SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C., 20549

 

FORM 10-Q

 

ý	Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2002.
or
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number 1-11853

 

ARGOSY GAMING COMPANY

(Exact name of Registrant as Specified in its Charter)

 

Delaware		37-1304247
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
219 Piasa Street Alton, Illinois 62002 (618) 474-7500
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes 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:  28,846,229 shares of Common Stock, $.01 par value per share, as of August 12, 2002.

 

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

		June 30, 2002			December 31, 2001
		(unaudited)
Current assets:
Cash and cash equivalents		$	57,551		$	57,221
Accounts receivable		4,431			4,384
Income taxes receivable		9,342			6,703
Deferred income taxes		6,357			6,357
Other current assets		4,394			5,679
Total current assets		82,075			80,344
Net property and equipment		438,170			442,613
Other assets:
Deferred finance costs, net		22,566			24,939
Goodwill, net		727,443			727,443
Intangible assets, net		29,574			30,746
Other, net		2,610			5,626
Total other assets		782,193			788,754
Total assets		$	1,302,438		$	1,311,711
Current liabilities:
Accounts payable		$	12,824		$	14,048
Accrued payroll and related expenses		21,017			19,838
Accrued gaming and admission taxes		34,794			25,155
Other accrued liabilities		40,848			35,691
Accrued interest		9,925			11,622
Current maturities of long-term debt		4,365			4,307
Total current liabilities		123,773			110,661
Long-term debt		933,612			994,845
Deferred income taxes		31,801			27,667
Other long-term obligations		1,050			536
Stockholders’ equity:
Common stock, $.01 par; 120,000,000 shares authorized; 28,846,229 and 28,829,480 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively		289			288
Capital in excess of par		87,220			86,845
Accumulated other comprehensive (loss) income		(333		)	1,809
Retained earnings		125,026			89,060
Total stockholders’ equity		212,202			178,002
Total liabilities and stockholders’ equity		$	1,302,438		$	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)

 

		Six Months Ended
		June 30, 2002			June 30, 2001
		(unaudited)			(unaudited)
Revenues:
Casino		$	477,288		$	338,262
Admissions		5,414			9,111
Food, beverage and other		48,893			35,230
		531,595			382,603
Less promotional allowances		(51,476		)	(45,903		)
Net revenues		480,119			336,700
Costs and expenses:
Casino		227,131			140,475
Selling, general and administrative		66,023			55,721
Food, beverage and other		37,056			26,063
Other operating expenses		20,956			16,020
Depreciation and amortization		22,904			21,229
		374,070			259,508
Income from operations		106,049			77,192
Other income (expense):
Interest income		102			625
Interest expense		(41,347		)	(25,827		)
		(41,245		)	(25,202		)
Income before minority interests and income taxes		64,804			51,990
Minority interests		—			(4,086		)
Income tax expense		(28,838		)	(19,640		)
Net income		$	35,966		$	28,264
Basic income per share		$	1.25		$	0.99
Diluted income per share		$	1.22		$	0.97

 

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
		June 30, 2002			June 30, 2001
		(unaudited)			(unaudited)
Revenues:
Casino		$	235,198		$	166,482
Admissions		2,622			4,472
Food, beverage and other		24,161			18,063
		261,981			189,017
Less promotional allowances		(25,728		)	(23,052		)
Net revenues		236,253			165,965
Costs and expenses:
Casino		120,448			69,806
Selling, general and administrative		32,704			26,546
Food, beverage and other		18,319			13,485
Other operating expenses		10,462			7,968
Depreciation and amortization		11,290			11,156
		193,223			128,961
Income from operations		43,030			37,004
Other income (expense):
Interest income		52			139
Interest expense		(20,501		)	(13,945		)
		(20,449		)	(13,806		)
Income before income taxes		22,581			23,198
Income tax expense		(11,315		)	(9,517		)
Net income		$	11,266		$	13,681
Basic income per share		$	0.39		$	0.48
Diluted income per share		$	0.38		$	0.47

 

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)

 

		Six Months Ended
		June 30, 2002			June 30, 2001
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net  income		$	35,966		$	28,264
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		21,731			17,026
Amortization		3,180			4,889
Loss (gain) on sale of fixed assets		341			(6		)
Minority interests		—			4,086
Deferred income taxes		5,777			(259		)
Changes in operating assets and liabilities:
Accounts receivable and other current assets		(1,452		)	(182		)
Accounts payable and other current liabilities		13,054			(3,169		)
Net cash provided by operating activities		78,597			50,649
Cash flows from investing activities:
Purchases of property and equipment		(18,341		)	(14,089		)
Purchases of Minority Interests in Partnership		—			(366,699		)
Other		663			(1,825		)
Net cash used in investing activities		(17,678		)	(382,613		)
Cash flows from financing activities:
Proceeds from (repayment of) line of credit, net		(59,000		)	179,800
Proceeds from issuance of subordinated notes		—			159,000
Payments on long-term debt		(1,781		)	(14,414		)
Payments of deferred finance costs		—			(6,386		)
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		221			1,229
Other		(29		)	27
Net cash (used in) provided by financing activities		(60,589		)	313,335
Net increase (decrease) in cash and cash equivalents		330			(18,629		)
Cash and cash equivalents, beginning of period		57,221			59,374
Cash and cash equivalents, end of period		$	57,551		$	40,745

 

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		16,749		1			375									376
Comprehensive income:
Other comprehensive (loss) - interest rate swaps										(2,142		)				(2,142		)
Net income for the six months ended June 30, 2002													35,966			35,966
Comprehensive income																33,824
Balance, June 30, 2002		28,846,229		$	289		$	87,220		$	(333	)	$	125,026		$	212,202

 

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:

 

		June 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		$	103,200		$	162,200
Term loan, matures July 31, 2008, principal and interest payments due quarterly at either LIBOR and/or prime plus a margin		272,250			273,625
Senior subordinated notes, including unamortized premium of $7,937 at June 30, 2002, due June 2009, interest payable semi-annually at 10.75%		357,937			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%		4,590			4,996
		937,977			999,152
Less:  current maturities		4,365			4,307
Long-term debt, less current maturities		$	933,612		$	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

 

6

 

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 June 30, 2002, we are in compliance with these ratios.

 

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 $3,461 and $2,151 would not have been recorded for the six months and three months ended June 30, 2001, respectively.  This would have increased our net income by $2,042 to $30,306 and our diluted net income per share by $0.07 to $1.04 for the six months ended June 30, 2001.  For the three months ended June 30, 2001, this would have increased our net income by $1,269 to $14,950 and our diluted net income per share by $0.04 to $0.51.

 

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 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:

 

		Six Months Ended						Three Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator:
Numerator for basic and diluted earnings per share -
Net Income		$	35,966		$	28,264		$	11,266		$	13,681
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding		28,840,352			28,512,489			28,846,081			28,568,892
Effect of dilutive securities (using the treasury stock method):
Employee and directors stock options		473,466			688,355			466,132			654,014
Warrants		81,145			76,359			80,869			77,477
Dilutive potential common shares		554,611			764,714			547,001			731,491
Denominator for diluted earnings per share - adjusted
Weighted-average shares and assumed conversions		29,394,963			29,277,203			29,393,082			29,300,383
Basic income per share		$	1.25		$	0.99		$	0.39		$	0.48
Diluted earnings per share		$	1.22		$	0.97		$	0.38		$	0.47

 

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 $463,764.  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 six months and the three months ended June 30, 2001 has been prepared assuming the acquisitions and implementation of SFAS Statements 141 and 142 had occurred on January 1, 2001 (for the six months and three months ended June 30, 2001, pre-tax amortization of goodwill of $3,461 and $2,151, 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.

 

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 and approximately two miles from the intersection of Interstate 55 and Interstate 80.  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

 

		Six Months Ended						Three Months Ended
		June 30, 2002			June 30, 2001			June 30, 2002			June 30, 2001
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Casino Revenues
Alton Belle Casino		$	61,307		$	61,576		$	30,237		$	30,489
Argosy Casino - Riverside		50,631			49,269			24,833			23,894
Argosy Casino - Baton Rouge		39,636			38,553			19,472			19,499
Belle of Sioux City Casino		19,276			17,968			9,498			9,099
Argosy Casino - Lawrenceburg		181,982			170,896			88,940			83,501
Empress Casino Joliet(1)		124,456			—			62,218			—
Total		$	477,288		$	338,262		$	235,198		$	166,482
Net Revenues
Alton Belle Casino		$	59,134		$	59,239		$	29,128		$	29,299
Argosy Casino - Riverside		48,639			47,214			23,853			22,823
Argosy Casino - Baton Rouge		40,508			38,373			20,002			19,803
Belle of Sioux City Casino		18,788			17,504			9,152			8,872
Argosy Casino - Lawrenceburg		185,593			174,155			90,498			85,086
Empress Casino Joliet(1)		127,288			—			63,557			—
Other		169			215			63			82
Total		$	480,119		$	336,700		$	236,253		$	165,965
Income (loss) from Operations(2)(6)
Alton Belle Casino		$	15,720		$	18,458		$	7,231		$	8,958
Argosy Casino - Riverside		10,907			10,519			4,958			4,689
Argosy Casino - Baton Rouge		6,071			4,559			2,694			2,438
Belle of Sioux City Casino		4,033			3,722			1,879			1,867
Argosy Casino - Lawrenceburg		52,981			55,582			20,312			27,002
Empress Casino Joliet(1)		28,569			—			11,492			—
Corporate		(10,198		)	(12,427		)	(4,498		)	(6,330		)
Jazz Enterprises, Inc.(3)		(1,529		)	(2,500		)	(783		)	(1,257		)
Other		(505		)	(721		)	(255		)	(363		)
Total		$	106,049		$	77,192		$	43,030		$	37,004
EBITDA(2)(4)(6)
Alton Belle Casino		$	18,967		$	21,351		$	8,872		$	10,413
Argosy Casino - Riverside		13,036			12,624			6,004			5,770
Argosy Casino - Baton Rouge		9,200			7,517			4,258			4,012
Belle of Sioux City Casino		5,130			4,501			2,421			2,257
Argosy Casino - Lawrenceburg		59,627			63,853			23,452			30,656
Lawrenceburg financial advisory fee(5)		—			(927		)	—			—
Empress Casino Joliet(1)		33,391			—			13,913			—
Corporate		(9,695		)	(9,345		)	(4,245		)	(4,363		)
Jazz Enterprises, Inc.(3)		(711		)	(1,124		)	(374		)	(569		)
Other		8			(29		)	19			(16		)
Total		$	128,953		$	98,421		$	54,320		$	48,160

 

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(1)          As we acquired the Empress Casino Joliet on July 31, 2001, the six months ended June 30, 2001 does not include any 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)          During the second quarter of 2002, Indiana and Illinois enacted legislation increasing gaming tax rates.  Our Income from Operations and EBITDA for our Alton Belle Casino, Argosy Casino — Lawrenceburg and Empress Casino Joliet included additional gaming tax expenses of $0.8 million, $9.8 million and $6.4 million, respectively, for the six months and three months ended June 30, 2002.  These additional gaming taxes reflect the impact of increased effective annualized gaming tax rates on our 2002 casino revenues through June 30, 2002 resulting from this legislation.

 

11

 

 

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 June 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 market 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 June 30, 2002, we have approximately $438 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 estimate of the useful lives is based on the nature of the asset 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 has 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.

 

Six months ended June 30, 2002 compared to six months ended June 30, 2001

 

Casino—Casino revenues for the six months ended June 30, 2002, increased $139.0 million, or 41.1 % to $477.3 million from $338.3 million for the six months ended June 30, 2001.  Our Empress Casino Joliet, acquired July 31, 2001, recorded $124.5 million in casino revenue for the six months ended June 30, 2002.  Lawrenceburg casino revenues increased $11.1 million, or 6.5%, to $182.0 million for the six months ended June 30, 2002, from $170.9 million for the six months ended June 30, 2001.  Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 2.1% increase in casino revenues from $167.4 million to $170.9 million.  Each of our casinos reported increases in the average win per passenger for the six months ended June 30, 2002, versus the six months ended June 30, 2001, except Sioux City, which had a significant increase in the number of passengers.

 

Casino expenses increased $86.6 million to $227.1 million for the six months ended June 30, 2002, from $140.5 million for the six months ended June 30, 2001.  Joliet had $71.0 million in casino expenses ($43.8 million in gaming taxes) for the six months ended June 30, 2002.  The remaining increase is due to increased gaming taxes totaling $13.7 million and increases in other casino expenses of $1.9 million to support the overall increased revenues as well as increased payroll related costs at all properties.  As we record our gaming tax expense using an estimated annualized effective rate, included in the gaming tax expense for our Indiana and Illinois properties for the six months ended June 30, 2002, is $17.0 million of additional gaming tax expense due to increased rates in Indiana and Illinois based on legislation passed in the second quarter 2002.

 

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Admissions—Admissions revenues (net of complimentary admissions) decreased to $0.9 million for the six months ended June 30, 2002, from $1.8 million for the six months ended June 30, 2001, due primarily to a decrease in the admissions price during the first quarter 2002 at Lawrenceburg.

 

Food, Beverage and Other—Food, beverage and other revenues increased $13.7 million to $48.9 million for the six months ended June 30, 2002, from $35.2 million for the six month period ended June 30, 2001.  Joliet contributed $10.5 million of this increase.  Food, beverage and other net profit increased $2.6 million to $11.8 million for the six months ended June 30, 2002, from $9.2 million for the six months ended June 30, 2001.  Joliet contributed $1.5 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 $10.3 million to $66.0 million for the six months ended June 30, 2002, from $55.7 million for the six months ended June 30, 2001, due primarily to Joliet’s expenses of $8.5 million for the six months ended June 30, 2002.

 

Other Operating Expenses—Other operating expenses increased by $5.0 million to $21.0 million for the six months ended June 30, 2002, as compared to $16.0 million for the six months ended June 30, 2001.  Joliet incurred $5.4 million of other operating expenses during the six months ended June 30, 2002.

 

Depreciation and Amortization—Depreciation and amortization increased $1.7 million from $21.2 million for the six months ended June 30, 2001, to $22.9 million for the six months ended June 30, 2002.  Joliet added $4.8 million of depreciation and intangible asset amortization and the other properties combined added $0.4 million for the six months ended June 30, 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 $3.5 million would not have been recorded for the six months ended June 30, 2001.  This would have increased our net income by $2.0 million to $30.3 million and our diluted net income per share by $0.07 to $1.04 for the six months ended June 30, 2001.

 

Interest Expense—Net interest expense increased $16.0 million to $41.2 million for the six months ended June 30, 2002, from $25.2 million for the six months ended June 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 six months ended June 30, 2002, as compared to $4.1 million for the six months ended June 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 $9.2 million to $28.8 million for the six months ended June 30, 2002, from $19.6 million for the six months ended June 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 state tax issues related to the gaming tax rate increases in Indiana and Illinois.

 

Net Income—Net income was $36.0 million for the six months ended June 30, 2002, compared to $28.3 million for the six months ended June 30, 2001, due primarily to the factors discussed above.

 

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

 

Casino—Casino revenues for the three months ended June 30, 2002, increased $68.7 million, or 41.3% to $235.2 million from $166.5 million for the three months ended June 30, 2001.  Our Empress Casino Joliet, acquired July 31, 2001, recorded $62.2 million in casino revenue for the three months ended June 30, 2002.  Lawrenceburg casino revenues increased $5.4 million, or 6.5%, to $88.9 million for the three months ended June 30, 2002, from $83.5 million for the three months ended June 30, 2001.  Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 1.3% increase in casino revenues from $83.0 million to $84.0 million.  Each of our casinos reported increases in the average win per passenger for the three months ended June 30, 2002, versus the three months ended June 30, 2001.

 

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Casino expenses increased $50.6 million to $120.4 million for the three months ended June 30, 2002, from $69.8 million for the three months ended June 30, 2001.  Joliet had $38.4 million in casino expenses ($24.9 million in gaming taxes) for the three months ended June 30, 2002.  The remaining increase is due to increased gaming taxes totaling $11.5 million and increases in other casino expenses of $0.7 million to support the overall increased revenues as well as increased payroll related costs at all properties.  As we record our gaming tax expense using an estimated annualized effective rate, included in the gaming tax expense for our Indiana and Illinois properties for the three months ended June 30, 2002, is $17.0 million of additional gaming tax expense due to increased rates in Indiana and Illinois based on legislation passed in the second quarter 2002.

 

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

 

Food, Beverage and Other—Food, beverage and other revenues increased $6.1 million to $24.2 million for the three months ended June 30, 2002, from $18.1 million for the three month period ended June 30, 2001.  Joliet contributed $5.4 million of this increase.  Food, beverage and other net profit increased $1.2 million to $5.8 million for the three months ended June 30, 2002, from $4.6 million for the three months ended June 30, 2001.  Joliet contributed $0.9 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 $6.2 million to $32.7 million for the three months ended June 30, 2002, from $26.5 million for the three months ended June 30, 2001, due primarily to Joliet’s expenses of $4.2 million for the three months ended June 30, 2002.

 

Other Operating Expenses—Other operating expenses increased by $2.5 million to $10.5 million for the three months ended June 30, 2002, as compared to $8.0 million for the three months ended June 30, 2001.  Joliet incurred $2.6 million of other operating expenses during the three months ended June 30, 2002.

 

Depreciation and Amortization—Depreciation and amortization increased $0.1 million from $11.2 million for the three months ended June 30, 2001, to $11.3 million for the three months ended June 30, 2002.  Joliet added $2.4 million of depreciation and intangible asset amortization and the other properties combined decreased $0.1 million for the three months ended June 30, 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 for all goodwill.  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 June 30, 2001.  This would have increased our net income by $1.3 million to $15.0 million and our diluted net income per share by $0.04 to $0.51 for the three months ended June 30, 2001.

 

Interest Expense—Net interest expense increased $6.6 million to $20.4 million for the three months ended June 30, 2002, from $13.8 million for the three months ended June 30, 2001.  This increase is primarily attributable to additional borrowings in connection with the Lawrenceburg and Joliet acquisitions.

 

Income Tax Expense—Income tax expense increased by $1.8 million to $11.3 million for the three months ended June 30, 2002, from $9.5 million for the three months ended June 30, 2001, due primarily to an increase in our effective tax rate due to state tax issues related to the gaming tax rate increases in Indiana and Illinois.

 

Net Income—Net income was $11.3 million for the three months ended June 30, 2002, compared to $13.7 million for the three months ended June 30, 2001, due primarily to the factors discussed above.

 

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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 August 6, 2002.  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.  There could be further unanticipated competition in any market, 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 six months ended June 30, 2002, we generated cash flows from operating activities of $78.6 million compared to $50.6 million for the same period in 2001.  This increase is due primarily to increases in our net income of $7.7 million and working capital of $15.0 million for the six months ended June 30, 2002 over the six months ended June 30, 2001, throughout our properties.

 

In the six months ended June 30, 2002, we used cash flows for investing activities of $17.7 million compared to $382.6 million for the six months ended June 30, 2001.  The greater use of funds for the six months ended June 30, 2001, is due primarily to our acquisition of the minority interests in the Lawrenceburg casino requiring the use of $366.7 million in cash.

 

During the six months ended June 30, 2002, cash of $60.6 million was used by financing activities compared to $313.3 million of cash flows provided by financing activities for the same period in 2001.  In 2001, $338.8 million was provided through the issuance of senior subordinated notes and borrowings on our credit facility.  These funds were used to fund the purchases of the Lawrenceburg casino minority interests.  For the six months ended June 30, 2002, we used $59.0 million for repayments on our credit facility.  Cash flows in 2001 were also used for repayment of partner loans and distributions related to the Lawrenceburg partnership.

 

At June 30, 2002, we had approximately $57.6 million of cash and cash equivalents.  At June 30, 2002, we had outstanding $375.5 million on our senior secured credit facility ($103.2 million on our revolver and $272.3 million on our term loan).  Additionally, we had outstanding $557.9 million of subordinated notes (due in June 2009 and September 2011), including $7.9 million of unamortized premium.  As of June 30, 2002, availability under the credit facility was approximately $291.1 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 June 30, 2002, the notional principal amounts were $199.3 million.  These notional amounts do not represent amounts exchanged by the parties and, thus, are not a measure of our exposure to credit loss.  In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, we recorded, as of June 30, 2002, the fair value of these interest rate swap agreements in the consolidated balance sheet in other long-term obligations ($.6 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 ($.4 million net of deferred taxes of $.2 million).

 

15

 

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 June 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 June 30, 2002, we have begun construction on a major project at our Riverside property.  We expect to begin a project at our Joliet property in the third quarter 2002.  As a result of these construction projects and our long-term investment plans, we will evaluate, as appropriate, the remaining useful lives and carrying values of our property and equipment.  As a result, we could record additional depreciation expense or write-downs on our property and equipment.  Over the next seven quarters, we expect to spend approximately $140 million to $150 million on these projects with approximately $50 million to $60 million to be spent in 2002.

 

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 June 30, 2002, matures as follows:

 

One year and less		$	4,365
1 - 3 years		9,319
4 - 5 years		111,466
After 5 years		812,827
Total		$	937,977

 

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

 

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

 

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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. Other than as disclosed below no material changes have occurred since our last filing.

 

Gaming Industry Class Actions

 

The Company has been named, along with two gaming equipment suppliers, 41 of the country’s largest gaming operators and four gaming distributors (the “Gaming Industry Defendants”) in class action lawsuits pending in Las Vegas, Nevada.  The court denied a motion for class action certification on June 25, 2002.  The plaintiffs are currently appealing this denial.

 

Item 2.    Changes in Securities - None

 

Item 3.    Defaults Upon Senior Securities - None

 

Item 4.    Submission of Matters to a Vote of Security Holders —

 

The Company’s Annual Meeting of Stockholders was held on April 16, 2002.  At the meeting, the stockholders voted on the matters below as follows:

 

		Votes For		Against		Abstain
Election of Director – William F. Cellini		25,951,151		520,113		—
Amendment of Company’s Certificate of Incorporation to increase number of authorized shares of common stock to 120,000,000 shares		24,570,977		1,892,572		7,715
Amendment of the Employees Stock Option Plan to increase number of shares reserved for issuance to 3,500,000 shares		24,730,002		4,725,942		15,320
Amendment of the Directors Stock Option Plan to increase number of shares reserved for issuance to 100,000 shares		25,247,817		1,205,268		18,179

 

Item 5.    Other Information - None

 

Item 6.    Exhibits and reports on Form 8-K

 

(a)           Exhibits

 

Exhibit 99.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.2	Certification 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

 

17

 

ARGOSY GAMING COMPANY

SIGNATURES

 

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

 

 

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

 

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