidiaries of ACI. Incorporated by reference to Exhibit 21.1 to the Form S-4. 23.1 Consent of Arthur Andersen Filed electronically LLP. herewith. 27.1 Financial Data Schedule Filed electronically herewith. 99.1 Agreement to furnish Filed electronically Securities and Exchange herewith. Commission certain instruments defining the rights of holders of certain long-term debt. _________________________________ * Denotes a management contract or compensatory plan or arrangement. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. AMERISTAR CASINOS, INC. (Registrant) March 29, 1999 By: /s/ Craig H. Neilsen Craig H. Neilsen President, Chairman of the Board and CEO Pursuant to the requirements of the Securities Exchanges Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE NAME AND TITLE DATE Craig H. Neilsen, President, Chairman of /s/ Craig H. Neilsen the Board and CEO March 29, 1999 (principal executive officer) /s/ Thomas M. Steinbauer Thomas M. Steinbauer, Senior Vice President of Finance and Administration (principal financial March 29, 1999 officer and principal accounting officer) and Director /s/ Paul I. Corddry Paul I. Corddry, March 29, 1999 Director /s/ Larry A. Hodges Larry A. Hodges, March 29, 1999 Director /s/ Warren E. McCain Warren E. McCain, March 29, 1999 McCain Director On this 29th of March 1999, Craig H. Neilsen directed Chris Hinton, in his presence as well as our own, to sign the foregoing document as "Craig H. Neilsen." Upon viewing the signatures as signed by Chris Hinton and in our presence, Craig H. Neilsen declared to us that he adopted them as his own signatures. /s/Donna Vido Witness /s/Cheryl L. Atchison Witness STATE OF NEVADA ) ):ss. COUNTY OF CLARK ) I, Joyce M. King, Notary Public in and for said county and state, do hereby certify that Craig H. Neilsen personally appeared before me and is known or identified to me to be the president and chief executive officer of Ameristar Casinos, Inc. the corporation that executed the within instrument or the person who executed the instrument on behalf of said corporation. Craig H. Neilsen, who being unable due to physical incapacity to sign his name or offer his mark, did direct Chris Hinton, in his presence, as well as my own, to sign his name to the foregoing document. Craig H. Neilsen, after viewing his name as signed by Chris Hinton, thereupon adopted the signatures as his own by acknowledging to me his intention to so adopt as if he had personally executed the same both in his individual capacity and in behalf of said corporation, and further acknowledged to me that such corporation executed the same. IN WITNESS WHEREOF, I have hereunto set my hand and official seal this 29th day of March 1999. /s/Joyce M. King Notary Public My Commission Expires: July 23, 2002 Residing at: Las Vegas, NV REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Ameristar Casinos, Inc.: We have audited the accompanying consolidated balance sheets of Ameristar Casinos, Inc. (a Nevada corporation) and subsidiaries as of December 31, 1997 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, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ameristar Casinos, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Las Vegas, Nevada March 10, 1999 (except with respect to matter discussed in Note 5, as to which the date is March 31, 1999) AMERISTAR CASINOS, INC. CONSOLIDATED BALANCE SHEETS ASSETS (Amounts in Thousands) December 31, 1997 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 13,031 $ 18,223 Restricted cash 153 119 Accounts receivable, net 2,051 1,476 Income tax refund receivable 2,103 2,815 Inventories 2,300 3,614 Prepaid expenses 4,125 4,794 Deferred income taxes 2,724 3,906 -------- -------- Total current assets 26,487 34,947 -------- -------- PROPERTY AND EQUIPMENT, at cost: Buildings and improvements 171,942 260,716 Building under capitalized lease 800 800 Furniture, fixtures and equipment 54,024 91,329 Furniture, fixtures and equipment under capitalized leases 7,531 3,907 -------- -------- 234,297 356,752 Less: Accumulated depreciation and amortization 68,951 92,708 -------- -------- 165,346 264,044 Land 26,309 26,485 Land under capitalized leases 4,865 4,865 Construction in progress 85,648 2,426 -------- -------- 282,168 297,820 -------- -------- PREOPENING COSTS 6,820 - -------- -------- EXCESS OF PURCHASE PRICE OVER FAIR MARKET VALUE OF NET ASSETS ACQUIRED 15,408 15,046 -------- -------- DEPOSITS AND OTHER ASSETS 5,303 3,924 -------- -------- $336,186 $351,737 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. AMERISTAR CASINOS, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (Amounts in Thousands, Except Share Data) December 31, 1997 1998 -------- -------- CURRENT LIABILITIES: Accounts payable $ 4,772 $ 6,324 Construction contracts payable 19,391 913 Accrued liabilities 21,549 26,359 Current obligations under capitalized leases 875 2,398 Current maturities of notes payable and long-term debt 5,635 9,924 -------- -------- Total current liabilities 52,222 45,918 -------- -------- OBLIGATIONS UNDER CAPITALIZED LEASES, net of current maturities 9,600 13,196 -------- -------- NOTES PAYABLE AND LONG-TERM DEBT, net of current maturities 183,513 217,203 -------- -------- DEFERRED INCOME TAXES 10,212 7,496 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value: Authorized - 30,000,000 shares; Issued - None - - Common stock, $.01 par value: Authorized - 30,000,000 shares; Issued and outstanding - 20,360,000 shares at December 31, 1997 and 1998 204 204 Additional paid-in capital 43,043 43,043 Retained earnings 37,392 24,677 -------- -------- 80,639 67,924 -------- -------- $336,186 $351,737 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. AMERISTAR CASINOS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands, Except Per Share Data) Years ended December 31, 1996 1997 1998 -------- -------- -------- REVENUES: Casino $161,338 $173,077 $216,345 Food and beverage 24,250 30,672 45,745 Rooms 7,641 9,685 14,434 Other 7,760 8,275 9,966 -------- -------- -------- 200,989 221,709 286,490 Less: Promotional allowances 12,524 15,530 22,071 -------- -------- -------- Net revenues 188,465 206,179 264,419 -------- -------- -------- OPERATING EXPENSES: Casino 75,685 78,733 105,331 Food and beverage 16,773 19,784 31,506 Rooms 2,368 3,130 5,791 Other 7,054 7,546 8,592 Selling, general and administrative 47,758 51,958 75,147 Depreciation and amortization 14,135 16,358 24,191 Abandonment loss - 646 - Preopening costs 7,379 - 10,611 -------- -------- -------- Total operating expenses 171,152 178,155 261,169 -------- -------- -------- Income from operations 17,313 28,024 3,250 OTHER INCOME (EXPENSE): Interest income 354 445 378 Interest expense (8,303) (12,107) (22,699) Other (77) (35) (7) -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) 9,287 16,327 (19,078) Income tax provision (benefit) 3,390 5,959 (6,363) -------- -------- -------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 5,897 10,368 (12,715) EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT, net of income tax benefit of $0, $387 and $0, respectively - (673) - -------- -------- -------- NET INCOME (LOSS) $ 5,897 $ 9,695 $(12,715) ======== ======== ========
AMERISTAR CASINOS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED) (Amounts in Thousands, Except Per Share Data) Years ended December 31, 1996 1997 1998 -------- -------- -------- EARNINGS (LOSS) PER SHARE: Income (loss) before extraordinary loss Basic and diluted $ 0.29 $ 0.51 $ (0.62) Net income (loss) Basic and diluted $ 0.29 $ 0.48 $ (0.62) WEIGHTED AVERAGE SHARES OUTSTANDING 20,360 20,360 20,360
The accompanying notes are an integral part of these consolidated financial statements. AMERISTAR CASINOS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in Thousands, Except Number of Shares) Capital Stock Additional No. of Paid-In Retained Shares Balance Capital Earnings Total ---------- -------- -------- -------- -------- Balance, December 31, 1995 20,360,000 $ 204 $ 43,043 $ 21,800 $ 65,047 Net income - - - 5,897 5,897 ---------- -------- -------- -------- -------- Balance, December 31, 1996 20,360,000 204 43,043 27,697 70,944 Net income - - - 9,695 9,695 ---------- -------- -------- -------- -------- Balance, December 31, 1997 20,360,000 204 43,043 37,392 80,639 Net loss - - - (12,715) (12,715) ---------- -------- -------- -------- -------- Balance, December 31, 1998 20,360,000 $ 204 $ 43,043 $ 24,677 $ 67,924 ========== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. AMERISTAR CASINOS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands) Years ended December 31, 1996 1997 1998 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 5,897 $ 9,695 $(12,715) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 14,135 16,358 24,191 Change in deferred income taxes (181) 2,964 (3,898) Net (gain) loss on disposition of assets (56) 505 11 Amortization of debt issuance costs 229 424 661 Preopening costs 7,379 - 10,611 Extraordinary loss on early retirement of debt - 1,060 - Changes in current assets and liabilities: Restricted cash (162) 265 34 Accounts receivable, net (94) (643) 575 Income tax receivable - (2,103) (712) Inventories (112) 85 (1,314) Prepaid expenses (468) (374) (669) Accounts payable 3,524 (2,531) 1,552 Accrued liabilities 3,037 7,985 4,810 Income taxes payable 49 (49) - -------- -------- -------- Total adjustments 27,280 23,946 35,852 -------- -------- -------- Net cash provided by operating activities 33,177 33,641 23,137 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (43,087) (72,932) (32,312) Increase (decrease) in construction contracts payable (4,791) 14,055 (18,478) Proceeds from sale of assets 56 126 - Increase in deposits and other assets (5,924) (4,666) (3,073) -------- -------- -------- Net cash used in investing activities (53,746) (63,417) (53,863) -------- -------- --------
AMERISTAR CASINOS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Amounts in Thousands) Years ended December 31, 1996 1997 1998 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt $ 44,628 $150,786 $ 42,606 Debt issuance costs - (4,439) - Minority interest income - (16) - Restricted security deposit 11,511 - - Principal payments of long- term debt and capitalized leases (39,633) (114,248) (6,688) -------- -------- -------- Net cash provided by financing activities 16,506 32,083 35,918 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,063) 2,307 5,192 CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR 14,787 10,724 13,031 -------- -------- -------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 10,724 $ 13,031 $ 18,223 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. AMERISTAR CASINOS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation and basis of presentation The consolidated financial statements of Ameristar Casinos, Inc. ("ACI" or the "Company"), a Nevada corporation, include the accounts of the Company and its wholly owned subsidiaries, Cactus Petes, Inc. ("CPI"), Ameristar Casino Vicksburg, Inc. ("ACVI"), Ameristar Casino Council Bluffs, Inc. ("ACCBI") and Ameristar Casino Las Vegas, Inc. ("ACLVI"). ACI also operates A.C. Food Services, Inc., a purchasing subsidiary. ACVI has a wholly owned subsidiary, AC Hotel Corp., created for the purpose of constructing and operating a hotel in Vicksburg, Mississippi. CPI owns and operates two casino-hotels in Jackpot, Nevada - - - Cactus Petes Resort Casino and The Horseshu Hotel and Casino. ACVI owns and operates Ameristar Vicksburg, a riverboat-themed dockside casino, and related land-based facilities in Vicksburg, Mississippi. ACCBI owns and operates Ameristar Council Bluffs, a riverboat casino and associated hotel and other land-based facilities in Council Bluffs, Iowa. ACLVI owns and operates The Reserve Hotel Casino ("The Reserve") in the Henderson-Green Valley suburban area of Las Vegas, Nevada, which opened February 10, 1998. The gaming licenses granted to ACVI and ACCBI must be periodically renewed by the respective state gaming authorities to continue gaming operations. In addition, ACCBI's gaming operations are subject to a county-wide reauthorizing referendum every eight years, commencing in 2002. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements. Cash and cash equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market, due to the short-term maturities of these instruments. Accounts receivable Gaming receivables are included as part of the Company's accounts receivable balance. An allowance of $464,000 and $304,000 at December 31, 1997 and 1998, respectively, has been applied to reduce receivables to amounts anticipated to be collected. Inventories Inventories are stated at the lower of cost or market. Cost is determined principally on the weighted average basis. Interest Rate Collar Agreement The Company uses an interest rate collar agreement to assist in managing interest incurred on its long-term debt. The difference between amounts received and amounts paid under such agreement, as well as any costs or fees, is recorded as a reduction of, or addition to, interest expense as incurred over the life of the collar agreement. Depreciation and capitalization Property and equipment is recorded at cost, including interest charged on funds borrowed to finance construction. Interest of $2,313,000, $4,654,000 and $1,434,000 was capitalized for the years ended December 31, 1996, 1997 and 1998, respectively. Depreciation is provided on both the straight-line and accelerated methods in amounts sufficient to relate the cost of depreciable assets to operations. Amortization of building and furniture, fixtures and equipment under capitalized leases is provided over the shorter of the estimated useful life of the asset or the term of the associated lease (including lease renewal or purchase options the Company expects to exercise). Depreciation and amortization is provided over the following estimated useful lives: Buildings and improvements 5 to 40 years Building under capitalized lease 39 years Furniture, fixtures and equipment 3 to 15 years Furniture, fixtures and equipment under capitalized leases 3 to 5 years Betterments, renewals and repairs that extend the life of an asset are capitalized. Ordinary maintenance and repairs are charged to expense as incurred. The excess of the purchase price over fair market value of net assets acquired related to the Gem Gaming, Inc. acquisition (see Note 10) is being amortized over a 39-year period that commenced with the opening of The Reserve. Dividends The Company intends to retain future earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future. Gaming revenues and promotional allowances In accordance with industry practice, the Company recognizes as gaming revenues the net win from gaming activities, which is the difference between gaming wins and losses. Gross revenues include the retail value of complimentary food, beverage and lodging services furnished to customers. The retail value of these promotional allowances is deducted to compute net revenues. The estimated departmental costs of providing such promotional allowances are included in casino costs and expenses and consist of the following: Years ended December 31, 1996 1997 1998 -------- -------- -------- (Amounts in Thousands) Food and beverage $ 9,560 $ 12,283 $ 20,399 Room 732 708 1,024 Other 469 644 958 -------- -------- -------- $ 10,761 $ 13,635 $ 22,381 ======== ======== ========
Advertising The Company expenses advertising costs the first time the advertising takes place. Advertising expense included in selling, general and administrative expenses was approximately $6,144,000, $5,453,000, and $9,966,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Business development expenses Business development expenses are general costs incurred in connection with identifying, evaluating and pursuing opportunities to expand into existing or emerging gaming jurisdictions. Such costs include, among others, legal fees, land option payments and fees for applications filed with regulatory agencies and are expensed as incurred. Preopening costs Preopening costs primarily represent direct personnel and other operating costs incurred prior to the opening of new facilities. These costs are capitalized as incurred. Upon commencement of operations, the Company expenses all such preopening costs. The Accounting Standard Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 98-5 "Reporting the Costs of Start-up Activities." The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and require that the costs associated with start-up activities (including preopening costs of casinos) be expensed as incurred. Management estimates that this SOP will have no impact on the Company's results of operations or financial position. Federal income taxes Income taxes are recorded in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Earnings Per Share In 1997, the Company adopted SFAS No. 128 - Earnings Per Share. SFAS 128 replaces previously reported earnings per share with "basic" earnings per share and "diluted" earnings per share. Basic earnings per share are computed by dividing reported earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the additional dilution for all potentially dilutive securities such as stock options. Basic and diluted earnings per share are equal for the years ended December 31, 1996, 1997 and 1998 as the outstanding stock options were antidilutive. Reclassifications Certain reclassifications, having no effect on net income, have been made to the prior periods' consolidated financial statements to conform with the current year presentation. NOTE 2 - ACCRUED LIABILITIES Accrued liabilities consist of the following: December 31, 1997 1998 -------- -------- (Amounts in Thousands) Compensation and related benefits $ 5,488 $ 7,164 Taxes other than income taxes 4,625 5,649 Progressive slot machine jackpot 959 1,753 Interest 6,129 6,013 Deposits and other accruals 4,348 5,780 -------- -------- $ 21,549 $ 26,359 ======== ========
NOTE 3 - FEDERAL INCOME TAXES The components of the income tax provision are as follows: Years ended December 31, 1996 1997 1998 -------- -------- -------- (Amounts in Thousands) Current $ 3,571 $ 2,371 $ (5,312) Deferred (181) 3,588 (1,051) -------- -------- -------- Provision (benefit) on income before extraordinary item 3,390 5,959 (6,363) Tax benefit of extraordinary item - (387) -------- -------- -------- $ 3,390 $ 5,572 $ (6,363) ======== ======== ========
The reconciliation of income tax at the Federal statutory rates to income tax expense is as follows: Years ended December 31, 1996 1997 1998 -------- -------- -------- Federal statutory rate 35% 35% 34% Nondeductible expenses 2% 2% (1%) -------- -------- -------- 37% 37% 33% ======== ======== ========
Under SFAS No. 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax liability consisted of the following: December 31, 1997 1998 -------- -------- (Amounts in Thousands) Deferred tax assets: Preopening costs $ 2,212 $ 4,290 Accrued book expenses not currently deductible 1,674 2,769 Alternative minimum tax credit (1) 2,409 4,716 Project development costs 1,118 1,118 Net operating loss carry forward(2) - 540 Book loss in excess of tax loss 202 202 Asset reserves 161 105 Other 161 212 -------- -------- Total deferred tax assets 7,937 13,952 -------- -------- Deferred tax liabilities: Tax depreciation in excess of book depreciation (13,598) (15,277) Book capitalized interest in excess of tax (451) (451) Other (1,376) (1,814) -------- -------- Total deferred tax liabilities (15,425) (17,542) -------- -------- Net deferred tax liability $ (7,488) $ (3,590) ======== ========
_____________ (1)The excess of the alternative minimum tax over regular Federal income tax is a tax credit which can be carried forward indefinitely to reduce future Federal income tax liabilities. (2)The Company has available at December 31, 1998, $1,587,000 of an unused operating loss carryforward that may be applied against future taxable income and that expires in the year 2018. NOTE 4 - SUPPLEMENTAL CASH FLOW DISCLOSURES The Company made cash payments for interest, net of amounts capitalized, of $7,930,000, $8,223,000 and $22,515,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company made cash payments for Federal income taxes of $2,900,000, $4,760,000, and $350,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company acquired assets through capitalized leases of $0, $2,998,000 and $7,180,000 during the years ended December 31, 1996, 1997 and 1998, respectively. The Company acquired assets through the issuance of notes payable of $3,173,000, $704,000 and $0 during the years ended December 31, 1996, 1997 and 1998, respectively. The Company retired the balance of $94,500,000 under the 1995 Revolving Credit Facility by entering into a new Revolving Credit Facility (see Note 5) during the year ended December 31, 1997. The Company assumed a note payable of $311,000 and recognized a minority interest of $271,000 in connection with the purchase of certain aviation-related assets in 1996. These assets were returned to Gem Gaming as part of the merger settlement (See Note 10). The following reflects the noncash components of the Company's acquisition of Gem Gaming, Inc. (amounts in thousands): Purchase price - Notes payable to former stockholders of Gem Gaming, Inc. (net of discount) $ 33,650 -------- Fair value of net assets acquired: Prepaid expenses 146 Property and equipment 29,546 Preopening costs 1,873 Accounts payable (12) Construction contracts payable (2,289) Accrued liabilities (133) Long-term debt (11,400) Capitalized lease (1,340) Deferred tax liability (1,784) -------- 14,607 -------- Excess of purchase price over fair market value of net assets acquired $ 19,043 ========
Adjustments to the excess of purchase price over fair market value of net assets acquired as of December 31, 1997 due to the Gem Settlement Agreement (see Note 10) are as follows (amounts in thousands): Reduction in value of Gem notes $ (2,725) Deferred taxes on land purchase (1,784) Dissolution of NVAGAIR subsidiary 418 Return of aviation asset 271 Miscellaneous receivables 185 -------- Total change in excess purchase price $ (3,635) ========
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consist of the following: December 31, 1997 1998 -------- -------- (Amounts in Thousands) Revolving Credit Facility (see below) $ 54,550 $ 90,000 10.5 percent Senior Subordinated Notes, interest only payable semiannually, principal due August 1, 2004 100,000 100,000 Notes payable issued to former stockholders of Gem Gaming, Inc. with interest at 8 percent, interest payable quarterly beginning July 1997 through October 1998 and then monthly thereafter, periodic principal payments beginning November 1998, due December 31, 2004 (See Note 10) 28,650 26,650 Note payable to lender, with interest at 15 percent, secured by a deed of trust on the hotel at ACVI, interest payable in periodic payments, principal due December 31, 1999. 1,856 7,453 Mortgages payable to United States Department of Agriculture Rural Economic and Community Development Services Multi- Housing Program with variable interest (effective rate of approximately 3.8 percent and 4.2 percent for the years ended December 31, 1997 and 1998, respectively), collateralized by a first deed of trust on certain apartment units and land, due in variable monthly payments of not less than $4,725, including interest, through November 2016 and October 2033. 1,335 1,292 Note payable to financing company, with interest at 10.75 percent, collateralized by certain equipment, due in monthly principal and interest payments of $53,177 through January 1999. 1,431 877 Other 1,326 855 -------- -------- 189,148 227,127 Less: Current maturities 5,635 9,924 -------- -------- $183,513 $217,203 ======== ========
On July 5, 1995, the Company, as borrower, and its principal operating subsidiaries, as guarantors, entered into a Revolving Credit Facility (the "1995 Revolving Credit Facility") with Wells Fargo Bank, N.A. ("WFB"), and a syndicate of banks. On July 8, 1997, the Company, as borrower, and its principal operating subsidiaries, as guarantors, entered into a new $125 million Revolving Credit Facility (the "Revolving Credit Facility") with WFB, and a syndicate of banks. As a result of the retirement of the 1995 Revolving Credit Facility, the Company incurred an extraordinary pre-tax loss (related primarily to the write-off of unamortized loan costs) of $1,060,000. As of December 31, 1998, the Company had drawn $90.0 million on the Revolving Credit Facility. These borrowings were used to repay the 1995 Revolving Credit Facility and to fund the development of The Reserve. The proceeds from the Senior Subordinated Notes offering were used to repay a portion of the Revolving Credit Facility and fees to Revolving Credit Facility lenders. Originally, the Company could not borrow under the Revolving Credit Facility in excess of 3.25 times its rolling four-quarter EBITDA (earnings before interest, taxes, depreciation and amortization). The Company was also limited to borrowing no more than 5.0 times EBITDA in total debt as adjusted per the Revolving Credit Facility. The Company and the lenders amended the Revolving Credit Facility effective June 30, 1998. Under the amended Revolving Credit Facility, borrowings under the Revolving Credit Facility may not exceed 2.75 times the Company's rolling four quarter EBITDA (earnings before interest, taxes, depreciation and amortization), and the Company's total funded debt may not exceed the Company's rolling four-quarter EBITDA multiplied by a factor as follows: 5.25 commencing June 30, 1998; 5.5 commencing September 30, 1998; 5.25 commencing June 30, 1999; 4.75 commencing December 31, 1999; 4.5 commencing March 31, 2000; and 4.0 commencing September 30, 2000. As of December 31, 1998, the total funded debt of the Company was 5.498 times the Company's rolling four-quarter EBITDA. The maximum amount available under the Revolving Credit Facility reduces semiannually commencing July 1, 1999 on a sliding scale (ranging from $2.5 million to $10.0 million in reductions) with a final reduction of $75.0 million at maturity on June 30, 2003. The Revolving Credit Facility, as amended, requires the Company to maintain a gross fixed charge coverage ratio of 1.25 to 1.0 until September 30, 1999, and 1.50 to 1.0 thereafter. The amended Revolving Credit Facility also limits the Company's aggregate capital expenditures in each year to an amount equal to 5 percent of its consolidated net revenue for the preceding year and prohibits the Company from incurring any additional secured indebtedness without the approval of the lenders. The amended Revolving Credit Facility also requires the Company to maintain a tangible net worth of at least $56,000,000, plus 90 percent of net income (without any reduction for net losses) as of the end of each quarter beginning September 30, 1998, plus 90 percent of the net proceeds of certain future equity offerings. As of March 31, June 30, September 30 and December 31, 1998, the Company has been in non-compliance with the tangible net worth requirement. In each instance of non- compliance, the Company has obtained a waiver of the violation from the lenders. As of December 31, 1998, the Company's tangible net worth was $2.8 million less than required by this covenant. The waiver for this violation was obtained on March 31, 1999 and also amended the Revolving Credit Facility's minimum tangible net worth requirement to $50.0 million as of that date. Under the terms of the Revolving Credit Facility, concurrent with each loan draw, the Company may select the interest rate based on either the London Interbank Offering Rate ("LIBOR") or WFB's prime interest rate. The maximum number of outstanding draws at any time using LIBOR is five, with a minimum draw amount of $5.0 million per draw. A LIBOR draw can be for a one-, two-, three- or six-month term with interest accruing monthly and due at the end of the term, but in no event less frequently than quarterly. The interest rate is fixed throughout the term of a LIBOR-based draw and, as amended, ranges from LIBOR plus 1.5 percentage points to LIBOR plus 4.0 percentage points. On a prime interest rate draw, the interest rate is variable and, as amended, ranges from a minimum of prime plus 0.25 percentage points to a maximum of prime plus 2.75 percentage points with interest payable monthly in arrears. As of December 31, 1998, the Company has taken LIBOR draws totaling $90.0 million with an average interest rate of approximately 9.25 percent per annum. The applicable margins for both LIBOR draws and prime interest rate draws adjust semiannually based on the ratio of the Company's consolidated total debt to consolidated cash flows, as measured by an EBITDA formula. The Revolving Credit Facility is secured by liens on substantially all of the real and personal property of the Company and its subsidiaries. The Revolving Credit Facility prohibits any secondary liens on these properties without the prior written approval of the lenders. Certain changes in control of the Company may constitute a default under the Revolving Credit Facility. The Revolving Credit Facility also requires the Company to expend a maximum of 5 percent of the consolidated net revenues for the preceding year on capital maintenance annually. The Revolving Credit Facility binds the Company to a number of other affirmative and negative covenants. These include promises to maintain certain financial ratios within defined parameters, not to engage in new businesses without lender approval and to make certain reports to the lenders. As of December 31, 1998, the Company was in compliance with these covenants, except as indicated above. The Company has entered into an interest rate collar agreement with WFB to manage interest expense, which is subject to fluctuation due to the variable-rate nature of the debt under the Company's Revolving Credit Facility. Under the agreement, which covers $50.0 million of the borrowings on the Revolving Credit Facility, the Company has a LIBOR floor rate of 5.39 percent and a LIBOR ceiling rate of 6.75 percent, plus the applicable margin. As of December 31, 1998, the Company had paid approximately $10,000 in additional interest as a result of this agreement. The agreement terminates on June 30, 2003 to coincide with the maturity of the Revolving Credit Facility. On July 15, 1997, the Company completed an offering of $100 million in principal amount of 10-1/2% Senior Subordinated Notes due 2004 (the "Senior Subordinated Notes"). The Senior Subordinated Notes have a coupon rate of 10.5 percent and were sold at par. Interest is due semiannually on February 1 and August 1 of each year, and the maturity date is August 1, 2004. Proceeds of the offering were used to retire and refinance existing debt. The Senior Subordinated Notes are not secured and are subordinate to all existing and future Senior Indebtedness (as defined), which includes the Revolving Credit Facility. The indenture governing the Company's senior subordinated notes (the "Indenture") contains certain customary financial and other covenants, which among other things, govern the ability of the Company and its subsidiaries to incur indebtedness (except as specifically allowed) unless, after giving effect thereto, a 2.0 to 1.0 pro forma Consolidated Coverage Ratio (as defined in the Indenture) has been met. As of December 31, 1998, the Company was in compliance with these covenants. The Senior Subordinated Notes were issued by ACI, and all of ACI's current subsidiaries (the "Guarantors") have jointly and severally, and fully and unconditionally, guaranteed the Senior Subordinated Notes. Each of the Guarantors is a wholly owned subsidiary of ACI, and the Guarantors constitute all of ACI's direct and indirect subsidiaries. ACI is a holding company with no operations or material assets independent of those of the Guarantors, other than its investment in the Guarantors, and the aggregate assets, liabilities, earnings and equity of the Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis. Separate financial statements and certain other disclosures concerning the Guarantors are not presented because, in the opinion of management, such information is not material to investors. Other than customary restrictions imposed by applicable corporate statutes, there are no restrictions on the ability of the Guarantors to transfer funds to ACI in the form of cash dividends, loans or advances. In August 1997, AC Hotel Corp. entered into a loan agreement providing for borrowings of up to $7.5 million for the purpose of funding a portion of the construction costs of a 150-room hotel at Ameristar Vicksburg. This nonrecourse loan from a private lender is secured by a deed of trust on the hotel and the underlying land senior in priority to the liens securing the Revolving Credit Facility. Borrowings under this loan bear interest at 15 percent per annum, payable in periodic installments, and the loan matured in July 1998, but was amended to extend the maturity to December 31, 1999. The Company is required to pay a non-usage fee at the rate of 3 percent per annum on the undrawn loan balance, and draws are subject to the satisfaction of various conditions typically applicable to construction loans. As of December 31, 1998, the balance on this loan was $7.5 million. On December 28, 1995, ACCBI entered into a preferred ship mortgage with General Electric Credit Corp. ("GECC"). Borrowings totaled $11,511,000 and occurred on December 29, 1995. GECC required the Company to maintain a cash security deposit (the "Security Deposit") in the full amount of the borrowing until certain conditions precedent were fulfilled, including having the casino at Ameristar Council Bluffs fully operational and open to the general public for gaming operations and satisfying all licensing requirements within 30 days of the borrowing date. The Security Deposit was released by GECC on January 19, 1996. This borrowing was secured by the Council Bluffs casino. The loan's principal was to be repaid over four years. Principal payments of approximately $320,000 per month for the first 12 months and approximately $213,000 per month for the remaining 36 months were required. The Company had the right to prepay the entire borrowing at a premium ranging from one percent to two percent during the first 18 months of the loan. Thereafter until maturity, the Company had the right to prepay the loan without premium. ACI had entered into an unconditional guaranty of prompt payment and performance with respect to this borrowing. This borrowing was repaid in July 1997. Proceeds from an equipment loan entered into with WFB on December 12, 1995 for $7,137,000 were used to finance slot machines, surveillance equipment and property signage at ACCBI. The loan is being amortized over four years with monthly principal payments of approximately $149,000. The interest rate is equivalent to that charged on the Revolving Credit Facility. This borrowing was repaid in July 1997 with proceeds from the Senior Subordinated Notes offering. The mortgages payable to United States Department of Agriculture Rural Economic and Community Development Services Multi-Housing Program provide long-term financing for low income housing facilities constructed by the Company. Monthly principal and interest payments are determined by a formula based upon demographics of the tenants. Interest rates on the mortgages may vary from 1.0 percent to 11.88 percent. Provisions of the loan agreements require that rents received be used to fund operating and maintenance expenses, debt service and reserve accounts. In connection with the merger of Gem Gaming, Inc. into ACLVI, the Company acquired a one-half interest in an aircraft owned by Gem Air, Inc., an affiliate of Gem Gaming, Inc. In addition, the Company and Gem Air, Inc. formed NVAGAIR to hold certain other aviation-related assets. NVAGAIR or the Company, as a result of these transactions, assumed certain aviation- related notes payable. These borrowings were removed from the Company's obligations as part of the Gem Settlement. (See Notes 4 and 10) The book value of the Company's long-term debt approximates fair value due to the predominantly variable-rate nature of the obligations. Also, fixed rate obligations are at rates that approximate the Company's incremental borrowing rate for debt with similar terms and remaining maturities. Maturities of the Company's borrowings for the next five years as of December 31, 1998 are as follows (amounts in thousands): 1999 $ 9,924 2000 2,350 2001 2,045 2002 8,045 2003 88,046 Thereafter 116,717 -------- $227,127 ========
NOTE 6 - LEASES The Company has entered into capitalized lease agreements for a restaurant, including associated furniture, fixtures and equipment, and land on which Ameristar Vicksburg is situated. Such leases contained initial terms for rental payments covering the period of project development and were converted to the primary lease terms (as defined below) upon the opening of the project. Ameristar Vicksburg opened on February 27, 1994, at which time the primary terms of the leases became effective. The primary terms of the leases, expiring from 5 to 30 years from the opening date, require total payments of approximately $655,000 per year. Each lease contains a purchase option exercisable at various times during the term of the lease generally in varying amounts based on the time of exercise. The purchase options lapse in conjunction with the expiration dates of the primary terms of the corresponding leases. Assuming the Company defers the exercise of its purchase option under each lease to the expiration of the purchase option, the Company will pay $50,000 in 1999, approximately $1,500,000 in 2004 and approximately $480,000 in 2024 to purchase all of the parcels. If the Company were to accelerate its exercise of the purchase options to the earliest possible dates, the Company would pay approximately $6,086,000 in 1999. The Company generally may terminate each lease upon the payment of termination penalties, the maximum aggregate amount of which is $328,000. In addition, if the leases were terminated, the Company may be required to restore certain parcels to their condition prior to the lease commencement date, including the removal of the cofferdam and other improvements lying below the water. However, the Company has no plans to abandon the site. ACVI has entered into a seven-year capitalized lease for restaurant equipment, due in monthly payments totaling approximately $118,000 per year, through April 2001. ACVI also entered into a five-year capitalized lease for a computer system. Quarterly payments are required totaling approximately $42,000 per year through October 1998. ACI had entered into two three-year capitalized lease agreements for computer equipment on behalf of ACCBI. Monthly payments were required totaling approximately $197,000 per year through November 1998. ACCBI had entered into a five-year capitalized lease agreement for telephone systems and related equipment. This equipment was purchased at the time of the Company's debt refinancing in July 1997. CPI has entered into a four-year equipment lease for the financing of slot equipment at the facility. Monthly principal payments of $44,000 plus interest are required through May 2001 with a balloon payment in June 2001. ACLVI has entered into a ten-year capitalized lease agreement for signage at The Reserve, with monthly payments totaling approximately $260,000 per year through December 2006. ACLVI has entered into a four-year equipment lease for the financing of slot equipment at the facility. Monthly principal payments of $111,000 plus interest are required through January 2002 with a balloon payment in February 2002. Future minimum lease payments required under capitalized leases for the five years subsequent to December 31, 1998 are as follows (amounts in thousands): 1999 $ 3,603 2000 4,512 2001 3,329 2002 2,433 2003 753 Thereafter 11,199 -------- 25,829 Less: Amount representing interest 10,235 -------- Present value of minimum lease payments $ 15,594 ========
ACCBI, as lessor, has leased a portion of the Ameristar Council Bluffs site to an independent hospitality company, which operates a 140-room hotel on the property. The lease is for a period of 50 years beginning March 1, 1996. The lease requires the hospitality company to pay ACCBI base rent of $5,000 per month and percentage rent equal to 5 percent of the hotel's gross sales in excess of $2.0 million per year. ACI has leased office space located in Las Vegas, Nevada to serve as its corporate offices. The office space is leased under two operating lease agreements. The agreements require aggregate monthly payments of approximately $52,500, plus the Company's share of certain common area maintenance expenses. Payments under the leases are subject to annual escalation clauses corresponding to increases in the cost of living. The first lease agreement, covering approximately 90 percent of the office space leased by the Company, contains two three-year renewal options. The initial term of the first lease is through December 2001. The second lease agreement, covering approximately 10 percent of the office space leased by the Company, contains two two-year renewal options. The initial term of the second lease was through January 1998 and the first two-year option was exercised and with a new expiration date in January 2000. The Company recorded rental expense of approximately $360,000 and $533,000 under these leases in the years ended December 31, 1997, and 1998, respectively. NOTE 7 - BENEFIT PLANS 401(k) plan The Company instituted a defined contribution 401(k) plan in March 1996 which covers all employees who meet certain age and length of service requirements and allows an employer contribution up to 50 percent of the first four percent of each participating employee's compensation. Plan participants can elect to defer before-tax compensation through payroll deductions. These deferrals are regulated under Section 401(k) of the Internal Revenue Code. The Company's matching contribution were $373,000, $570,000 and $485,000 for the fiscal years ended December 31, 1996, 1997, and 1998, respectively. Insurance plan The Company has a qualified employee insurance benefit trust covering all employees on a regular basis who work an average of 32 hours or more per week. The amount of the Company's contribution is determined by the Trust Committee. The plan also requires contributions from eligible employees and their dependents. The Company's contribution expense for the plan was approximately $2,258,000, $3,834,000 and $4,950,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Stock Option Plans The Company has adopted a Management Stock Option Incentive Plan ("Option Plan") which provides for the grant of options to purchase Common Stock intended to qualify as incentive stock options or non-qualified options. All officers, directors, employees, consultants, advisors, independent contractors and agents are eligible to receive options under the Option Plan, except that only employees may receive incentive stock options. The maximum number of shares available for issuance under the Option Plan is 1,600,000. No person eligible to receive options under the Option Plan may receive options for the purchase of more than an aggregate of 200,000 shares. The Option Plan is administered by the Board of Directors or, in its discretion, by a Committee of the Board of Directors. The exercise price of incentive stock options granted under the Option Plan must be at least equal to the fair market value of the shares on the date of grant (110 percent of fair market value in the case of participants who own shares possessing more than 10 percent of the combined voting power of the Company) and may not have a term in excess of 10 years from the date of grant (five years in the case of participants who are more than 10 percent stockholders). With certain limited exceptions, options granted under the Option Plan are not transferable other than by will or the laws of descent and distribution. In December 1998, certain stock options were amended to reduce the per share exercise prices to $2.64 (the market price on the date of amendment) from initial exercise prices ranging from $2.78 to $6.13. Other than the exercise price, the option terms remained the same with respect to the vesting date and the remaining contractual life. The Company previously maintained a Non-Employee Director Stock Option Plan ("Director Plan") which provided for the grant of non-qualified options to purchase Common Stock to the non- employee members of the Company's Board of Directors. The issuance of new stock options under the Director Plan was terminated in June 1997. The Director Plan is administered by the Board of Directors. Under the Director Plan, each non-employee director was automatically granted an initial option to purchase 1,000 shares of Common Stock and automatically granted an option to purchase an additional 1,000 shares of Common Stock on each anniversary of such date if he remained a non-employee director on that anniversary date. Options granted under the Director Plan have an exercise price equal to the fair market value of the shares on the date of grant and have a term of 10 years from the date of grant. Options granted under the Director Plan become exercisable one year from the date of grant and are not transferable other than by will or the laws of descent and distribution. Options exercisable for 8,000 shares of Common Stock remain outstanding under the Director Plan. The Company accounts for its stock option plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock- Based Compensation," the Company's net income (loss) and earnings (loss) per share would have been reduced to the following pro forma amounts: Years ended December 31, 1996 1997 1998 -------- -------- -------- (Amounts in Thousands, Except Per Share Data) Net income (loss): As reported $ 5,897 $ 9,695 $(12,715) Pro forma 5,708 9,491 (13,002) Earnings (loss) per share: As reported $ 0.29 $ 0.48 $ (0.62) Pro forma 0.28 0.47 (0.64)
The fair value of each option granted (or repriced during the period for which SFAS 123 is effective) is estimated on the date of grant (or repricing) using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants (or repricings) in 1996, 1997 and 1998, respectively: risk-free interest rates of 6.4, 6.2, and 4.5 percent; expected volatility of 63, 63 and 58 percent. The expected lives of the options are 5 years for 1996, 1997 and 1998. No dividends are expected to be paid. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Summarized information for the stock option plans is as follows: 1996 1997 1998 ----------------- ---------------- -------------- Wtd. avg. Wtd. avg. Wtd. avg. Shares ex. price Shares ex. price Shares ex. price ------- --------- ------- --------- ------- --------- Options outstanding, beginning of year 548,000 $6.15 566,000 $ 6.25 594,500 $ 6.12 Granted 70,000 7.31 150,000 5.32 833,610 2.69 Exercised - - - Canceled (52,000) 6.67 (121,500) 9.57 (288,000) 6.22 ------- -------- --------- Options outstanding, end of year 566,000 6.25 594,500 6.12 1,140,110 2.68 ======= ======== ========= Options available for grant 534,000 1,013,500 467,890 Options exercisable, end of year 154,800 6.24 233,800 6.25 184,300 2.75 Weighted average fair value of options granted $ 4.34 $ 3.14 $ 1.18
At December 31, 1998, 1,132,110 of the 1,140,110 options outstanding have an exercise price of $2.64, with a weighted average exercise price of $2.64 and a weighted average remaining contractual life of 9.1 years. 6,000 options outstanding have exercise prices between $5.13 and $6.50, with a weighted average exercise price of $5.88 and a weighted average remaining contractual life of 7.2 years. The remaining 2,000 options have an outstanding exercise price of $16.00, with a remaining contractual life of 5.2 years. NOTE 8 - COMMITMENTS AND CONTINGENCIES Litigation The Company is engaged in several legal actions arising in the ordinary course of business. With respect to these legal actions, the Company believes that it has adequate legal defenses, insurance coverage or indemnification protection and believes that the ultimate outcome(s) will not have a material adverse impact on the Company's financial position. On October 14, 1998, a general contractor for certain interior construction at The Reserve filed a complaint against ACLVI in the District Court of Clark County, Nevada. The construction contract, as amended through change orders, provided for a guaranteed maximum price not to exceed $25,482,532, inclusive of fees to the contractor. The contractor alleged that ACLVI is obligated to pay it $5,621,098, plus interest, in excess of the guaranteed maximum price for additional labor costs invoiced to ACLVI. The complaint does not state a specific theory for recovery. Settlement negotiations are ongoing, and ACLVI has answered the complaint. If this case is not resolved through the current settlement negotiations, ACLVI intends to vigorously defend this case. In June 1998, ACVI received a letter from the Financial Crimes Enforcement Network ("FinCEN") of the Department of Treasury identifying 26 alleged currency transaction reporting failures or errors that were discovered in an audit by the Internal Revenue Service covering an approximately 13-month period following the opening of Ameristar Vicksburg. ACVI has responded to the FinCEN letter and has implemented various steps intended to improve compliance with the currency transaction reporting requirements. ACVI is expected to meet with FinCEN officials in the near future concerning this matter, which Management anticipates will be resolved without a material adverse effect on the Company or its results of operations or financial condition. On February 17, 1998, ACI received a petition that E. L. Pennebaker, Jr. had filed with the Mississippi Gaming Commission. In that petition Mr. Pennebaker requests that the Mississippi Gaming Commission order ACI, Harrah's Vicksburg, Inc., and Riverboat Corporation of Mississippi-Vicksburg to stop opposing the approval and construction of a casino on the Big Black River and for such other corrective and punitive action that the Mississippi Gaming Commission might find appropriate. The bases for the petition are nearly identical to those alleged in the lawsuit filed by Mr. Pennebaker, which lawsuit is discussed below. On February 23, 1998, E. L. Pennebaker, Jr. filed a complaint in the Circuit Court of Pike County, Mississippi against ACI, Harrah's Vicksburg, Inc., Riverboat Corporation of Mississippi-Vicksburg, and Deposit Guaranty National Bank. The complaint was amended on February 27, 1998, to add James F. Belisle, Multi Gaming Management, Inc. and Multi Gaming Management of Mississippi, Inc. as additional plaintiffs. The plaintiffs are property owners or have rights to acquire property along the Big Black River in Warren County, Mississippi. They allege they would have profited if the Mississippi Gaming Commission had found suitable for a casino a location along that river that was controlled by plaintiffs Belisle, Multi Gaming Management, Inc. and Multi Gaming Management of Mississippi, Inc. The plaintiffs further allege that the defendants entered into an agreement to hinder trade and restrain competition in the gaming industry in violation of the antitrust laws and the gaming laws of the Mississippi Code. Specifically, the plaintiffs allege the defendants conducted an aggressive campaign in opposition to the application of Horseshoe Gaming, Inc. for a gaming site on the Big Black River. The plaintiffs allege compensatory damages of $38.0 million and punitive damages of $200.0 million. ACI has answered the complaint and is defending the suit, in part, on the basis that its conduct alleged by the plaintiffs is constitutionally protected under the First Amendment. In September 1996, the Company received from the general contractor of the Main Street Pavilion and the hotel for its property in Council Bluffs, Iowa, a demand for arbitration regarding amounts due under the contract. The demand did not contain a plea for a specific amount of damages, and instead requested an award for extra or changed work, delayed, disrupted and accelerated work, together with inefficiencies and impacts experienced on the project, along with unpaid retainage and certain other costs. Based on a statement of damages filed in the arbitration, management estimated that the general contractor's claims were for an amount of approximately $4.6 million, which includes certain amounts due to subcontractors that have already been paid by ACCBI. ACCBI submitted a counterclaim in the arbitration for cost overruns in excess of the guaranteed maximum price that ACCBI has had to pay, liquidated damages for delay and certain other costs. ACCBI submitted a statement of damages in the arbitration proceeding seeking $7.1 million from the general contractor. As of December 31, 1996, $1,515,000 in cost overruns had been paid by the Company. In addition, at December 31, 1996, $2,154,000 of the Company's construction payables represented disputed general contractor claims. On November 13, 1997, the three-member arbitrator panel for the American Arbitration Association increased the guaranteed maximum price under the construction contract by approximately $690,000 to approximately $33.0 million and required the general contractor to pay to ACCBI approximately $825,000, plus interest, to compensate for cost overruns previously paid by ACCBI as settlement of the arbitration. As a result of this settlement, the Company was relieved of any liability for the $2,154,000 in disputed claims. NOTE 9 - RELATED PARTY TRANSACTIONS The Company engages Neilsen and Company to provide certain construction and professional services, office space and other equipment and facilities. Neilsen and Company is controlled by the principal stockholder and President of the Company. Total payments to Neilsen and Company were $46,000, $43,000 and $33,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Company also leases office space from the Lynwood Shopping Center which is controlled by the principal stockholder and President of the Company. Total payments to the Lynwood Shopping Center were $88,000, $31,000 and $23,000 for the years ended December 31, 1996, 1997 and 1998, respectively. In management's opinion, at the time the above described transactions were entered into, they were in the best interest of the Company and on terms as fair to the Company as could have been obtained from unaffiliated parties. NOTE 10 - GEM GAMING, INC. MERGER On October 9, 1996, Gem Gaming, Inc. ("Gem"), a Nevada Corporation, was merged with and into ACLVI, pursuant to a merger agreement entered into on May 31, 1996, as amended in July and October, 1996 (the "Merger Agreement"). Gem was originally established to develop The Reserve. Activities relating to The Reserve have been included in the consolidated financial statements of the Company since October 9, 1996. The merger of Gem into ACLVI was recorded using the purchase method of accounting. Under the amended Merger Agreement, all of the outstanding shares of Gem common stock were cancelled at the merger closing and were converted into the right for the former stockholders of Gem (the "Gem Stockholders") to receive cash, subject to reduction, equal to the amount of the net proceeds (after payment of underwriter's discounts and commissions and certain other offering expenses) in excess of $4.0 million from an underwritten public offering of 7.5 million shares of the Company's Common Stock (the "Post-Merger Offering"). If the Post-Merger Offering is not concluded in whole or in part prior to June 1, 1997, the Company will deliver to the Gem Stockholders promissory notes (the "Gem Notes") in an aggregate principal amount equal to (i) the average 10-day closing price of the Common Stock as of June 1, 1997, (ii) multiplied by 7.5 million (iii) minus $4.0 million and (iv) minus one-half of any offering expenses. The Gem Notes would be unsecured, would mature on June 1, 2000, and would accrue interest at the rate of eight percent per annum. Interest would be payable on a monthly basis. To reflect the obligation to the Gem Stockholders upon the closing of the merger, the Company recorded notes payable at $35,375,000, the amount at which they would have been issued based on the Company's stock price on the closing date of the merger, less a discount of $1,725,000 to reflect imputed interest over the noninterest-bearing term of the obligation. As of December 31, 1996, approximately $605,000 of the discount had been amortized to interest expense. The amount recorded as notes payable exceeds the fair market value of the net assets acquired by the Company in the merger. The excess of purchase price over fair market value of net assets acquired, recorded as a long-term asset on the Company's consolidated balance sheet, will be amortized over the estimated 39-year depreciable life beginning in the period in which the acquired property commences operations. Due to certain disputes between the Gem stockholders and the Company surrounding the Merger Agreement, an arbitration proceeding brought by the Company was settled by mutual agreement (the "Gem Settlement Agreement") in June 1997. The Gem Settlement Agreement provides that the Company will pay to the Gem Stockholders $32.7 million in installments, plus interest, in lieu of the consideration provided for in the Merger Agreement. The Company made an initial payment of $4.0 million to the Gem Stockholders and issued unsecured subordinated promissory notes for the balance of $28.7 million (the "Gem Notes" -See Note 5). The Gem Notes are subordinate to the Revolving Credit Facility, the Senior Subordinated Notes and other long-term indebtedness of ACI specified by ACI up to a maximum of $250 million. Pursuant to the Gem Settlement Agreement, the Company has also reconveyed to Gem Air, Inc. ("Gem Air"), an affiliate of one of the Gem Stockholders, the Company's interests in certain aviation-related assets acquired in July 1996. Gem Air has assumed certain liabilities of the Company related to these assets and an aircraft operating agreement and a sublease relating to these assets (the "Gem Aviation Agreements") have been terminated. In lieu of the merger consideration provided for in the Merger Agreement, the Gem Settlement Agreement provides that the Company will pay to the Gem Stockholders $32.7 million in installments, plus interest. Upon the effectiveness of the Gem Settlement Agreement, the Company made a payment of $4.0 million to the Gem Stockholders and issued the Gem Notes for the balance of the cash consideration ($28.7 million). Pursuant to the Gem Settlement Agreement, The Company has also reconveyed to Gem Air, Inc. ("Gem Air"), an affiliate of one of the Gem Stockholders, the Company's interests in certain aviation-related assets acquired in July 1996. Gem Air has assumed certain liabilities of the Company related to these assets and an aircraft operating agreement and a sublease relating to these assets (the "Gem Aviation Agreements") have been terminated. The Gem Settlement Agreement includes mutual general releases of the parties to the arbitration proceeding and certain of their respective related parties with respect to all obligations arising out of, based upon or relating to the Merger Agreement and the Gem Aviation Agreements, except for certain excluded claims. Among the excluded claims under the Gem Settlement Agreement are claims against the Gem Stockholders with respect to Excluded Liabilities (as defined in the Merger Agreement) and certain indemnification obligations of the Gem Stockholders under the Merger Agreement with respect to claims asserted by third parties against the Company. The following unaudited supplemental pro forma information shows estimated net income and earnings per share as though the merger had occurred at the beginning of 1996. The pro forma amounts reflect the Company's actual results combined with Gem's actual results for the period presented, adjusted to reflect additional interest expense as if the Gem Notes had been issued at the beginning of the period, and the associated income tax benefit at the federal statutory rate of 35 percent. No pro forma revenues are disclosed because Gem had no operations prior to the merger. Year ended December 31, 1996 ----------------- Pro forma net income before extraordinary items (in thousands) $ 3,756 ======= Pro forma net income (in thousands) $ 3,756 ======= Pro forma earnings per share $ 0.18 ======= EX-4 2 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("First Amendment") is made and entered into as of the 9th day of September, 1998, by and among AMERISTAR CASINOS, INC., a Nevada corporation ("ACI"), CACTUS PETE'S, INC., a Nevada corporation ("CPI"), AMERISTAR CASINO VICKSBURG, INC., a Mississippi corporation ("ACVI"), AMERISTAR CASINO COUNCIL BLUFFS, INC., an Iowa corporation ("ACCBI") and AMERISTAR CASINO LAS VEGAS, INC., a Nevada corporation ("ACLVI" and together with ACI, CPI, ACVI and ACCBI, collectively referred to as the "Borrowers") and WELLS FARGO BANK, National Association, U.S. BANK NATIONAL ASSOCIATION, FIRST AMERICAN NATIONAL BANK, operating as, and successor in interest by merger to, DEPOSIT GUARANTY NATIONAL BANK, THE FIRST NATIONAL BANK OF CHICAGO, BANKERS TRUST COMPANY, FIRST NATIONAL BANK OF COMMERCE, TRUSTMARK NATIONAL BANK, IMPERIAL BANK, NORWEST BANK OF NEBRASKA, N.A. and FORT WAYNE NATIONAL BANK, as Lenders, and WELLS FARGO BANK, National Association, as Swingline Lender and as the administrative and collateral agent for the Lenders and Swingline Lender (herein in such capacity called the "Agent Bank" and, together with the Lenders and Swingline Lender, collectively referred to as the "Banks"). R_E_C_I_T_A_L_S: WHEREAS: A. Borrowers and Banks (Fort Wayne National Bank having acquired its respective Syndication Interest from Wells Fargo Bank, National Association by Assignment, Assumption and Consent Agreement dated as of October 6, 1997) entered into a Credit Agreement dated as of July 8, 1997 (the "Existing Credit Agreement") for the purpose of establishing a reducing revolving line of credit in favor of Borrowers, to be funded by Lenders up to the maximum principal amount of One Hundred Twenty-Five Million Dollars ($125,000,000.00), including a Swingline Facility to be funded by Swingline Lender up to the maximum amount of Five Million Dollars ($5,000,000.00) at any time outstanding. B. For the purpose of this First Amendment, all capitalized words and terms not otherwise defined herein shall have the respective meanings and be construed herein as provided in Section 1.01 of the Existing Credit Agreement and shall be deemed to incorporate that provision as a part hereof, in the same manner and with the same effect as if the same were fully set forth herein. C. Borrowers and Banks have agreed to the waiver and amendments to the Existing Credit Agreement on the terms and subject to the conditions and provisions set forth in this First Amendment. NOW, THEREFORE, in consideration of the foregoing and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do agree to the waiver, amendments and modifications to the Existing Credit Agreement as specifically hereinafter provided as follows: 1. Definitions. As of the First Amendment Effective Date, Section 1.01 of the Existing Credit Agreement entitled "Definitions" shall be and is hereby amended to include the following definitions. Those terms which are currently defined by Section 1.01 of the Existing Credit Agreement and which are also defined below shall be superseded and restated by the applicable definition set forth below: "Applicable Margin" means for any Base Rate Loan or LIBOR Loan the applicable per annum percentage amount to be added to the Base Rate or the LIBO Rate, as the case may be, as set forth in the table below based on the Leverage Ratio of the Borrower Consolidation as of each Fiscal Quarter end, commencing with the end of the Fiscal Quarter ending June 30, 1998, together with the immediately preceding three (3) Fiscal Quarters on a four (4) Fiscal Quarter basis, any change in the applicable percentage amount by reason thereof to be effective as of the 1st day of the third month immediately following each such Fiscal Quarter end: LIBO Leverage Ratio Base Rate Rate Margin Margin Greater than 5.00 to 1.00 2.75% 4.00% Greater than 4.00 to 1.00 2.25% 3.5% but less than or equal to 5.00 to 1.00 Greater than 3.00 to 1.00 1.75% 3.00% but less than or equal to 4.00 to 1.00 Greater than 2.0 to 1.0 but 1.25% 2.50% less than or equal to 3.0 to 1.0 Greater than 1.00 to 1.0 but 0.75% 2.00% less than or equal to 2.0 to 1.00 Less than or equal 0.25% 1.50% to 1.00 to 1.00 "Availability Limit" shall mean: (i) for the period commencing on the Closing Date and until June 30, 1998, three and onequarter (3.25) times (x) EBITDA of the Borrower Consolidation determined as of the end of each Fiscal Quarter together with the immediately preceding three (3) Fiscal Quarters on a four (4) Fiscal Quarter basis as set forth on an Availability Limit Certificate and received by Agent Bank on each Availability Determination Date, and (ii) for the period commencing on July 1, 1998 and continuing until the Maturity Date, two and three-quarters (2.75) times (x) EBITDA of the Borrower Consolidation determined as of the end of each Fiscal Quarter together with the immediately preceding three (3) Fiscal Quarters on a four (4) Fiscal Quarter basis as set forth on an Availability Limit Certificate and received by Agent Bank on each Availability Determination Date. "Credit Agreement" shall mean the Existing Credit Agreement as amended by the First Amendment, together with all Schedules, Exhibits and other attachments thereto, as it may be further amended, modified, extended, renewed or restated from time to time. "Existing Credit Agreement" shall have the meaning set forth in Recital Paragraph A of the Second Amendment. "First Amendment" shall mean the First Amendment to Credit Agreement. "First Amendment Effective Date" shall mean June 30, 1998. 2. Modification of Applicable Margin Matrix. As of the First Amendment Effective Date, the definition of Applicable Margin shall be modified as set forth in the definition of Applicable Margin contained in the First Amendment. 3. Reduction of Availability Limit. As of July 1, 1998, the Availability Limit shall be reduced from 3.25 times (x) EBITDA to 2.75 times (x) EBITDA as set forth in the definition of Availability Limit contained in the First Amendment. 4. Restatement of Capital Expenditures Covenant. As of the First Amendment Effective Date, Section 6.01 entitled "Minimum Capital Expenditures", shall be and is hereby fully amended and restated in its entirety as follows: "Section 6.01. Capital Expenditures. During each Fiscal Year, commencing with the Fiscal Year commencing January 1, 1998, Borrowers shall make or cause to be made, Capital Expenditures to the Collateral Properties in a minimum aggregate amount equal to or greater than two percent (2%) of net revenues but in no event greater than a maximum aggregate amount equal to three percent (3%) of net revenues, exclusive of all amounts approved by Lenders as of the First Amendment Effective Date for Capital Expenditures to be made during the 1998 Fiscal Year, derived from the Collateral Properties by the Borrower Consolidation during the immediately preceding Fiscal Year. Commencing with the 1999 Fiscal Year and continuing until the Maturity Date, Borrowers shall make or cause to be made, Capital Expenditures to the Collateral Properties in a minimum aggregate amount equal to or greater than two percent (2%) of net revenues, but in no event greater than a maximum aggregate amount equal to five percent (5%) of net revenues, derived from the Collateral Properties by the Borrower Consolidation during the immediately preceding Fiscal Year." 5. One-Time Waiver of Minimum Tangible Net Worth Violation. Banks shall and do hereby waive the violation of the minimum Tangible Net Worth covenant set forth in Section 6.02 of the Existing Credit Agreement, which violation occurred as of the Fiscal Quarter ended March 31, 1998. Borrowers acknowledge that the Banks are entitled to require strict compliance with Section 6.02 of the Credit Agreement (as well as all other provisions of the Loan Documents) with respect to all other periods and at all times. 6. Restatement of Minimum Tangible Net Worth Covenant. As of the First Amendment Effective Date, Section 6.02 of the Existing Credit Agreement entitled "Minimum Tangible Net Worth" shall be and is hereby fully amended and restated in its entirety as follows: "Section 6.02. Minimum Tangible Net Worth. As of the Fiscal Quarter ended June 30, 1998, and as of each Fiscal Quarter thereafter occurring until Bank Facility Termination, the Borrower Consolidation shall maintain as of the last day of each Fiscal Quarter a Tangible Net Worth equal to or greater than the sum of (a) Fifty-Six Million Dollars ($56,000,000.00), plus (b) ninety percent (90%) of Net Income after taxes realized as of each Fiscal Quarter end occurring on and after September 30, 1998 (without reduction for any net losses), plus (c) ninety percent (90%) of the proceeds received in Cash or Cash Equivalents (net of reasonable expenses) of any and all additional Equity Offerings made after the Closing Date, other than proceeds of any Equity Offerings that are required to be paid to Rebeil or Magliarditi pursuant to the terms of the Gem Merger Agreement." 7. Restatement of Leverage Ratio Covenant. As of the First Amendment Effective Date, Section 6.03 of the Existing Credit Agreement entitled "Leverage Ratio" shall be and is hereby fully amended and restated in its entirety as follows: "Section 6.03. Leverage Ratio. Commencing as of the first Fiscal Quarter ending subsequent to the Closing Date and continuing as of each Fiscal Quarter end until Bank Facilities Termination, the Borrower Consolidation shall maintain a Leverage Ratio no greater than the ratios described hereinbelow to be calculated as of the end of each Fiscal Quarter in accordance with the following schedule: Fiscal Quarter End Leverage Ratio ------------------ -------------- As of the Closing Date through the Fiscal Quarter ending March 31, 1998 5.00 to 1.00 As of the Fiscal Quarter ending June 30, 1998 5.25 to 1.00 As of the Fiscal Quarter ending September 30,1998 through the Fiscal Quarter ending March 31, 1999 5.50 to 1.00 As of the Fiscal Quarter ending June 30, 1999 through the Fiscal Quarter ending September 30, 1999 5.25 to 1.00 As of the Fiscal Quarter ending December 31, 1999 4.75 to 1.00 As of the Fiscal Quarter ending March 31, 2000 through the Fiscal Quarter ending June 30, 2000 4.50 to 1.00 As of the Fiscal Quarter ending September 30, 2000 through the end of each Fiscal Quarter until the occurrence of the Maturity Date 4.00 to 1.00" 8. Restatement of Gross Fixed Charge Coverage Ratio Covenant. As of the First Amendment Effective Date, Section 6.04 entitled "Gross Fixed Charge Coverage Ratio" shall be and is hereby fully amended and restated in its entirety as follows: "Section 6.04. Gross Fixed Charge Coverage Ratio. Commencing as of the first Fiscal Quarter ending subsequent to the Closing Date and continuing as of each Fiscal Quarter end until Bank Facilities Termination, the Borrower Consolidation shall maintain a Gross Fixed Charge Coverage Ratio no less than the ratios described herein below to be calculated as of the end of each Fiscal Quarter in accordance with the following schedule: As of the Closing Date through the Fiscal Quarter ending March 31, 1998 1.50 to 1.00 As of the Fiscal Quarter ending June 30,1998 through the Fiscal Quarter ending September 30, 1999 1.25 to 1.00 As of the Fiscal Quarter ending December 31, 1999 through the end of each Fiscal Quarter until the occurrence of the Maturity Date 1.50 to 1.00" 9. Addition of Section 6.15 entitled "No Additional Secured Indebtedness". As of the First Amendment Effective Date, Section 6.16 shall be added to the Credit Agreement as follows: "Section 6.16. No Additional Secured Indebtedness. Notwithstanding herein contained or contained in Section 6.08(c) of the Credit Agreement to the contrary, on and after the First Amendment Effective Date, Borrower shall not incur any additional Indebtedness secured by any Lien encumbering all or any portion of the Collateral, exclusive, however, of secured purchase money Indebtedness permitted under Section 6.08(c) of the Credit Agreement which was incurred and outstanding as of the First Amendment Effective Date." 10. Conditions Precedent to Effectiveness of First Amendment. The First Amendment shall become effective as of the date hereof upon receipt by Agent Bank of the following documents and payments, in each case in a form and substance reasonably satisfactory to Agent Bank, and the occurrence of each other condition precedent set forth below: a. Due execution by Borrowers and Banks of twelve (12) duplicate originals of this First Amendment; b. Corporate resolutions or other evidence of requisite authority of Borrowers to execute the First Amendment; c. Reimbursement to Agent Bank by Borrowers for all reasonable fees and out-of pocket expenses incurred by Agent Bank in connection with the First Amendment, including, but not limited to, reasonable attorneys' fees of Henderson & Morgan, LLC; and d. Such other documents, instruments or conditions as may be reasonably required by Lenders. 11. Representations of Borrowers. Borrowers hereby represent to the Banks that as of the date hereof: a. the representations and warranties contained in Article IV of the Existing Credit Agreement and contained in each of the other Loan Documents (other than representations and warranties which expressly speak only as of a different date, which shall be true and correct in all material respects as of such date) are true and correct on and as of the date hereof in all material respects as though such representations and warranties had been made on and as of the date hereof, except to the extent that such representations and warranties are not true and correct as a result of a change which is permitted by the Credit Agreement or by any other Loan Document or which has been otherwise consented to by Agent Bank; b. Since the date of the most recent financial statements referred to in Section 5.08 of the Existing Credit Agreement, no Material Adverse Change has occurred and no event or circumstance which could reasonably be expected to result in a Material Adverse Change or Material Adverse Effect has occurred; c. no event has occurred and is continuing which constitutes a Default or Event of Default under the terms of the Credit Agreement; and d. The execution, delivery and performance of this First Amendment has been duly authorized by all necessary action of Borrowers and this First Amendment constitutes a valid, binding and enforceable obligation of Borrowers. 12. Incorporation by Reference. This First Amendment shall be and is hereby incorporated in and forms a part of the Existing Credit Agreement. 13. Governing Law. This First Amendment shall be governed by the internal laws of the State of Nevada without reference to conflicts of laws principles. 14. Counterparts. This First Amendment may be executed in any number of separate counterparts with the same effect as if the signatures hereto and hereby were upon the same instrument. All such counterparts shall together constitute one and the same document. 15. Continuance of Terms and Provisions. All of the terms and provisions of the Existing Credit Agreement shall remain unchanged except as specifically modified herein. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the day and year first above written. BORROWERS: AMERISTAR CASINOS, INC., a Nevada corporation By /s/Thomas Steinbauer Thomas Steinbauer, Senior Vice President CACTUS PETE'S, INC., a Nevada corporation By /s/Thomas Steinbauer, Thomas Steinbauer, Vice President AMERISTAR CASINO VICKSBURG, INC., a Mississippi corporation By /s/Thomas Steinbauer Thomas Steinbauer, Vice President AMERISTAR CASINO COUNCIL BLUFFS, INC., an Iowa Corporation By /s/Thomas Steinbauer Thomas Steinbauer, Vice President AMERISTAR CASINO LAS VEGAS, INC., a Nevada corporation By /s/Thomas Steinbauer Thomas Steinbauer, Vice President BANKS: WELLS FARGO BANK, National Association, Agent Bank, Lender and Swingline Lender By /s/Casey Potter Casey Potter, Vice President U.S. BANK, Lender By /s/Jack W. Prescott Jack W. Prescott Vice President FIRST AMERICAN NATIONAL BANK, operating as, and successor in interest by merger to, DEPOSIT GUARANTY NATIONAL BANK, Lender By /s/Larry C. Ratzlaff Larry C. Ratzlaff Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO, Lender By /s/Mark A. Isley Mark A. Isley, First Vice President BANKERS TRUST COMPANY, Lender By /s/Patricia Hogan Patricia Hogan, Principal FIRST NATIONAL BANK OF COMMERCE, Lender By /s/Louis Ballero Louis Ballero, Senior Vice President TRUSTMARK NATIONAL BANK, Lender By /s/Johnny Ray Johnny Ray, Vice President IMPERIAL BANK, Lender By /s/Steven K. Johnson Steven K. Johnson, Senior Vice President NORWEST BANK OF NEBRASKA, N.A., Lender By /s/Michael V. Hinrichs Michael V. Hinrichs, Vice President FORT WAYNE NATIONAL BANK By /s/Mark A. Minnick Mark A. Minnick, Senior Vice President EX-4 3 INTEREST RATE COLLAR AGREEMENT THIS AGREEMENT ("Agreement") is entered into as of the 10th day of August, 1998, by and between AMERISTAR CASINOS, INC. ("Collar Purchaser"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Collar Seller"). WHEREAS, Collar Purchaser desires to protect against fluctuations in interest rates and has requested that Collar Seller make payments to Collar Purchaser in the event that the Floating Rate exceeds the Cap Rate. WHEREAS, In exchange for Collar Purchaser's payment of an amount equal to the Collar Fee and agreement to pay Collar Seller in the event that the Floating Rate declines below the Floor Rate, Collar Seller is willing to make such payments on the terms set forth herein. NOW THEREFORE, in consideration of their mutual covenants, Collar Seller and Collar Purchaser agree as follows: 1. Definitions. The capitalized terms "Cap Amount", "Cap Rate", "Collar Fee", "Collar Fee Payment Date", "Collar Interest Settlement Payment Dates", "Effective Date", "Floating Rate", "Floating Rate Maturity", "Floor Amount", "Floor Rate", "Reset Dates" "Termination Date" and "Trade Date" shall each be as specified in the Collar Confirmation. All other capitalized terms shall have the meanings set forth below or as otherwise set forth in this Agreement: (a) "Business Day" means a day (other than Saturday, Sunday or holiday) on which Collar Seller is open and conducting its customary banking transactions in the State of California. (b) "Business Day Convention" means, for purposes of determining each Calculation Period, that convention specified in the Collar Confirmation for adjusting any relevant date if it would otherwise fall on a day that is not a Business Day, so that: (i) if "following" is specified, that date will be the first following day that is a Business Day; (ii) if "modified following" is specified, that date will be the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day; and (iii) if "preceding" is specified, that date will be the first preceding day that is a Business Day. (c) "Calculation Period" means, subject to Business Day Convention, each consecutive period designated in the Collar Confirmation, the first of which will commence on, and include the Effective Date and extend to, but exclude the first Reset Date. Each subsequent Calculation Period, will commence on, and include the Reset Date and extend to, but exclude the next Reset Date. The final Calculation Period will end on, but exclude, the Completion Date. (d) "Collar Confirmation" means a document, substantially in the form of Exhibit A hereto, with the information required in each blank space completed. (e) "Completion Date" shall mean the Termination Date unless an Early Termination Date has occurred, in which case the Completion Date shall be the Early Termination Date. (f) "Day Count Convention" means that the calculation of each Cap Interest Settlement and Floor Interest Settlement will be based on the actual number of days in the Calculation Period divided by a 360-day year. (g) "Early Termination Date" means the date, if any, prior to the Termination Date upon which this Agreement is terminated pursuant to Paragraph 4(a) below. (h) "LIBOR" means, with respect to each Calculation Period, the rate for deposits in U.S. Dollars for a period equal to the Floating Rate Maturity, which appears on Telerate Page 3750 as of 11:00 AM, London Time, on the day that is two Business Days prior to the Reset Date (or the Effective Date in the case of the initial Period). If such rate does not appear on Telerate Page 3750, the rate for that Reset Date will be the arithmetic mean of the rates quoted by major Banks in London, selected by Cap Seller, for a period equal to the Floating Rate Maturity, as of 11:00 AM, London Time, on the day that is two Business Days prior to the Reset Date. (i) Telerate Page 3750 means the display designated as Page 3750 on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers Association as the information vendor for the purpose of displaying British Bankers Association Interest Settlement Rates for U.S. Dollar Deposits). 2. Collar Fee. (a) As a condition precedent to its acquiring any rights hereunder, Collar Purchase shall pay Collar Seller the Collar Fee in cleared funds, no later than 3:00 p.m., California time, on the Collar Fee Payment Date. (b) In order to establish the Cap Rate and perform its obligations under this Agreement, Collar Seller may "hedge" in the financial markets or otherwise make arrangements to permit it to carry out its obligations under the terms of this Agreement. Such actions may impose various costs and risks on Collar Seller beyond those which it would otherwise incur. Collar Purchaser acknowledges that the Collar Fee is nonrefundable and reasonable compensation for such additional risks and costs, regardless of whether Collar Seller in fact "hedges" in the financial markets. 3. Payment of Interest Settlements. (a) At least five Business Days prior to the end of each Calculation Period, Collar Seller will send Collar Purchaser a written notice ("Settlement Notice") specifying: (i) the amount of interest which would have accrued on the Cap Amount during the Calculation Period at a rate per annum equal to the Floating Rate; (ii) the amount of interest which would have accrued on the Cap Amount during the Calculation Period at a rate per annum equal to the Cap Rate; and (iii) the excess, if any, of the amount computed pursuant to Paragraph 3(a)(i) over the amount computed pursuant to Paragraph 3(a)(ii) above ("Cap Interest Settlement"). (b) In addition, the Settlement Notice will also include: (i) the amount of interest which would have accrued on the Floor Amount during the Calculation Period at a rate per annum equal to the Floor Rate; (ii) the amount of interest which would have accrued on the Floor Amount during the Calculation Period at a rate per annum equal to the Floating Rate; and (iii) the excess, if any, of the amount computed pursuant to Paragraph 3(b)(i) over the amount computed pursuant to Paragraph 3(b)(ii) above ("Floor Interest Settlement"). (c) All calculations under Paragraphs 3(a) and (b) above will be made on the basis of the Day Count Convention. (d) On each Collar Interest Settlement Payment Date, Collar Seller will pay Collar Purchaser the amount, if any, of the Cap Interest Settlement that may be due by, at Collar Seller's option, crediting Collar Purchaser's demand deposit account with Collar Seller, or by check payable to Collar Purchaser and sent to Collar Purchaser at the address set forth below, or by wiring funds to designated Collar Purchaser account. (e) On each Collar Interest Settlement Date, Collar Purchaser will pay Collar Seller the amount (if any) of the Floor Interest Settlement that may be due to Collar Seller by, at Collar Seller's option, Collar Seller's debiting Collar Purchaser's demand deposit account with Collar Seller, or by wiring funds to Collar Seller. 4. Early Termination. (a) This Agreement shall expire on the Termination Date and neither party may terminate this Agreement prior thereto; provided, however that in the event of a default by Collar Purchaser or Collar Seller in the performance of any of its obligations hereunder, unless such default is cured within five Business Days following the defaulting party's receipt of written notice thereof, the non-defaulting party may terminate this Agreement. (b) In the event of an early termination of this Agreement pursuant to Paragraph 4(a) above, the defaulting party shall promptly pay, on demand, the non-defaulting party an amount equal to the Termination Amount which the defaulting party acknowledges to be a reasonable estimate of the costs and loss of compensation incurred by the non-defaulting party as a result of the default and resulting early termination of this Agreement. (c) "Termination Amount" means the amount in U.S. Dollars equal to the sum of (i) the arithmetic mean of the respective one-time all-in fees (including documentation costs) communicated to the non-defaulting party on the earliest practicable Business Day following the Early Termination Date by each of three leading commercial banks or investment banking firms in San Francisco, Los Angeles or New York selected in good faith by the non-defaulting party as the fee that it would charge to assume, as of the Early Termination Date all of the rights and obligations of the defaulting party under this Agreement, and (ii) the aggregate amount of all amounts then due and owing the non-defaulting party by the defaulting party on the Early Termination Date; provided, however, that if one or more such entities fail so to communicate such a fee, the non-defaulting party is not required to seek another such entity to obtain a quote and the Termination Amount shall be determined on the basis of the fee or fees so communicated to the non-defaulting party by the other entities. 5. Limitations of Liability. In no event shall either party hereto be liable to the other for loss of profit or indirect, special, consequential, punitive or exemplary damages, arising out of any default under this Agreement. 6. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed served when personally delivered or, if mailed, upon the first to occur of receipt or the expiration of seventy-two hours after deposit in the United States Postal Service, certified mail, or if sent by overnight courier service, upon the first to occur of receipt or 3:00 p.m. (local time at place of delivery) the next Business Day, addressed to Collar Purchaser or Collar Seller at their respective addresses set forth in the Collar Confirmation. 7. Successors; Assigns. This Agreement shall be binding on and inure to the benefit of the successors and assigns of the parties; provided, however, that Collar Purchaser shall not, without the prior written consent of Collar Seller, assign (whether by operation of law or otherwise) its rights and obligations under this Agreement or any interest herein and any such attempted assignment shall be void and without force or effect. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any choice of law doctrine. 9. No Third Party Beneficiary. This Agreement and the payments to be made by the parties hereunder are solely for the benefit of the parties hereto for the purposes stated herein and no other person or entity shall have any rights hereunder or be a beneficiary of either party's obligations under this Agreement. 10. Counterparts. This Agreement may be executed in any number of counterparts and by each party hereto on separate counterparts, each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument. 11. Amendments; Waivers. Any amendment or waiver of any right under any provision of this Agreement shall be in writing and, in the case of an amendment, signed by both parties hereto, or in the case of a waiver, signed by the party waiving such right. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 12. Trade Date; Interest Agreement Not Credit Commitment. This Agreement shall be effective at, and as of, 12:01 a.m., California time, on the Trade Date. Nothing in this Agreement shall be construed to (i) mean that Collar Seller is committed to make a loan or extend any other credit to Collar Purchaser, or (ii) amend or modify any contract, instrument or document executed in connection with any loan or other credit extended to Collar Purchaser by Collar Seller. 13. Costs, Expenses and Attorneys' Fees. In the event of any dispute or litigation between the parties hereto, the prevailing party shall be entitled to recover from the other party, immediately upon demand, all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with the enforcement of its rights and/or the collection of any amounts which become due to it under this Agreement, and the prosecution or defense of any action in any way related to this Agreement, including any of the foregoing incurred in connection with any bankruptcy proceeding relating to such other party. 14. Security. All obligations of the Collar Purchaser to the Collar Seller under this Agreement are secured by the collateral provided in that certain Credit Agreement dated July 8, 1998 in the amount of $125,000,000 as evidenced in the several Security Agreements dated July 8, 1998 provided thereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. Collar Seller: Collar Purchaser: WELLS FARGO BANK, AMERISTAR CASINOS, INC. NATIONAL ASSOCIATION By:/s/Oliver Perin By:/s/Thomas Steinbauer Name: Oliver Perin Name: Thomas Steinbauer Title: Vice President Title: Senior Vice President/ Chief Financial Officer August 10,1998 Ameristar Casinos, Inc. 3773 Howard Hughes Parkway, Suite 490S Las Vegas, Nevada 89109 ATTENTION: Thomas Steinbauer (702) 567-7030 VIA FAX: (702) 369-8860 Dear Thomas, The purpose of this letter agreement ("Collar Confirmation") is to confirm the terms and conditions of the Collar Transaction entered into between Wells Fargo Bank, N.A. ("Collar Seller") and Ameristar Casinos, Inc. ("Collar Purchaser"). This Collar Confirmation is effective at, and as of, 12:01 a.m., California time, on the Trade Date specified below. This confirmation supplements, forms part of, and is subject to that Interest Rate Collar Agreement between Collar Seller and Collar Purchaser dated August 10, 1998. In the absence of any other such agreement, this communication itself constitutes a binding agreement setting forth the essential terms of the Collar Transaction. The terms of the Collar Transaction to which this Collar Confirmation relates are as follows: Collar Purchaser: Ameristar Casinos, Inc. Collar Seller: Wells Fargo Bank, N.A. Trade Date: August 10,1998 Effective Date: August 12,1998 Termination Date: June 30, 2003 Cap Amount: $50,000,000 Floor Amount: $50,000,000 Collar Fee: $0 Collar Fee Payment Date: not applicable Floating Rate: LIBOR Cap Rate: 6.75% Floating Rate Maturity: 3 months Reset Date: The last day of each March, June, September, and December, subject to adjustment in accordance with the designated Business Day Convention. The first reset date is August 12, 1998. Floor Rate: 5.39% Day Count Convention: Actual/360 days Business Day Convention: modified following Calculation Period: From the last day of each March, June, September, and December, beginning with August 12, 1998, up to the last day of the following three month period, continuing until the Termination Date, subject to adjustment in accordance with the designated Business Day Convention. Collar Interest Settlement Payment Dates: The last day of each March, June, September, and December, beginning with September 30, 1998, continuing up to and including the Termination Date, subject to adjustment in accordance with the designated Business Day convention. Account Details: Payments to Collar Seller: Made via Debit to DDA #4159-550797 Payments to Collar Purchaser: Made via credit to DDA #4159-550797 Security: All obligations of the Collar Purchaser to the Collar Seller under this Agreement are secured by the collateral provided in that certain Credit Agreement dated July 8, 1998 in the amount of $125,000,000 as evidenced in the several Security Agreements dated July 8, 1998 provided thereto. Addresses for Notices: Collar Purchaser: Ameristar Casinos, Inc. 3773 Howard Hughes Parkway, Suite 490S Las Vegas, Nevada 89109 Attention: Thomas Steinbauer (702) 567-7030 FAX: (702) 369-8860 Collar Seller: Wells Fargo Bank, National Association 420 Montgomery Street, 6th Floor MAC: 0101-063 San Francisco, CA 94163 Attention: Oliver Perin (415) 394-4011 FAX: (415) 956-9581 Please confirm that the foregoing correctly sets forth the terms of our agreement by signing this facsimile and sending it as a return acknowledgment to Kelly Johnson's attention (FAX:(415) 956-9581. Collar agreement documents will follow via overnight delivery. If you have any questions, please call me at (415) 394-4011. Sincerely, CONFIRMED BY: /s/ Thomas Steinbauer NAME: Thomas Steinbauer TITLE: Vice President and Chief Financial Officer DATE: August 10, 1998 EX-23 4 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report in this 1998 Annual Report on Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-83378, 333-34313.) Arthur Andersen LLP Las Vegas, Nevada March 31, 1999 EX-27 5
5 This data should be reviewed in conjunction with the financial statements included in this filing. 1,000 YEAR DEC-31-1998 DEC-31-1998 18,223 0 1,476 0 3,614 34,947 390,528 92,708 351,737 45,918 100,000 0 0 204 67,720 351,737 264,419 264,419 0 261,169 0 0 22,699 (19,078) (6,363) 0 0 0 0 (12,715) (0.62) (0.62)
EX-99 6 EXHIBIT 99.1 SUPPLEMENTAL AGREEMENT OF AMERISTAR CASINOS, INC. Ameristar Casinos, Inc. ("ACI") hereby agrees to furnish supplementally to the Securities and Exchange Commission a copy of any of the following instruments defining the rights of holders of long-term debt issued by ACI or its subsidiaries: Promissory Note, dated November 22, 1976, from Cactus Pete's, Inc. ("CPI") to United States of America and related Credit Agreement. Promissory Note, dated October 7, 1983, from CPI to United States of America and related Credit Agreements. Credit Agreement, dated June 27, 1996, between ACCBI and PDS Financial Corporation ("PDS"); Promissory Note from ACCBI to PDS; related Security Agreement; and Guaranty from ACI to PDS. Premium Finance Agreement, Disclosure Statement and Security Agreement, dated June 24, 1997, between ACI and A.I. Credit Corp. -----END PRIVACY-ENHANCED MESSAGE-----