UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

 

FORM 10-Q

 

 

Commission File Number 1-11853

 

ARGOSY GAMING COMPANY

 (Exact name of Registrant as Specified in its Charter)

 

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: 29,491,749 shares of Common Stock, $.01 par value per share, as of October 27, 2004.

 

 

Item 1.  Financial Statements

 

ARGOSY GAMING COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

 

		September 30, 2004			December 31, 2003
		(unaudited)
Current assets:
Cash and cash equivalents		$	63,829		$	67,205
Accounts receivable, net		3,693			4,292
Income taxes receivable		—			1,015
Deferred income taxes		12,001			13,295
Other current assets		10,665			7,196
Total current assets		90,188			93,003
Net property and equipment		548,684			548,120
Other assets:
Deferred finance costs, net		20,230			16,748
Goodwill, net		727,470			727,470
Intangible assets, net		24,338			26,092
Other		4,652			439
Total other assets		776,690			770,749
Total assets		$	1,415,562		$	1,411,872
Current liabilities:
Accounts payable		$	14,579		$	26,955
Accrued payroll and related expenses		24,323			24,125
Accrued gaming and admission taxes		20,117			14,486
Other accrued liabilities		69,439			70,070
Accrued interest		6,594			9,296
Income taxes payable		9,762			—
Current maturities of long-term debt		2,526			4,648
Total current liabilities		147,340			149,580
Long-term debt		802,751			865,510
Deferred income taxes		112,145			93,119
Other long-term obligations		1,211			419
Stockholders’ equity:
Common stock, $.01 par; 120,000,000 shares authorized; 29,479,267 and 29,314,542 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		295			293
Capital in excess of par		95,796			92,551
Accumulated other comprehensive loss		—			(1,941		)
Retained earnings		256,024			212,341
Total stockholders’ equity		352,115			303,244
Total liabilities and stockholders’ equity		$	1,415,562		$	1,411,872

 

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,							Nine Months Ended September 30,
		2004				2003			2004			2003
		(unaudited)				(unaudited)			(unaudited)			(unaudited)
Revenues:
Casino		$	271,204			$	245,928		$	795,424		$	738,938
Admissions		5,829				4,594			16,540			10,761
Food, beverage and other		26,828				24,270			79,246			74,023
		303,861				274,792			891,210			823,722
Less promotional allowances		(37,373			)	(31,854		)	(106,069		)	(96,107		)
Net revenues		266,488				242,938			785,141			727,615
Costs and expenses:
Gaming and admission taxes		95,442				82,125			277,033			257,448
Casino		30,660				32,499			94,413			99,873
Selling, general and administrative		42,153				37,412			124,254			112,682
Food, beverage and other		19,304				17,394			56,626			52,953
Other operating expenses		10,449				10,420			30,047			31,305
Depreciation and amortization		16,504				13,235			45,577			38,757
Gain on sale of asset held for sale		(3,155			)	—			(3,155		)	—
Write-down of assets		—				—			—			6,500
		211,357				193,085			624,795			599,518
Income from operations		55,131				49,853			160,346			128,097
Other income (expense):
Interest income		65				20			104			106
Interest expense		(15,680			)	(19,054		)	(50,325		)	(56,990		)
Expense on early retirement of debt		—				—			(26,040		)	—
		(15,615			)	(19,034		)	(76,261		)	(56,884		)
Income before income taxes		39,516				30,819			84,085			71,213
Income tax expense		(18,376			)	(14,330		)	(40,402		)	(33,114		)
Net income		$		21,140		$	16,489		$	43,683		$	38,099
Basic income per share		$		0.72		$	0.56		$	1.48		$	1.31
Diluted income per share		$		0.71		$	0.56		$	1.47		$	1.30
Weighted average shares outstanding:
Basic		29,475,631				29,230,951			29,421,578			29,095,635
Diluted		29,658,326				29,428,042			29,634,103			29,339,888

 

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,
		2004			2003
		(unaudited)			(unaudited)
Cash flows from operating activities:
Net income		$	43,683		$	38,099
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		43,823			36,987
Amortization		5,249			4,864
(Gain) loss on sale of property and equipment		(3,299		)	204
Compensation expense recognized on issuance of stock		27			126
Loss on early retirement of debt		26,040			—
Write-down of assets		—			6,500
Deferred income taxes		20,471			15,235
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable and other current assets		(3,626		)	6,801
Accounts payable and other current liabilities		15,105			22,797
Net cash provided by operating activities		147,473			131,613
Cash flows from investing activities:
Purchases of property and equipment		(59,955		)	(95,838		)
Proceeds from assets held for sale		3,610			—
Other		827			226
Net cash used in investing activities		(55,518		)	(95,612		)
Cash flows from financing activities:
Repayments on credit facility, net		(57,575		)	(39,162		)
Proceeds from issuance of senior subordinated notes		350,000			—
Payments on senior subordinated notes, including early redemption premium		(377,961		)	—
Increase in deferred finance costs		(11,642		)	(1,310		)
Proceeds from stock option exercises		1,775			1,798
Other		72			(646		)
Net cash used in financing activities		(95,331		)	(39,320		)
Net change in cash and cash equivalents		(3,376		)	(3,319		)
Cash and cash equivalents, beginning of period		67,205			59,720
Cash and cash equivalents, end of period		$	63,829		$	56,401

 

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 (Loss) Income			Retained Earnings				Total Stockholders’ Equity
Balance, December 31, 2003		29,314,542		$	293			$	92,551			$	(1,941	)	$		212,341		$	303,244
Exercise of stock options and restricted stock award, including tax benefit		164,725		2				3,218											3,220
Restricted stock compensation expense								27											27
Comprehensive income:
Other comprehensive income - interest rate swaps												1,941							1,941
Net income for the nine months ended September 30, 2004															43,683				43,683
Comprehensive income																			45,624
Balance, September 30, 2004		29,479,267		$		295		$		95,796		$	—		$	256,024			$		352,115

 

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 its 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 that 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, 2003, 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.

 

2.     Long-Term Debt

 

Long-term debt consists of the following:

 

		September 30, 2004				December 31, 2003
		(unaudited)
Senior Secured Credit Facility:
Senior secured line of credit, expires September 30, 2009, interest payable at least quarterly at either LIBOR and/or prime plus a margin		$		77,750		$	42,200
Term loan, matures June 30, 2011, principal and interest payments due quarterly at either LIBOR and/or prime plus a margin		175,000				268,125
		252,750				310,325
Subordinated Notes:
Due June 1, 2009, interest payable semi-annually at 10.75%		—				356,623
Due September 2011, interest payable semi-annually at 9.0%		200,000				200,000
Due January 2014, interest payable semi-annually at 7.0%		350,000				—
		550,000				556,623
Notes payable, principal and interest payments due quarterly through September 2015, discounted at 10.5%		2,527				3,210
Total Long-Term Debt		805,277				870,158
Less: current maturities		2,526				4,648
Long-term debt, less current maturities		$	802,751			$		865,510

 

On September 30, 2004, we entered into the Third Amended and Restated Credit Agreement (“the Credit Facility”) with a revolving line of credit for up to $500,000 and a Term Loan of $175,000 maintaining our total facility of $675,000. Our 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 our 9% Subordinated Notes on a joint and several basis.  All of our subordinated notes rank junior to all of our senior indebtedness, including borrowings under the Credit Facility.

 

In February and June 2004, we refinanced a portion of our existing indebtedness with net proceeds from the issuance of $350,000 in new 7% Subordinated Notes due 2014, together with funds from our Credit Facility. These funds were used to repurchase the $350,000 10.75% Subordinated Notes due 2009. Related to this refinancing, we paid $26,040 in net premiums and fees.

 

6

 

The subordinated notes 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, based on terms as defined in the Credit Facility, which, as of September 30, 2004, are as follows: (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.75 to 1.0; (2) Senior Funded Debt to EBITDA Ratio of a maximum of 3.50 to 1.0; and (3) Fixed Charge Coverage Ratio of a minimum of 1.50 to 1.0.  As of September 30, 2004, we are in compliance with these ratios.  At September 30, 2004, based upon these financial ratios, additional availability under the Credit Facility was approximately $412,400.

 

3.     Stock-based Compensation

 

In December 2002, the Financial Accounting Standards Board issued FAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”.  We have a stock-based employee compensation plan and a stock-based director compensation plan.  As we continue to follow APB 25 for stock options granted to employees and directors, no stock-based compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table discloses our pro forma net income and diluted net income per share had we applied the fair value recognition provisions of FAS 123.

 

		For the three months ended September 30,						For the nine months ended September 30,
(unaudited, in thousands, except share data)		2004			2003			2004			2003
Net income
As reported		$	21,140		$	16,489		$	43,683		$	38,099
Pro forma stock-based compensation, net of tax benefit		(243		)	(296		)	(732		)	(772		)
Pro forma		$	20,897		$	16,193		$	42,951		$	37,327
Diluted net income per share
As reported		$	0.71		$	0.56		$	1.47		$	1.30
Pro forma stock-based compensation, net of tax benefit		(0.01		)	(0.01		)	(0.02		)	(0.03		)
Pro forma		$	0.70		$	0.55		$	1.45		$	1.27

 

These pro forma amounts to reflect FAS 123 option expense may not be representative of future disclosures because, under FAS 123, the estimated fair value of the options is amortized to expense over the vesting period and additional options may be granted in the future.

 

In February 2003, we issued 25,000 shares of restricted common stock of which 50% vested in February 2004.  The remaining 50% have been forfeited.  In April and July 2004, we granted 638,571 and 20,000 shares of non-qualified stock options, respectively, to certain key employees and 40,000 shares of non-qualified stock options to our non-employee directors under the Argosy Gaming Company Stock Option Plan and the Argosy Gaming Company Directors Option Plan, respectively.

 

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4.                                      Earnings Per Share

 

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

 

		Three months ended September 30,						Nine months ended September 30,
(unaudited, in thousands, except share data)		2004			2003			2004			2003
Numerator:
Numerator for basic and diluted earnings per share - Net income		$	21,140		$	16,489		$	43,683		$	38,099
Denominator:
Denominator for basic earnings per share - weighted average shares outstanding		29,475,631			29,230,951			29,421,578			29,095,635
Effect of dilutive securities (computed using the treasury stock method):
Employee and directors stock options		182,695			184,284			212,525			235,162
Restricted stock		—			12,807			—			9,091
Dilutive potential common shares		182,695			197,091			212,525			244,253
Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions		29,658,326			29,428,042			29,634,103			29,339,888
Basic earnings per share		$	0.72		$	0.56		$	1.48		$	1.31
Diluted earnings per share		$	0.71		$	0.56		$	1.47		$	1.30

 

For the three months and nine months ended September 30, 2004, employee options to purchase 713,145 shares of common stock priced at a range from $35.18 - $37.71 per share and director options to purchase 52,000 shares of common stock priced at a range from $35.15 - $39.99 per share, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the underlying common shares and, therefore, the effect would be anti-dilutive.

 

For the three months ended September 30, 2003, employee options to purchase 66,471 shares of common stock priced at a range from $25.72 - $35.18 per share and director options to purchase 12,000 shares of common stock priced at a range from $35.15 - $39.99 per share, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the underlying common shares and, therefore, the effect would be anti-dilutive.

 

For the nine months ended September 30, 2003, employee options to purchase 280,744 shares of common stock priced at a range from $21.08 - $35.18 per share and director options to purchase 20,500 shares of common stock priced at a range from $22.30 - $39.99 per share, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the underlying common shares and, therefore, the effect would be anti-dilutive.

 

5.             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.

 

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Item 2.  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 includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning our business outlook, plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. When used in this document, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “will,” “would,” “could,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions.  Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them, but there can be no assurance that our expectations, beliefs and projections will be realized.

 

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this document.  Such risks, uncertainties and other important factors include, but are not limited to: (i) increased competition and general economic conditions in our markets, including the legalization of gaming in states adjacent to our operations; (ii) changes in, or failure to comply with, laws or regulations (including increases in existing taxes or the imposition of new taxes on gaming revenues or gaming devices), or decisions of courts, regulators, accounting standards and governmental bodies; (iii) construction factors relating to our expansion projects, including delays, zoning issues, environmental restrictions, weather or other hazards, site access matters and building permit issues; (iv) the ability to effectively implement operational changes at our properties; (v) the effect of economic, credit, and capital market conditions on the economy in general, and on gaming companies in particular; (vi) the effect of future legislation or regulatory changes on our operations; (vii) our dependence on our Lawrenceburg, Indiana casino; (viii) our substantial leverage; and (ix) other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

 

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements. The forward-looking statements included in this document are made only as of the date of this document. We do not intend, and undertake no obligation, 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 Argosy Casino in Sioux City, Iowa; and the Argosy Casino in Lawrenceburg, Indiana.

 

In 2003, we invested capital to enhance our product offering and expand capacity at our facilities. We opened our approximately $105 million casino facility in Riverside on December 11, 2003 and have seen a significant increase in revenues. Net revenues for the nine months ended September 30, 2004 for Riverside increased $39.9 million, or 58.0% compared to the nine months ended September 30, 2003. In May 2003, we opened an approximately $43 million barge-based facility in Joliet.  In spite of this investment, Joliet net revenues decreased 5.9% for the nine months ended September 30, 2004 over the nine months ended September 30, 2003 due to the increase in gaming taxes in the state of Illinois and the subsequent operating measures taken by the Company as described below. In Sioux City, we completed an approximately $6 million renovation in February 2003 and have spent approximately $4 million to date on an $8 million renovation of the riverboat formerly used at our Riverside property.  This newly renovated riverboat relocated to our Sioux City property and was placed in service on September 1, 2004.  The earlier renovation together with the newly remodeled riverboat has increased Sioux City’s net revenues by 13.4% for the nine months ended September 30, 2004 over the nine months ended September 30, 2003.

 

During June 2004, our Lawrenceburg casino amended its development agreement with the City of Lawrenceburg, Indiana effective January 1, 2004.  This amendment allows for a reduction of up to $5 million annually in fees paid to the City of Lawrenceburg.  For the year ended December 31, 2004, we estimate earning the

 

9

 

full $5 million reduction, and therefore, we have recorded a $3.8 million reduction in selling, general and administrative expense for the nine months ended September 30, 2004.

 

Year over year results were impacted by the enactment of higher gaming and admission tax rates in Illinois effective July 1, 2003.  Included in gaming and admission tax expense for the nine months ended September 30, 2003 is a $5.9 million charge at Lawrenceburg due to new legislation in June 2003 relating to the 2002 Indiana gaming tax increase and additional expense of $6.2 million combined at our Illinois casinos for the increase in gaming and admission tax rates in Illinois.  These items raised our effective gaming and admission tax rate for the nine months ended September 30, 2003 to 35.4%. Exclusive of these 2003 items, our consolidated effective gaming and admission tax rates (as a percent of net revenues) for the nine months ended September 30, 2004 and 2003 were 35.3% and 33.7%, respectively. For the nine months ended September 30, 2004, our income from operations increased 25.2%, or $32.2 million, as compared to the nine months ended September 30, 2003.  This increase was the result of increased revenues at all of our facilities except our Illinois locations.  For example, Riverside net revenues increased 58.0% as we opened our new expanded casino in December 2003 and our Lawrenceburg casino’s net revenues increased 8.5%.  Our Illinois facilities’ net revenues were lower due to implementation of reduced hours of operation at both casinos and restaurants, changes in product mix, significant revisions to marketing programs and Joliet implementing an admission fee to minimize the impact of increased gaming and admission tax rates in Illinois.  Our operating expenses increased due primarily to higher state gaming and admission taxes at our properties with increased revenues and due to rate increases in Illinois.

 

We also continue to invest in coinless or “TITO” slot machines, which, when implemented, are more convenient to our customers and result in operational efficiencies. As of September 30, 2004, approximately 96% of our total slot machines were TITO-operational. We believe that going forward the convenience and efficiency of TITO machines will have a positive impact on both our casino revenues and our operating expenses.

 

On September 30, 2004, we entered into the Third Amended and Restated Credit Agreement (“Credit Facility”) with a revolving line of credit of $500 million and a Term Loan of $175 million maintaining our total Credit Facility of $675 million. In February and June 2004, we refinanced a portion of our existing indebtedness with net proceeds from the issuance of $350 million in new 7% Senior Subordinated Notes (“7% Notes”) due 2014, together with funds from our Credit Facility.  These funds were used to repurchase the $350 million 10.75% Senior Subordinated Notes (“10.75% Notes”) due 2009.  Associated with this refinancing, we incurred a pretax charge for the nine months ended September 30, 2004 of $26.0 million for net premiums and fees associated with the early redemption of our 10.75% Notes.

 

Legislative uncertainties present challenges and risks to our ongoing operations.  For example, casino gaming is currently prohibited or restricted in several states adjacent to Indiana, Iowa and Missouri, and residents of those states comprise a significant portion of the patrons at our Lawrenceburg, Sioux City and Riverside casinos.  Legislation has been proposed in various states that would permit certain types of casino-style gaming. If this legislation were approved in states adjacent to our properties, it would result in increased competition with respect to significant portions of our target markets.  Furthermore, the large number of state and local governments with significant current or projected budget deficits make it more likely that those governments that permit gaming will seek to fund such deficits with new or increased gaming taxes.  To address these legislative risks, we must regularly adjust our business strategies and adapt our casino operations.

 

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ARGOSY GAMING COMPANY AND SUBSIDIARIES

SELECTED FINANCIAL INFORMATION

(in thousands, unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2004			2003			2004				2003
CASINO REVENUES
Alton Belle Casino		$	27,774		$	26,778		$	80,861			$	85,364
Argosy Casino - Riverside		35,980			23,453			111,181				71,569
Argosy Casino - Baton Rouge		20,109			20,109			62,743				60,598
Argosy Casino - Sioux City		12,914			10,515			35,997				31,684
Argosy Casino - Lawrenceburg		115,358			106,817			335,031				307,014
Empress Casino Joliet		59,069			58,256			169,611				182,709
Total		$	271,204		$	245,928		$	795,424			$	738,938
NET REVENUES
Alton Belle Casino		$	26,433		$	25,583		$		77,067		$	81,718
Argosy Casino - Riverside		34,847			22,724			108,603				68,738
Argosy Casino - Baton Rouge		20,533			20,358			64,389				62,160
Argosy Casino - Sioux City		12,497			10,190			34,878				30,765
Argosy Casino - Lawrenceburg		115,504			107,805			336,486				310,228
Empress Casino Joliet		56,674			56,278			163,718				174,006
Total		$	266,488		$	242,938		$		785,141		$	727,615
INCOME (LOSS) FROM OPERATIONS
Alton Belle Casino		$	3,009		$	3,694		$		8,593		$	13,027
Argosy Casino - Riverside		6,208			3,814			23,713				11,216
Argosy Casino - Baton Rouge		1,809			1,226			7,239				4,215
Argosy Casino - Sioux City		3,055			1,748			8,267				5,338
Argosy Casino - Lawrenceburg		34,530			32,302			101,368				82,733
Empress Casino Joliet (4)		14,259			12,802			33,672				29,020
Corporate		(7,739		)	(5,733		)	(22,506			)	(17,452		)
Total		$	55,131		$	49,853		$	160,346			$	128,097

 

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RECONCILIATION OF NET INCOME TO EBITDA (1) (2)

(In thousands, unaudited)

 

		For the three months ended September 30,
		2004						2003
Net income					$	21,140					$	16,489
Income tax expense					18,376						14,330
Interest expense, net					15,615						19,034
Depreciation and amortization expense:
Alton Belle Casino		$	1,746					$	1,598
Argosy Casino - Riverside		4,355						1,479
Argosy Casino - Baton Rouge		2,178						2,282
Argosy Casino - Sioux City		786						1,119
Argosy Casino - Lawrenceburg		3,585						3,216
Empress Casino Joliet		3,212						2,986
Corporate		642						555
Depreciation and amortization expense		16,504			16,504			13,235			13,235
EBITDA (1) (2):
Alton Belle Casino		4,755						5,292
Argosy Casino - Riverside		10,563						5,293
Argosy Casino - Baton Rouge		3,987						3,508
Argosy Casino - Sioux City		3,841						2,867
Argosy Casino - Lawrenceburg		38,115						35,518
Empress Casino Joliet (4)		17,471						15,788
Corporate (2)		(7,097		)				(5,178		)
EBITDA (1) (2)		$	71,635		$	71,635		$	63,088		$	63,088

 

 

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RECONCILIATION OF NET INCOME TO EBITDA (1) (2)

(In thousands, unaudited)

 

		For the nine months ended September 30,
		2004						2003
Net income (3)					$	43,683					$	38,099
Income tax expense					40,402						33,114
Interest expense, net					50,221						56,884
Depreciation and amortization expense:
Alton Belle Casino		$	4,906					$	5,009
Argosy Casino - Riverside		9,404						4,297
Argosy Casino - Baton Rouge		6,683						6,514
Argosy Casino - Sioux City		2,506						3,306
Argosy Casino - Lawrenceburg		10,580						9,710
Empress Casino Joliet		9,599						8,319
Corporate		1,899						1,602
Depreciation and amortization expense		45,577			45,577			38,757			38,757
EBITDA (1) (2):
Alton Belle Casino		13,499						18,036
Argosy Casino - Riverside		33,117						15,513
Argosy Casino - Baton Rouge		13,922						10,729
Argosy Casino - Sioux City		10,773						8,644
Argosy Casino - Lawrenceburg		111,948						92,443
Empress Casino Joliet (4)		43,271						37,339
Corporate (2) (3)		(46,647		)				(15,850		)
EBITDA (1) (2)		$	179,883		$	179,883		$	166,854		$	166,854

 

(1) “EBITDA” is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is presented solely as a supplemental disclosure because management believes it is 1) a widely used measure of operating performance in the gaming industry, 2) a principal basis for valuation of gaming companies and 3) is used as a basis for determining compliance with our credit facility. Management uses property-level EBITDA (EBITDA before corporate expense) and EBITDA margin (EBITDA as a percent of net revenues) as the primary measures of our properties’ performance, including the evaluation of operating personnel. EBITDA should not be construed as an alternative to GAAP-based financial measures such as operating income, an indicator of our operating performance, or cash flows from operating activities, as a measure of liquidity. We have significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in EBITDA.  We believe the performance of our operating units is more appropriately measured before these expenses, since the allocation of our capital is decided by corporate management and is subject to the approval of the board of directors.  In addition, we manage cash and finance our operations at the consolidated level and we file a consolidated income tax return.  We do not consider EBITDA in isolation. Our calculation of EBITDA may not be comparable to similarly titled measures reported by other companies. For a further discussion of such limitations, see our additional disclosures in this report under the heading “Non-GAAP Financial Measures.”

 

(2) Because we do not include corporate expense in our computation, property-level EBITDA does not reflect all the costs of operating the properties as if each were a stand-alone business unit.  Corporate expense includes significant expenses necessary to manage a multiple casino operation, certain of which, such as corporate executive compensation, development, public company reporting, treasury, legal and tax expenses, would also be required of a typical stand-alone casino property.

 

(3) Includes $26,040 of pre-tax expense on early retirement of debt for the nine months ended September 30, 2004.

 

(4) Included for the three and nine months ended September 30, 2004 is a gain of $3,155 on the sale of an asset held for sale.  Included for the nine months ended September 30, 2003 is a $6,500 write-down of assets related to assets previously held for future development.

 

 

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Nine months ended September 30, 2004, compared to nine months ended September 30, 2003

 

A discussion of each of our properties operating results:

 

Lawrenceburg – Net revenues increased $26.3 million primarily due to an increase in casino revenues of $28.0 million, or 9.1%, to $335.0 million.  This increase resulted from increases in admissions of 2.6% and win per admission of 6.4%, the implementation of 24-hour gaming and revisions to our marketing programs. Additionally, promotional allowances increased $3.3 million across all lines of complimentary programs due to changes in marketing programs and overall increases in casino revenues.  Operating expenses increased $7.6 million to $235.1 million from $227.5 million.  Included in the nine months ended September 30, 2003 was a charge of $5.9 million in gaming and admission taxes due to new legislation in June 2003 relating to the 2002 Indiana gaming tax increase.  Excluding this charge, gaming and admission taxes increased $11.1 million due to our increased revenue.  Selling, general and administrative (“SG&A”) expense increased $1.1 million due primarily to a combined $1.4 million increase in promotions and payroll offset by a net decrease in city development fees of $0.5 million.  This decrease in city development fees is due to an amendment to the development agreement with the City of Lawrenceburg that reduces our annual fee paid to the City of Lawrenceburg.

 

Riverside – Net revenues increased $39.9 million as casino revenues increased $39.6 million, or 55.3%, to $111.2 million due to the opening of our renovated casino property in December 2003, which included a 53% increase in gaming capacity, renovation of the pavilion and increased food and beverage facilities.  Admissions increased 45.0% and win per admission increased 7.2%.  Food, beverage and other (“FB&O”) revenue increased $6.3 million to $13.4 million due to our new restaurants, the increase in admissions with the opening of our new casino and limited food service during the first nine months of 2003 due to renovations in our buffet.  With this increase in revenues and patrons, our promotional allowances increased $6.1 million, primarily in our complimentary food program.

 

Operating expenses increased $27.4 million in the following areas:  gaming and admission taxes increased $10.3 million corresponding with our increase in revenues and admissions with the opening of our new casino in December 2003, SG&A expense and casino expense increased $5.5 million and $2.5 million, respectively, with our expanded casino operations, FB&O expense increased $4.2 million due to our expanded restaurant operations and the increase in patrons with our overall expanded facility and depreciation and amortization expense increased $5.1 million due to the project capital placed in service with the opening of our new casino in December 2003 and accelerated depreciation on our current parking garage structure to be demolished during early 2005 to allow construction of our new hotel.  Additionally, operating margins have increased due to efficiencies from operating on one level and full implementation of TITO slot machines.

 

Joliet – Net revenues decreased $10.3 million due primarily to a decrease in casino revenues of $13.1 million, or 7.2%, to $169.6 million due to the implementation of reduced hours of operations, the implementation of an admission fee and changes in marketing efforts commencing in August 2003 in response to Illinois tax legislation increasing gaming and admission tax rates effective July 2003.  Due to the commencement of an admission fee in August 2003, admission revenues were $6.5 million in 2004 compared with $1.1 million in 2003 while net admission revenue (net of complimentary admissions) was $1.0 million in 2004 compared with $0.5 million in 2003. Additionally, FB&O revenues decreased $2.9 million due to the reduced admissions.

 

After excluding the impact of a $6.5 million write-down of assets for the nine months ended September 30, 2003 and a $3.2 million gain on the sale of one of the Empress boats for the nine months ended September 30, 2004, operating expenses decreased $5.3 million.  Components of this decrease are: casino expense and other operating expense decreased $3.7 million and $1.8 million, respectively, following the operational changes implemented in response to the Illinois tax legislation increasing gaming and admission tax rates, FB&O expense decreased $1.7 million corresponding to our decrease in revenues and admissions, and offsetting these decreases was an increase in gaming and admission taxes of $1.8 million due to the increased tax rates in Illinois, even though casino revenues have decreased.

 

Alton – Net revenues decreased $4.7 million as casino revenues decreased $4.5 million, or 5.3%, to $80.9 million due to competitive pressures in the St. Louis market and the implementation of reduced hours commencing in August 2003 in response to the Illinois tax legislation.  Operating expenses increased slightly by $0.1 million consisting of: increases in SG&A of $1.7 million and gaming and admission taxes of $0.5 million, not ratably with the decrease in casino revenues due to the increased tax rates in Illinois, offset by a reduction in casino expense of $2.1 million due to

 

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the operational changes implemented in response to the Illinois tax legislation increasing gaming and admission tax rates.

 

Baton Rouge – Net revenues increased $2.2 million as casino revenues increased $2.1 million, or 3.5%, to $62.7 million due primarily to an increase in win per admission.  Operating expenses decreased $0.8 million primarily due to a decrease in casino expense of $1.1 million offset by an increase in gaming and admission taxes of $0.4 million corresponding with the increase in casino revenues.

 

Sioux City – Net revenues increased $4.1 million due to an increase in casino revenues of $4.3 million, or 13.6%, to $36.0 million due to the positive impact of property renovations completed in the first quarter 2003 and the transfer and renovation of our Riverside riverboat to Sioux City that was placed in service on September 1, 2004 and provides 125 additional slot machines and six additional table games. Operating expenses increased $1.2 million as gaming and admissions taxes increased $1.4 million corresponding to the increase in casino revenues offset by a decrease in depreciation and amortization of $0.8 million as the former riverboat was depreciated to its salvage value in June 2004 and replaced by our Riverside riverboat in September 2004.  Depreciation expense in future periods will increase.

 

Corporate – Operating expenses increased $4.7 million due in part to changes in incentive compensation plans and year-over-year expansion of our corporate MIS staff and increased business development activities.

 

Other overall company costs were as follows:

 

Other Income (Expense) – Net interest expense decreased $6.7 million to $50.2 million due to the refinancing, in February and June 2004, of our 10.75% Notes with new 7% Notes due 2014 and reductions in our overall debt levels.  We also had capitalized interest of $2.3 million related to our casino construction projects for the nine months ended September 30, 2003 compared to minimal capitalized interest for the nine months ended September 30, 2004, as these assets were placed in service during 2003. Associated with this debt refinancing, we incurred $26.0 million in net premiums and fees for the nine months ended September 30, 2004.

 

Income Tax Expense – Income tax expense increased $7.3 million to $40.4 million as pretax earnings increased primarily due to increased earnings at our Riverside and Lawrenceburg properties offset by expenses related to the early retirement of our 10.75% Notes. Our overall effective tax rate is higher for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 due to recording a tax benefit related to this debt refinancing at a rate lower than our overall effective tax rate. Our effective tax rate would have been the same in both years had this debt refinancing not occurred.

 

Three months ended September 30, 2004, compared to three months ended September 30, 2003

 

A discussion of each of our properties operating results:

 

Lawrenceburg – Net revenues increased $7.7 million, primarily due to an increase in casino revenues of $8.5 million, or 8.0%, to $115.4 million as win per admission increased 9.9% and admissions decreased 1.7%. Promotional allowances increased $1.2 million across all lines of complimentary programs due to changes in marketing programs. Operating expenses increased $5.5 million to $81.0 million from $75.5 million principally due to gaming and admissions taxes increasing $4.1 million due to our increase in casino revenues.

 

Riverside – Net revenues increased $12.1 million as casino revenues increased $12.5 million, or 53.4%, to $36.0 million due to the opening of our renovated casino property in December 2003 which included a 53% increase in gaming capacity, renovation of the pavilion and increased food and beverage facilities.  Admissions increased 40.5% and win per admission increased 9.2%.  FB&O revenue increased $1.8 million to $4.3 million due to our new restaurants and the increase in admissions with the opening of our new casino. With this increase in revenues and patrons, our promotional allowances increased $2.2 million, primarily in our complimentary food program.

 

Operating expenses increased $9.7 million in the following areas: an increase in gaming and admission taxes of $3.2 million corresponding with our increase in revenues and admissions with the opening of our new casino in December 2003, SG&A expense and casino expense increased $1.8 million and $0.9 million, respectively, with our expanded casino operations, FB&O expense increased $1.2 million due to our expanded restaurant operations and the

 

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increase in patrons with our overall expanded facility and depreciation and amortization expense increased $2.9 million due to the project capital placed in service with the opening of our new casino in December 2003 and accelerated depreciation on our current parking garage structure to be demolished during early 2005 to allow construction of our new hotel. Additionally, operating margins have increased due to efficiencies from operating on one level and full implementation of TITO slot machines.

 

Joliet – Net revenues increased $0.4 million as casino revenues increased $0.8 million, or 1.4%, to $59.1 million.  With the opening of our new barge-based casino in May 2003, we experienced increased revenues prior to the implementation of reduced hours of operations, the implementation of an admission fee and changes in marketing efforts commencing in August 2003 in response to Illinois tax legislation increasing gaming and admission tax rates effective July 2003. Additionally, admissions increased 2.2% and win per admission increased 0.8%. Admission revenues were $2.4 million in 2004 compared to $1.1 million in admission revenues in 2003 due to the commencement of an admission fee in August 2003. Promotional allowances increased $1.4 million due to an increase in complimentary admissions of $1.6 million.

 

Operating expenses decreased $1.1 million due primarily to a $3.2 million gain on the sale of one of the Empress boats.  Excluding this gain, operating expenses increased $2.3 million as gaming and admission taxes increased $3.7 million due primarily to higher tax rates for Illinois and a slight increase in revenues.  Casino expense decreased $1.3 million due to the operational changes implemented in response to the Illinois tax legislation increasing gaming and admission tax rates.

 

Alton – Net revenues increased $0.9 million as casino revenues increased $1.0 million to $27.8 million as admissions increased 0.8% and win per admission increased 2.9%. Operating expenses increased $1.5 million due to increased gaming and admission taxes of $1.6 million due primarily to the higher tax rates for Illinois and an increase in SG&A expense of $0.7 million, offset by a decrease in casino expense of $1.0 million due to the operational changes implemented in response to the Illinois tax legislation increasing gaming and admission tax rates.

 

Baton Rouge– Net revenues increased $0.2 million as admissions decreased 2.4% and win per admission increased 2.5%.  Operating expenses decreased $0.4 million primarily due to reductions in payroll costs.

 

Sioux City – Net revenues increased $2.3 million consisting of an increase in casino revenues of $2.4 million, or 22.8%, to $12.9 million due primarily to the transfer of our larger Riverside riverboat to Sioux City that was placed in service in September 2004 adding 125 slot machines and six table games. This capacity increase resulted in increases in admissions of 19.9% and win per admission of 2.4%.  For the month of September 2004, casino revenues increased 48% on a 28% increase in capacity. Operating expenses increased $1.0 million due primarily to an increase in gaming and admissions taxes of $0.8 million corresponding to the increase in casino revenues.  Depreciation expense in future periods will increase as we placed the larger riverboat in service in September 2004.

 

Corporate – Operating expenses increased $2.0 million primarily in increases in SG&A expense of $1.9 million spread throughout various corporate departments.

 

Other overall company costs were as follows:

 

Other Income (Expense) – Net interest expense decreased $3.4 million to $15.6 million, which is primarily attributable to the refinancing, in February and June 2004, of our 10.75% Notes with new 7% Notes due 2014.  We also had capitalized interest of $0.7 million related to our casino construction projects for the three months ended September 30, 2003 compared to minimal capitalized interest for the three months ended September 30, 2004 as these assets were placed in service during 2003.

 

Income Tax Expense – Income tax expense increased $4.1 million to $18.4 million as pretax earnings increased due to increased operating income at all of our locations, except for Alton, and reduced interest expense.

 

Competition

 

Our Alton Casino faces competition from four other casino operators in the St. Louis area (two additional casinos have been approved for the St. Louis market).  One competitor opened a hotel expansion and facility renovation during the third quarter 2004.  Our Riverside Casino faces competition from three casinos in the Kansas City area.  Our

 

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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 seven other casino operators in the Chicago metropolitan area, including four casinos in Indiana.

 

There could be further unanticipated competition in any market in which we operate as a result of legislative changes or other events.  For instance, several states have discussed adopting or expanding gaming in various forms, which could cause increased competition in our markets.  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, 2004, we generated cash flows from operating activities of $147.5 million compared to $131.6 million for the nine months ended September 30, 2003. This increase is due to an overall increase in our operating performance.

 

In the nine months ended September 30, 2004, we used cash flows for investing activities of $55.5 million compared to $95.6 million for the nine months ended September 30, 2003.  During the nine months ended September 30, 2004, our investing activities included purchases of property and equipment of $60.0 million ($28.4 million for residual payments on the Riverside construction project opened in December 2003 (including $13.6 million relating to accounts payable at December 31, 2003)) and our new Riverside garage project and $3.9 million on the renovation of our Riverside riverboat placed in service in September 2004 in Sioux City with the remainder for maintenance capital.  This compares to $95.8 million in property and equipment purchases for the nine months ended September 30, 2003 ($77.4 million for construction projects at our Riverside, Joliet and Sioux City facilities with the remainder for maintenance capital).

 

During the nine months ended September 30, 2004, we used cash flows of $95.3 million for financing activities compared to using $39.3 million for the nine months ended September 30, 2003.  For the nine months ended September 30, 2004, we used $378.0 million for payments related to the repurchase of our 10.75% Notes offset by cash provided through the issuance of $350 million of our new 7% Notes.  Additionally, for the nine months ended September 30, 2004, we incurred $11.6 million for deferred finance fees related to the 7% Notes and our Third Amended and Restated Credit Agreement.  For the nine months ended September 30, 2004 and September 30, 2003, we used cash of $57.6 million and $39.2 million, respectively, for repayments on our senior secured credit facility.

 

On September 30, 2004, we entered into the Third Amended and Restated Credit Agreement (the “Credit Facility”) with a revolving line of credit up to $500 million and a Term Loan of $175 million maintaining our total facility of $675 million.  In February and June 2004, we refinanced a portion of our existing indebtedness with net proceeds from the issuance of $350 million in new 7% Notes due 2014, together with funds from our Credit Facility.  These funds were used to repurchase the $350 million 10.75% Notes due 2009. Related to this refinancing, we paid approximately $28.0 million in premiums.  Funding of this debt purchase, call premium and accrued interest was from funds available under our Credit Facility.

 

During October 2001, we effectively fixed the interest rate on approximately $200.0 million of our term loan through three interest rate swap agreements, which expired on September 30, 2004.  For each swap agreement, we agreed 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%.

 

Our subordinated notes due in 2011 and 2014 contain certain restrictions on the payment of dividends on our common stock and the occurrence of additional indebtedness, as well as other customary debt covenants.  In addition, the Credit Facility requires us to maintain certain financial ratios, based on terms as defined in the Credit Facility, which, as of September 30, 2004, are as follows:  (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.75 to 1.0; (2) Senior Funded Debt to EBITDA Ratio of a maximum of 3.50 to 1.0; and (3) Fixed Charge Coverage Ratio of a minimum of 1.50 to 1.0.  As of September 30, 2004, we were in compliance with these ratios.

 

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Under our subordinated notes indentures, our ability to make dividends and other distributions on our common stock and make investments outside of the Company and its restricted subsidiaries is generally limited to 50% of our consolidated net income since July 1, 1999.  In addition, we are restricted from incurring additional indebtedness, which, after giving effect of the additional indebtedness, would cause our Interest Coverage Ratio (Consolidated EBITDA to Consolidated Interest Expense for the most recent four fiscal quarters on a pro forma basis) to be less than 2.0 to 1.  None of these covenants currently places any material limitations on our anticipated future operating plans.

 

During May 2003, we announced Board of Directors approval of a stock repurchase program authorizing us to repurchase up to $30.0 million of our common stock.  The repurchases can be made at management’s discretion without prior notice from time to time in the open market or through privately negotiated third party transactions in compliance with applicable laws and depending on market conditions.  As of the filing date of this report, we have made no stock repurchases under this program.

 

We continue to make capital investments at our existing properties for expansion and product enhancement.  In December 2003, we opened our new approximately $105 million Riverside casino.  For the remainder of 2004, we expect to spend approximately $15-$20 million, including continued expansion at Riverside for a new 1,400-space parking garage (estimated to be completed in the third quarter 2005) and maintenance capital expenditures (including the continuing implementation of our coinless TITO slot product). The new garage at our Riverside property is part of a $75 million expansion project that also includes a new 250-room hotel.  Additionally, in October 2004, we entered into a contract to purchase Raceway Park in Toledo, Ohio for approximately $20 million, subject to various conditions including regulatory approval. We expect to fund these expenditures from internally generated cash and availability under our Credit Facility.

 

Given our significant cash generation capabilities, we seek investment opportunities at our existing properties, including but not limited to additional capital investments at our Riverside and Lawrenceburg properties, or into new assets. Should we decide to make additional investments at our existing properties or acquire new assets, we may amend our existing Credit Facility or issue additional debt or equity securities.  At September 30, 2004, we had approximately $63.8 million of cash and cash equivalents; $252.8 million was outstanding on our Credit Facility ($77.8 million on our revolving Credit Facility and $175.0 million on our term loan) and $550.0 million of Subordinated Notes (due in September 2011 and January 2014).  As of September 30, 2004, we had outstanding letters of credit of $9.9 million and additional availability under the Credit Facility was approximately $412.4 million.  We have no off-balance sheet debt.

 

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 fund capital expenditures or pay down debt 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.

 

Because we have no direct operations and no significant assets other than ownership of stock in our subsidiaries, we are dependent on our subsidiaries for payments of dividends and other distributions to generate the funds necessary to meet our cash needs.  Although there are currently no restrictions on the flow of funds between our subsidiaries and us, should our subsidiaries be unable to remit dividends or other payments, our ability to meet our financial obligations may be impaired.

 

Our long-term debt, as of September 30, 2004, matures as follows (in thousands):

 

One year and less		$	2,526
1 - 3 years		3,899
4 - 5 years		81,741
After 5 years		717,111
Total		$	805,277

 

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Off Balance Sheet Arrangements

 

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interest, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

 

Critical Accounting Estimates

 

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 estimates, 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, 2004, 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, 2004, we have approximately $549 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 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 or future 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.

 

Income Taxes – We are subject to income taxes in the United States and in several states.  We account for income taxes in accordance with SFAS Statement 109, “Accounting for Income Taxes.”  Our income tax returns are subject to examination by various taxing authorities. We regularly assess the potential outcomes of these examinations in determining the adequacy of our provision for income taxes and our income tax liabilities.  Inherent on our determination of any necessary reserves are assumptions based on past experiences and judgments about potential actions by taxing authorities.  Our estimate of the potential outcome for any uncertain tax issue is highly judgmental.  We believe we have adequately provided for any reasonable and foreseeable outcome related to uncertain tax matters.  When actual results of tax examinations differ from our estimates, we adjust the income tax provision in the period in which the examination issues are settled.

 

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