UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

 

FORM 10-Q

 

 

 

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 ý    No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:  28,946,229 shares of Common Stock, $.01 par value per share, as of November 8, 2002.

 

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

		September 30, 2002			December 31, 2001
		(unaudited)
Current assets:
Cash and cash equivalents		$	57,238		$	57,221
Accounts receivable, net		4,681			4,384
Income taxes receivable		4,352			6,703
Deferred income taxes		6,357			6,357
Other current assets		4,090			5,679
Total current assets		76,718			80,344
Net property and equipment		446,445			442,613
Other assets:
Deferred finance costs, net		21,349			24,939
Goodwill, net		727,443			727,443
Intangible assets, net		29,040			30,746
Other, net		2,378			5,626
Total other assets		780,210			788,754
Total assets		$	1,303,373		$	1,311,711
Current liabilities:
Accounts payable		$	12,465		$	14,048
Accrued payroll and related expenses		19,536			19,838
Accrued gaming and admission taxes		47,726			25,155
Other accrued liabilities		34,897			35,691
Accrued interest		14,327			11,622
Current maturities of long-term debt		4,427			4,307
Total current liabilities		133,378			110,661
Long-term debt		894,968			994,845
Deferred income taxes		39,023			27,667
Other long-term obligations		5,983			536
Stockholders’ equity:
Common stock, $.01 par; 120,000,000 shares authorized; 28,946,229 and 28,829,480 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively		289			288
Capital in excess of par		88,643			86,845
Accumulated other comprehensive (loss) income		(3,065		)	1,809
Retained earnings		144,154			89,060
Total stockholders’ equity		230,021			178,002
Total liabilities and stockholders’ equity		$	1,303,373		$	1,311,711

 

See accompanying notes to condensed consolidated financial statements.

 

1

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share and Per Share Data)

 

		Nine Months Ended
		September 30, 2002			September 30, 2001
		(unaudited)			(unaudited)
Revenues:
Casino		$	716,409		$	554,389
Admissions		8,482			13,945
Food, beverage and other		73,315			57,586
		798,206			625,920
Less promotional allowances		(78,331		)	(72,328		)
Net revenues		719,875			553,592
Costs and expenses:
Casino		338,286			236,468
Selling, general and administrative		99,688			87,059
Food, beverage and other		54,905			43,166
Other operating expenses		31,287			26,216
Depreciation and amortization		35,038			33,923
		559,204			426,832
Income from operations		160,671			126,760
Other income (expense):
Interest income		115			706
Interest expense		(61,517		)	(46,342		)
		(61,402		)	(45,636		)
Income before minority interests and income taxes		99,269			81,124
Minority interests		—			(4,086		)
Income tax expense		(44,175		)	(31,617		)
Net income		$	55,094		$	45,421
Basic income per share		$	1.91		$	1.59
Diluted income per share		$	1.87		$	1.55

 

See accompanying notes to condensed consolidated financial statements.

 

2

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Share and Per Share Data)

 

		Three Months Ended
		September 30, 2002			September 30, 2001
		(unaudited)			(unaudited)
Revenues:
Casino		$	239,121		$	216,127
Admissions		3,068			4,834
Food, beverage and other		24,422			22,356
		266,611			243,317
Less promotional allowances		(26,855		)	(26,425		)
Net revenues		239,756			216,892
Costs and expenses:
Casino		111,155			95,993
Selling, general and administrative		33,665			31,338
Food, beverage and other		17,849			17,103
Other operating expenses		10,331			10,196
Depreciation and amortization		12,134			12,694
		185,134			167,324
Income from operations		54,622			49,568
Other income (expense):
Interest income		13			81
Interest expense		(20,170		)	(20,515		)
		(20,157		)	(20,434		)
Income before income taxes		34,465			29,134
Income tax expense		(15,337		)	(11,977		)
Net income		$	19,128		$	17,157
Basic income per share		$	0.66		$	0.60
Diluted income per share		$	0.65		$	0.58

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Except Share and Per Share Data)

 

		Nine Months Ended
		September 30, 2002			September 30, 2001
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net  income		$	55,094		$	45,421
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		33,279			27,011
Amortization		4,774			8,617
Loss on sale of fixed assets		428			51
Minority interests		—			4,086
Deferred income taxes		16,126			5,336
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable and other current assets		3,824			(663		)
Accounts payable and other current liabilities		22,597			20,156
Net cash provided by operating activities		136,122			110,015
Cash flows from investing activities:
Purchases of property and equipment		(37,734		)	(20,455		)
Purchases of Minority Interests in Partnership		—			(366,700		)
Purchase of Empress Casino Joliet, net of cash acquired		—			(453,880		)
Other		68			38
Net cash used in investing activities		(37,666		)	(840,997		)
Cash flows from financing activities:
Proceeds from (repayment of) line of credit, net		(96,400		)	135,400
Proceeds from issuance of subordinated notes		—			634,000
Payments on long-term debt		(2,754		)	(14,642		)
Payments of deferred finance costs		—			(20,807		)
Repayment of partner loans		—			(266		)
Partnership equity distributions		—			(5,199		)
Payment of preferred equity return and dividends to partner		—			(456		)
Proceeds from stock option exercises		744			1,342
Other		(29		)	27
Net cash (used in) provided by financing activities		(98,439		)	729,399
Net increase (decrease) in cash and cash equivalents		17			(1,583		)
Cash and cash equivalents, beginning of period		57,221			59,374
Cash and cash equivalents, end of period		$	57,238		$	57,791

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited - In Thousands, Except Share and Per Share Data)

 

 

		Shares		Common Stock			Capital in Excess of Par			Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders’ Equity
Balance, December 31, 2001		28,829,480		$	288		$	86,845		$	1,809		$	89,060		$	178,002
Exercise of stock options, including tax benefit		116,749		1			1,798									1,799
Comprehensive income:
Other comprehensive (loss) - interest rate swaps										(4,874		)				(4,874		)
Net income for the nine months ended September 30, 2002													55,094			55,094
Comprehensive income																50,220
Balance, September 30, 2002		28,946,229		$	289		$	88,643		$	(3,065	)	$	144,154		$	230,021

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

ARGOSY GAMING COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In Thousands, Except Share and Per Share Data)

 

1.   Basis of Presentation

 

Argosy Gaming Company provides casino-style gaming and related entertainment to the public and, through our subsidiaries, operates casinos in Alton and Joliet, Illinois; Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana; and Sioux City, Iowa.  Except where otherwise noted, the words “we”, “us”, “our” and similar terms, as well as “Argosy” or the “Company”, refer to Argosy Gaming Company and all of its subsidiaries.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole.  For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 2001, included in our Annual Report on Form 10-K (File No. 1-11853).  The accompanying unaudited condensed consolidated financial statements contain all adjustments, which are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the periods indicated.  Such adjustments include only normal recurring accruals.  Certain 2001 amounts have been reclassified to conform to the 2002 financial statement presentation.

 

2.   Long-Term Debt

 

Long-term debt consists of the following:

		September 30, 2002			December 31, 2001
Senior secured line of credit, expires July 31, 2006, interest payable at least quarterly at either LIBOR and/or prime plus a margin		$	65,800		$	162,200
Term loan, matures July 31, 2008, principal and interest payments due quarterly at either LIBOR and/or prime plus a margin		271,563			273,625
Senior subordinated notes, including unamortized premium of $7,728 at September 30, 2002, due June 2009, interest payable semi-annually at 10.75%		357,728			358,331
Senior subordinated notes, due September 2011, interest payable semi-annually at 9%		200,000			200,000
Notes payable, principal and interest payments due quarterly through September 2015, discounted at 10.5%		4,304			4,996
		899,395			999,152
Less:  current maturities		4,427			4,307
Long-term debt, less current maturities		$	894,968		$	994,845

 

On July 26, 2001, we issued $200,000 of 9.0% senior subordinated notes due 2011.  On February 1, 2001, we issued $150,000 of additional 10¾% senior subordinated notes due 2009.  Prior to this issuance, we had $200,000 of outstanding 10¾% subordinated notes (all “subordinated notes”).  On July 31, 2001, we entered into an amended and restated senior secured line of credit, maintaining our available line of credit at $400,000 and adding a term loan of $275,000 (“credit facility”).  The credit facility is secured by liens on substantially all of our assets and our subsidiaries are co-borrowers.  Substantially all of our subsidiaries fully and unconditionally guarantee the subordinated notes on a joint and several basis.  The subordinated notes rank junior to all of our senior indebtedness, including borrowings under the credit facility.

 

The subordinated notes and the credit facility contain certain restrictions on the payment of dividends on our common stock and the incurrence of additional indebtedness, as well as other customary debt covenants.   In addition, the credit facility requires us to maintain certain financial ratios as follows: (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.25 to 1.0.  As of September 30, 2002, we are in compliance with these ratios.

 

6

 

3.   Goodwill and Other Intangible Assets

 

The Financial Accounting Standards Board issued SFAS Statement 142, “Goodwill and Other Intangible Assets”  (“SFAS 142”).  Under this statement, amortization of the remaining book value of goodwill ceased as of January 1, 2002 and will be tested for impairment at least annually.  We adopted the provisions of SFAS 142 effective January 1, 2002.  If SFAS 142 had been in effect January 1, 2001, pre-tax goodwill amortization of $5,616 and $2,155 would not have been recorded for the nine months and three months ended September 30, 2001, respectively.  This would have increased our net income by $3,313 to $48,734 and our diluted net income per share by $0.11 to $1.66 for the nine months ended September 30, 2001.  For the three months ended September 30, 2001, this would have increased our net income by $1,271 to $18,428 and our diluted net income per share by $0.04 to $0.62.

 

We have completed the first step of transitional goodwill impairment testing.  This transitional testing used discounted cash flow methodology and market comparisons to determine a fair market value for each reporting entity with goodwill.  The results of our transitional testing indicated no reporting entities with impairment.

 

Additionally, a gaming tax increase enacted in Illinois during the second quarter 2002 resulted in additional interim impairment testing for goodwill and other intangible assets for our Empress Casino Joliet (“Empress”).  This additional interim impairment testing indicated no impairment for Empress at June 30, 2002.

 

Both the transitional and interim impairment testing are based upon our estimates of (1) the value of the applicable reporting entity, (2) future operating performance and (3) discount rates.  Should our estimates differ materially from actual results, we may be required to record impairment charges in future periods.

 

4.   Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Nine Months Ended						Three Months Ended
		September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator:
Numerator for basic and diluted earnings per share -
Net Income		$	55,094		$	45,421		$	19,128		$	17,157
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding		28,858,816			28,595,457			28,895,142			28,762,020
Effect of dilutive securities (using the treasury stock method):
Employee and directors stock options		513,593			615,971			427,975			495,655
Warrants		80,230			76,925			77,898			78,018
Dilutive potential common shares		593,823			692,896			505,873			573,673
Denominator for diluted earnings per share - adjusted Weighted-average shares and assumed conversions		29,452,639			29,288,353			29,401,015			29,335,693
Basic income per share		$	1.91		$	1.59		$	0.66		$	0.60
Diluted earnings per share		$	1.87		$	1.55		$	0.65		$	0.58

 

7

 

5.   Acquisitions

 

In 2001, we purchased the 42.5% limited partnership interests in the Argosy Casino in Lawrenceburg, Indiana (the “Lawrenceburg Casino”) for an aggregate price of $365,000 including all preferred equity interest and outstanding partner loans.  As a result of these acquisitions, we now own 100% of the Lawrenceburg Casino.

 

The purchase prices for the minority interests were determined based upon estimates of future cash flows and evaluations of the net worth of the assets acquired.  The purchases were accounted for under the purchase method.  The allocation of the purchase price resulted in approximately $298,000 in goodwill, which was being amortized over a 40-year life.  In accordance with SFAS 142, amortization of the remaining book value of goodwill ceased as of January 1, 2002, and will be tested for impairment at least annually.  The purchases were funded with approximately $155,000 of net proceeds from the issuance of subordinated notes and borrowings of approximately $210,000 under our credit facility.

 

On July 31, 2001, we diversified our operations and cash flows by acquiring 100% of the Empress (with casino operations located in Joliet, Illinois) for approximately $453,880, net of cash acquired.  The purchase price was determined based upon estimates of future cash flows and the net worth of the assets acquired.  We funded this acquisition through the issuance of subordinated notes and borrowings under the credit facility.

 

The Empress acquisition was accounted for using the purchase method under SFAS Statement 141.  The allocation of the purchase price, using appraised values, resulted in approximately $409,000 in goodwill and $5,400 in intangible assets.  In accordance with SFAS 142, the goodwill is not amortized but instead subject to impairment testing at least annually.

 

The following unaudited pro forma consolidated financial information for the nine months and the three months ended September 30, 2001 has been prepared assuming the acquisitions and implementation of SFAS Statements 141 and 142 had occurred on January 1, 2001 (for the nine months and three months ended September 30, 2001, pre-tax amortization of goodwill of $5,616 and $2,155, respectively, has been excluded).

 

 

These unaudited pro forma results are presented for comparative purposes only.  The pro forma results are not necessarily indicative of what our actual results would have been had the acquisitions been completed as of the beginning of the respective year, or of future results.

 

6.   Commitments and Contingent Liabilities

 

We are subject to, from time to time, various legal and regulatory proceedings in the ordinary course of our business.  We believe that current proceedings will not have a material effect on our financial condition or the results of our operations.

 

8

 

ARGOSY GAMING COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

 

Except where otherwise noted, the words, “we,” “us,” “our” and similar terms, as well as references to “Argosy” or the “Company” refer to Argosy Gaming Company and all of its subsidiaries.

 

Cautionary Statements for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

 

This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  When used in this document, the words “anticipate”, “believe”, “estimate” and “expect” and other similar expressions are generally intended to identify forward-looking statements.  Investors are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of the Company or its management, are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors including, but not limited to, (i) construction delays related to the Company’s expansion projects, (ii) competitive and general economic conditions in the markets in which the Company operates, (iii) increased competitive pressures in the markets in which the Company operates, (iv) the effect of future legislation or regulatory changes on the Company’s operations, including but not limited to gaming tax increases and issuances of additional gaming licenses and (v) other risks detailed from time to time in the Company’s Securities and Exchange Commission filings.  The Company does not intend to update these forward-looking statements.

 

 

Overview

 

We own and operate the Alton Belle Casino, in Alton, Illinois; the Empress Casino Joliet in Joliet, Illinois; the Argosy Casino in Riverside, Missouri; the Argosy Casino in Baton Rouge, Louisiana; the Belle of Sioux City Casino in Sioux City, Iowa; and the Argosy Casino in Lawrenceburg, Indiana.  In the first quarter of 2001, we became the sole owner of the Argosy Casino in Lawrenceburg, Indiana, through the purchase of the 42.5% minority interests in the property.  Prior to this acquisition, we were the majority owner of the Lawrenceburg Casino and, as such, our historical consolidated financial statements included the assets, liabilities and results of operations for the Lawrenceburg Casino on a consolidated basis.

 

On July 31, 2001, we acquired the Empress Casino Joliet in Joliet, Illinois on a 300-acre site approximately 40 miles southwest of Chicago.  We funded this acquisition through the issuance of $200 million of 9.0% senior subordinated notes due 2011 and a $275 million term loan through our amended and restated credit facility dated July 31, 2001.

 

9

 

		Nine Months Ended						Three Months Ended
		September 30, 2002			September 30, 2001			September 30, 2002			September 30, 2001
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Casino Revenues
Alton Belle Casino		$	91,025		$	92,491		$	29,718		$	30,915
Argosy Casino - Riverside		75,296			73,747			24,665			24,478
Argosy Casino - Baton Rouge		57,783			58,526			18,147			19,973
Belle of Sioux City Casino		29,055			27,509			9,779			9,541
Argosy Casino - Lawrenceburg		280,860			258,496			98,878			87,600
Empress Casino Joliet(1)		182,390			43,620			57,934			43,620
Total		$	716,409		$	554,389		$	239,121		$	216,127
Net Revenues
Alton Belle Casino		$	87,673		$	88,948		$	28,539		$	29,709
Argosy Casino - Riverside		72,304			70,620			23,665			23,406
Argosy Casino - Baton Rouge		58,780			58,485			18,272			20,112
Belle of Sioux City Casino		28,208			26,803			9,420			9,299
Argosy Casino - Lawrenceburg		285,957			263,883			100,364			89,728
Empress Casino Joliet(1)		186,732			44,537			59,444			44,537
Other		221			316			52			101
Total		$	719,875		$	553,592		$	239,756		$	216,892
Income (loss) from Operations(2)
Alton Belle Casino		$	22,189		$	27,386		$	6,469		$	8,928
Argosy Casino - Riverside		16,075			15,181			5,168			4,662
Argosy Casino - Baton Rouge		7,551			7,418			1,480			2,859
Belle of Sioux City Casino		5,884			5,947			1,851			2,225
Argosy Casino - Lawrenceburg		85,270			84,507			32,289			28,925
Empress Casino Joliet(1)		42,398			11,163			13,829			11,163
Corporate		(15,309		)	(18,306		)	(5,111		)	(5,879		)
Jazz Enterprises, Inc.(3)		(2,301		)	(3,526		)	(772		)	(1,026		)
Other		(1,086		)	(1,088		)	(581		)	(367		)
Total(6)		$	160,671		$	128,682		$	54,622		$	51,490
EBITDA(2)(4)
Alton Belle Casino		$	27,080		$	31,788		$	8,113		$	10,437
Argosy Casino - Riverside		19,290			18,340			6,254			5,716
Argosy Casino - Baton Rouge		12,330			11,914			3,130			4,397
Belle of Sioux City Casino		7,518			7,110			2,388			2,609
Argosy Casino - Lawrenceburg		95,203			96,452			35,576			32,599
Lawrenceburg financial advisory fee(5)		—			(927		)	—			—
Empress Casino Joliet(1)		49,662			12,746			16,271			12,746
Corporate		(14,321		)	(13,216		)	(4,626		)	(3,871		)
Jazz Enterprises, Inc.(3)		(1,074		)	(1,559		)	(363		)	(435		)
Other		21			(43		)	13			(14		)
Total(6)		$	195,709		$	162,605		$	66,756		$	64,184

 

(1)          As we acquired the Empress Casino Joliet on July 31, 2001, the nine months and three months ended September 30, 2001 includes only two months of operations under our ownership.  In accordance with FASB Statement 142, Accounting for Goodwill and Intangible Assets, no amortization expense has been recorded on the goodwill portion of the purchase price.

 

(2)          Income from operations and EBITDA exclude consideration of any management fee paid to us and the 42.5% minority interest in our Lawrenceburg casino for periods prior to our first quarter 2001 acquisitions of these minority interests.

 

(3)          Jazz Enterprises, Inc. is a wholly owned subsidiary that owns and operates the Catfish Town real estate development adjacent to our Baton Rouge casino.

 

(4)          “EBITDA” is defined as earnings before interest, taxes, depreciation and amortization and is presented before any management fees paid to Argosy.  EBITDA should not be construed as an alternative to operating income, or net income (as determined in accordance with generally accepted accounting principles) as an indicator of our operating performance, or as an alternative to cash flows generated by operating, investing and financing activities (as an indicator of cash flow or a measure of liquidity).  EBITDA is presented solely as a supplemental disclosure because management believes that it is a widely used measure of operating performance in the gaming industry and for companies with a significant amount of depreciation and amortization.  EBITDA may not be comparable to similarly titled measures reported by other companies.  We have other significant uses of cash flows, including debt service and capital expenditures, which are not reflected in EBITDA.

 

(5)          The Lawrenceburg partnership paid a financial advisory fee equal to 5.0% of its EBITDA to a minority partner prior to our acquisition of this minority interest in February 2001.

 

(6)          The three and nine months ended September 30, 2001, exclude a $1.9 million pre-tax charge related to costs associated with the abandoned Kenosha casino development.

 

10

 

Critical Accounting Policies

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which requires our management to make estimates and assumptions about the effects of matters that are inherently uncertain.  Of our accounting policies, we believe the following may involve a higher degree of judgment and complexity.

 

Goodwill – We have approximately $727 million of goodwill recorded on our balance sheet at September 30, 2002, related to acquisitions.  We regularly evaluate our acquired businesses for potential impairment indicators.  Additionally, we adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002, that requires us to perform impairment testing at least annually.  Our judgments regarding the existence of impairment indicators are based on, among other things, the regulatory and competitive status and operational performance of each of our acquired businesses.  Future events could significantly impact our judgments and any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

 

Property and Equipment – Our operations are capital intensive and we have made significant capital investments in each of our properties.  At September 30, 2002, we have approximately $446 million of net property and equipment recorded on our balance sheet.  We depreciate our assets on a straight-line basis over their estimated useful lives.  The estimates of the useful lives are based on the nature of the assets as well as our current operating strategy.  Future events, such as property expansions, new competition and new regulations, could result in a change in the manner in which we are using certain assets requiring a change in the estimated useful lives of such assets.  In assessing the recoverability of the carrying value of property and equipment, we must make assumptions regarding estimated future cash flows and other factors.  If these estimates or the related assumptions change in the future, we may be required to record impairment charges for these assets.

 

Insurance Accruals – Our insurance policies for employee health, workers’ compensation and general patron liability have significant deductible levels on an individual claim basis.  We accrue a liability for known workers’ compensation and general patron liability based upon claims reserves established by the third party administrator processing our claims.  Additionally, we accrue an amount for incurred but not reported claims based on our historical experience and other factors.  Our employee health insurance benefit accrual is based on our historical claims experience rate including an estimated lag factor.  These accruals involve complex estimates and could be significantly affected should current claims vary from historical levels.  Management reviews our insurance accruals for adequacy at the end of each reporting period.

 

Effective Gaming Tax Rates – We record gaming taxes based upon effective gaming tax rates for each of our casinos.  These effective rates are based upon statutory gaming tax rates and estimates of annual casino revenues.  Increases or decreases in our actual or estimated casino revenues or changes in statutory gaming tax rates could require changes to our effective gaming tax rates.  Management reviews our effective gaming tax rates at the end of each reporting period.

 

Nine months ended September 30, 2002 compared to nine months ended September 30, 2001

 

Casino –  Casino revenues for the nine months ended September 30, 2002, increased $162.0 million, or 29.2% to $716.4 million from $554.4 million for the nine months ended September 30, 2001.  Lawrenceburg casino revenues increased $22.4 million, or 8.7%, to $280.9 million for the nine months ended September 30, 2002, from $258.5 million for the nine months ended September 30, 2001.  Lawrenceburg commenced dockside gaming effective August 1, 2002.  Our Empress Casino Joliet (“Joliet”), acquired July 31, 2001, recorded $182.4 million in casino revenues for the nine months ended September 30, 2002.  As of September 30, 2001, we had owned Joliet for two months and recorded $43.6 million in casino revenues.  The commencement of dockside gaming in Indiana and facility renovations by two competitors of our Joliet casino have resulted in a decrease in Joliet’s casino revenues of $5.7 million, from the $43.6 million for the two months ended September 30, 2001 to $37.9 million for the two months ended September 30, 2002.  Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 0.4% increase in casino revenues from $252.3 million to $253.2 million.

 

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Casino expenses increased $101.8 million to $338.3 million for the nine months ended September 30, 2002, from $236.5 million for the nine months ended September 30, 2001.  Joliet had $104.0 million in casino expenses for the nine months ended September 30, 2002 and $23.7 million for the nine months ended September 30, 2001.  Joliet’s casino expenses for the two months ended September 30, 2002 were $21.0 million compared to the $23.7 million for the two months ended September 30, 2001, a $2.7 million decrease.  The remaining increase for the nine months ended September 30, 2002, is due primarily to our Lawrenceburg casino expense which includes increased gaming taxes corresponding to an increase in revenue with dockside gaming and an increase in gaming tax rates.

 

Admissions – Admissions revenues (net of complimentary admissions) decreased to $1.4 million for the nine months ended September 30, 2002, from $2.6 million for the nine months ended September 30, 2001, due primarily to a reduction in the admissions price during 2002 at Lawrenceburg.

 

Food, Beverage and Other – Food, beverage and other revenues increased $15.7 million to $73.3 million for the nine months ended September 30, 2002, from $57.6 million for the nine month period ended September 30, 2001.  Joliet contributed $11.9 million of this increase.  Additionally, our Baton Rouge facility (including the hotel operations) contributed $2.0 million of the increase.  Food, beverage and other net profit increased $4.0 million to $18.4 million for the nine months ended September 30, 2002, from $14.4 million for the nine months ended September 30, 2001.  Joliet and Baton Rouge (including hotel operations) contributed $2.1 million and $1.1 million, respectively, of this increase.  The remaining increases in revenues and net profits are spread throughout our other properties.

 

Selling, General and Administrative – Selling, general and administrative expenses increased $12.6 million to $99.7 million for the nine months ended September 30, 2002, from $87.1 million for the nine months ended September 30, 2001, due primarily to Joliet’s expenses of $12.2 million for the nine months ended September 30, 2002, as compared to $3.9 million for the nine months ended September 30, 2001 (an $8.3 million increase).  The remaining increase is due primarily to a $3.4 million increase in city development fees at Lawrenceburg due to the increase in revenues related to the switch to dockside gaming effective August 1, 2002.

 

Other Operating Expenses – Other operating expenses increased by $5.1 million to $31.3 million for the nine months ended September 30, 2002, as compared to $26.2 million for the nine months ended September 30, 2001.  Joliet incurred $7.9 million of other operating expenses during the nine months ended September 30, 2002 as compared to $1.8 million for the nine months ended September 30, 2001.

 

Depreciation and Amortization – Depreciation and amortization increased $1.1 million from $33.9 million for the nine months ended September 30, 2001, to $35.0 million for the nine months ended September 30, 2002.  Increases for the nine months ended September 30, 2002 consisted of Joliet adding $5.7 million of depreciation and intangible asset amortization, accelerated depreciation of $0.3 million on planned asset retirements and $0.4 million of depreciation for our new data warehouse put in service during the third quarter 2002.  These increases are offset by a decrease in goodwill amortization due to its elimination in accordance with SFAS 142, effective as of January 1, 2002 for all goodwill.  If SFAS 142 had been in effect January 1, 2001, pre-tax goodwill amortization of $5.6 million would not have been recorded for the nine months ended September 30, 2001.

 

Interest Expense – Net interest expense increased $15.8 million to $61.4 million for the nine months ended September 30, 2002, from $45.6 million for the nine months ended September 30, 2001.  This increase is primarily attributable to additional borrowings in connection with the Lawrenceburg and Joliet acquisitions.

 

Minority Interests – We had no minority interest expense for the nine months ended September 30, 2002, as compared to $4.1 million for the nine months ended September 30, 2001.  This decrease is attributable to our Lawrenceburg casino minority interests acquisitions during the first quarter 2001, and as the sole owner, we no longer incur minority interest expense.

 

Income Tax Expense – Income tax expense increased by $12.6 million to $44.2 million for the nine months ended September 30, 2002, from $31.6 million for the nine months ended September 30, 2001, due to increased pre-tax earnings (net of minority interests expense in 2001) and an increase in our effective tax rate due to an increase in Indiana tax rates.

 

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Net Income – Net income was $55.1 million for the nine months ended September 30, 2002, compared to $45.4 million for the nine months ended September 30, 2001, due primarily to the factors discussed above.  If SFAS 142 had been in effect January 1, 2001, our net income would have increased by $3.3 million to $48.7 million and our diluted net income per share would have increased by $0.11 to $1.66 for the nine months ended September 30, 2001.

 

Three months ended September 30, 2002 compared to three months ended September 30, 2001

 

Casino –  Casino revenues for the three months ended September 30, 2002, increased $23.0 million, or 10.6% to $239.1 million from $216.1 million for the three months ended September 30, 2001.  Lawrenceburg casino revenues increased $11.3 million, or 12.9%, to $98.9 million for the three months ended September 30, 2002, from $87.6 million for the three months ended September 30, 2001.  Lawrenceburg commenced dockside gaming effective August 1, 2002.  Joliet, acquired July 31, 2001, recorded $57.9 million in casino revenue for the three months ended September 30, 2002.  As of September 30, 2001, we owned Joliet for two months and recorded $43.6 million in casino revenues.  The commencement of dockside gaming in Indiana and facility renovations by two competitors of our Joliet casino have resulted in a decrease in Joliet’s casino revenues of $5.7 million, from the $43.6 million for the two months ended September 30, 2001 to $37.9 million for the two months ended September 30, 2002.  Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 3.1% decrease in casino revenues from $84.9 million to $82.3 million.  Our Alton casino was affected by increased competitive pressures due to an expanded facility by a competitor in August 2002 and our Baton Rouge casino experienced construction disruptions during a recently completed three-month refurbishment.

 

Casino expenses increased $15.2 million to $111.2 million for the three months ended September 30, 2002, from $96.0 million for the three months ended September 30, 2001.  Joliet had $33.0 million in casino expenses for the three months ended September 30, 2002 as compared to $23.7 million for the three months ended September 30, 2001.  Joliet’s casino expense for the two months ended September 30, 2002 was $21.0 million compared to the $23.7 million for the two months ended September 30, 2001, a $2.7 million decrease.  The remaining increase for the three months ended September 30, 2002, is due primarily to our Lawrenceburg casino expense which includes increased gaming taxes corresponding to an increase in revenue with dockside gaming and an increase in gaming tax rates.

 

Admissions – Admissions revenues (net of complimentary admissions) decreased to $0.5 million for the three months ended September 30, 2002, from $0.8 million for the three months ended September 30, 2001, due primarily to a reduction in the admissions price during 2002 at Lawrenceburg.

 

Food, Beverage and Other – Food, beverage and other revenues increased $2.0 million to $24.4 million for the three months ended September 30, 2002, from $22.4 million for the three month period ended September 30, 2001.  Joliet contributed $1.3 million of this increase.  Food, beverage and other net profit increased $1.3 million to $6.6 million for the three months ended September 30, 2002, from $5.3 million for the three months ended September 30, 2001.  Joliet contributed $0.6 million of this increase.  The remainder of the increases is an overall increase in revenues and profits spread throughout our other properties.

 

Selling, General and Administrative – Selling, general and administrative expenses increased $2.4 million to $33.7 million for the three months ended September 30, 2002, from $31.3 million for the three months ended September 30, 2001.  Lawrenceburg’s expenses increased $2.2 million for the three months ended September 30, 2002 due primarily to higher city development fees due to the increase in revenues with dockside gaming effective August 1, 2002.

 

Other Operating Expenses – Other operating expenses increased by $0.1 million to $10.3 million for the three months ended September 30, 2002, as compared to $10.2 million for the three months ended September 30, 2001.  Joliet’s

increase of  $0.7 million of other operating expenses during the three months ended September 30, 2002 was offset by slight decreases at all the other properties.

 

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Depreciation and Amortization – Depreciation and amortization decreased $0.6 million from $12.7 million for the three months ended September 30, 2001, to $12.1 million for the three months ended September 30, 2002.  Increases for the three months ended September 30, 2002 consisted of Joliet adding $0.9 million of depreciation and intangible asset amortization as we owned Joliet for only two months for the three months ended September 30, 2001, accelerated depreciation of $0.3 million on planned asset retirements and $0.4 million of depreciation for our new data warehouse put in service during the third quarter 2002.  This net increase was offset by a decrease in goodwill amortization due to its elimination in accordance with SFAS 142, effective as of January 1, 2002.  If SFAS 142 had been in effect January 1, 2001, pre-tax goodwill amortization of $2.2 million would not have been recorded for the three months ended September 30, 2001.

 

Interest Expense – Net interest expense decreased $0.2 million to $20.2 million for the three months ended September 30, 2002, from $20.4 million for the three months ended September 30, 2001.  This decrease is primarily attributable to repayments on our credit facility throughout 2002 resulting in less interest expense for the three months ended September 30, 2002.

 

Income Tax Expense – Income tax expense increased by $3.3 million to $15.3 million for the three months ended September 30, 2002, from $12.0 million for the three months ended September 30, 2001, due to increased pre-tax earnings and an increase in our effective tax rate due to an increase in Indiana tax rates.

 

Net Income – Net income was $19.1 million for the three months ended September 30, 2002, compared to $17.2 million for the three months ended September 30, 2001, due primarily to the factors discussed above.  If SFAS 142 had been in effect January 1, 2001, our net income would have increased by $1.3 million to $18.5 million and our diluted net income per share would have increased by $0.04 to $0.62 for the three months ended September 30, 2001.

 

Competition

 

Our Alton Casino faces competition from four other riverboat casino operators in the St. Louis area.  One of these competitors recently completed a major casino and facility renovation, which opened in early August 2002.  Another competitor recently announced a $75 million hotel expansion, which is expected to open in mid-to-late 2004.  Our Riverside Casino faces competition from three casino companies in the Kansas City area.  Our Baton Rouge Casino faces competition from one casino located in downtown Baton Rouge, a nearby Native American casino and multiple casinos throughout Louisiana. We face competition in Sioux City, Iowa from video gaming devices in nearby South Dakota, from two land-based Native American casinos and, to a lesser extent, from slot machines at a pari-mutuel racetrack in Council Bluffs, Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market.  The Lawrenceburg casino faces competition from two riverboat casinos in the Cincinnati market.  Our Joliet casino faces competition from eight other riverboat casino operators in the Chicago area.  Two of these competitors have opened major expansion projects within the last twelve months.  Additionally, four competitors in Indiana were allowed to begin dockside gaming in August 2002.  There could be further unanticipated competition in any market in which we operate as a result of legislative changes or other events.  We expect each market, in which we participate, both current and prospective, to be highly competitive.

 

Liquidity and Capital Resources

 

In the nine months ended September 30, 2002, we generated cash flows from operating activities of $136.1 million compared to $110.0 million for the same period in 2001.  This increase is due primarily to increases in our net income of $9.7 million and changes in our working capital of $6.9 million for the nine months ended September 30, 2002 over the nine months ended September 30, 2001, throughout our properties.

 

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In the nine months ended September 30, 2002, we used cash flows for investing activities of $37.7 million compared to $841.0 million for the nine months ended September 30, 2001.  During the nine months ended September 30, 2002, our investing activities included purchases of property and equipment of $37.7 million, a $17.2 million increase over property and equipment purchases for the nine months ended September 30, 2001.  This increase is due primarily to construction and expansion projects at our Joliet, Sioux City and Riverside facilities plus renovation at our Baton Rouge casino. The nine months ended September 30, 2001 included our acquisition of the minority interests in the Lawrenceburg casino requiring the use of $366.7 million in cash and our acquisition of the Empress Casino Joliet requiring the use of $453.9 million in cash.

 

During the nine months ended September 30, 2002, cash of $98.4 million was used by financing activities compared to $729.4 million of cash flows provided by financing activities for the same period in 2001.  In 2001, $769.4 million was provided through the issuance of subordinated notes and borrowings on our credit facility.  These funds were used to fund the purchases of the Lawrenceburg casino minority interests.  Cash flows in 2001 were also used for repayment of partner loans and distributions related to the Lawrenceburg partnership.  For the nine months ended September 30, 2002, we used $96.4 million for repayments on our credit facility.

 

At September 30, 2002, we had approximately $57.2 million of cash and cash equivalents.  At September 30, 2002, we had outstanding $337.4 million on our senior secured credit facility ($65.8 million on our revolving credit facility and $271.6 million on our term loan) and $557.7 million of subordinated notes (due in June 2009 and September 2011), including $7.7 million of unamortized premium.  As of September 30, 2002, we had outstanding letters of credit of $7.5 million and availability under the credit facility was approximately $326.7 million.  We have no off balance sheet debt.

 

During October 2001, we effectively fixed the interest rate on approximately $200.0 million of our term loan through three interest rate swap agreements expiring on September 30, 2004.  For each swap agreement, we agree to receive a floating rate of interest on the notional principal amount based upon a three month LIBOR rate (plus a 2.75% spread) in exchange for fixed rates ranging from 6.19% to 6.27%.  As of September 30, 2002, the notional principal amounts were $199.0 million.  These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of our exposure to credit loss.  In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, we recorded, as of September 30, 2002, the fair value of these interest rate swap agreements in the consolidated balance sheet in other long-term obligations ($5.5 million pretax) and the related change in fair value of these agreements is deferred in stockholders’ equity as a component of accumulated other comprehensive income ($3.1 million net of deferred taxes of $2.4 million).

 

The subordinated notes and the credit facility contain certain restrictions on the payment of dividends on our common stock and the occurrence of additional indebtedness, as well as other typical debt covenants.  In addition, the credit facility requires us to maintain certain financial ratios as follows:  (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.25 to 1.0.  As of September 30, 2002, we are in compliance with these ratios.

 

We have made a significant investment in property and equipment and plan to make significant additional investments at our existing properties. As of September 30, 2002, we have begun construction on major projects at our Riverside and Joliet properties.  During the fourth quarter 2002, we expect to spend approximately $40.0 million to $50.0 million on these projects.  We expect to fund these expenditures from internally generated cash and availability under our credit facility.

 

15

 

Consistent with gaming industry practice, we conduct our operations with a net working capital deficit.  Unlike traditional industrial companies, a gaming company’s balance sheet has limited accounts receivable and inventories.  In addition, casinos generate significant cash on a daily basis.  We generally apply our daily cash flows to pay down indebtedness under our revolving credit facility and pay our current liabilities pursuant to their normal cycles.  Given the significant daily cash flows generated by our operations and the financial flexibility provided by our credit facility, the existence of a working capital deficit has no impact on our ability to operate our business or meet our obligations as they become due.  We believe that cash on hand, operating cash flows, and funds available under our credit facility will be sufficient to fund our current operating, capital expenditure and debt service obligations for the next 12 months.

 

Our long-term debt, as of September 30, 2002, matures as follows:

 

One year and less		$	4,427
1 - 3 years		9,181
4 - 5 years		74,134
After 5 years		811,653
Total		$	899,395

 

 

Controls and Procedures

 

(a)       Evaluation of disclosure controls and procedures:

 

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is reported, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

        Within the 90 days prior to the filing date of this Report (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of the Company’s management, including James B. Perry, our Chief Executive Officer and Dale R. Black, our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and the Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the Evaluation Date.

 

(b)       Changes in internal controls:

 

        There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the evaluation date.

 

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ARGOSY GAMING COMPANY

OTHER INFORMATION

 

PART II.          Other Information

 

Item 1.              Legal Proceedings -

 

            The Company is from time to time a party to legal proceedings arising in the ordinary course of business.  No material changes have occurred since our last filing.

 

 

Item 2.    Changes in Securities and Use of Proceeds - None

 

Item 3.    Defaults Upon Senior Securities - None

 

Item 4.    Submission of Matters to a Vote of Security Holders – None

 

Item 5.    Other Information - None

 

Item 6.    Exhibits and reports on Form 8-K

 

(a)                Exhibit

 

                                                Exhibit 99.1     Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

(b)               Reports on Form 8-K – None

 

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ARGOSY GAMING COMPANY

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

			Argosy Gaming Company
			Registrant
Date:  November 12, 2002			/s/ Dale R. Black
			Dale R. Black
			Senior Vice President - Chief Financial Officer

 

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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, James B. Perry, Chief Executive Officer, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Argosy Gaming Company;

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 12, 2002
/s/ James B. Perry
James B. Perry
Chief Executive Officer

 

19

 

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Dale R. Black, Senior Vice President and Chief Financial Officer, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Argosy Gaming Company;

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)              designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)             evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)              presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)              all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  November 12, 2002
/s/ Dale R. Black
Dale R. Black
Senior Vice President and Chief Financial Officer

 

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