**SECURITIESAND 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 September 30, 2001.** |
|                                                    |   |                                                                                          |
| **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 asSpecified in its Charter)

 

 

| **Delaware**                                   |   | **37-1304247**                       |
|------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation) |   | (I.R.S. Employer Identification No.) |

 

**219Piasa Street**

# **Alton, Illinois 62002**

**(618)474-7500**

(Address, including zipcode, and telephone number, including

area code, of Registrant'sprincipal executive offices)

 

    Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

    Indicate the number of shares outstanding ofeach of the issuer's classes of common stock as of the latest practicabledate:  28,798,270 shares of Common Stock,$.01 par value per share, as of November 12, 2001.

 

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, ExceptShare and Per Share Data)

 

 
|                                                                                                                                                                       |   | **September 30,** |      | **December 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|------------------|--------|
|                                                                                                                                                                       |   | **2001**          |      | **2000**         |   |
|                                                                                                                                                                       |   | **(unaudited)**   |      |             |   |
| **Current assets:**                                                                                                                                                        |   |              |      |             |   |
| Cash and cash  equivalents                                                                                                                                                 |   | $                 | 57,791    |             | $      | 59,374 |   |
| Accounts  receivable, net                                                                                                                                                  |   | 4,131             |      | 2,444            |   |
| Deferred income  taxes                                                                                                                                                     |   | 4,849             |      | 4,849            |   |
| Other current  assets                                                                                                                                                      |   | 7,058             |      | 5,527            |   |
| Total current  assets                                                                                                                                                      |   | 73,829            |      | 72,194           |   |
|                                                                                                                                                                       |   |              |      |             |   |
| **Net property and equipment**                                                                                                                                             |   | 444,540           |      | 397,989          |   |
|                                                                                                                                                                       |   |              |      |             |   |
| **Other assets:**                                                                                                                                                          |   |              |      |             |   |
| Goodwill, net                                                                                                                                                              |   | 731,428           |      | 29,482           |   |
| Intangible and  other assets, net                                                                                                                                          |   | 33,918            |      | 29,804           |   |
| Deferred finance  costs, net                                                                                                                                               |   | 26,391            |      | 7,767            |   |
| Total other  assets                                                                                                                                                        |   | 791,737           |      | 67,053           |   |
| **Total assets**                                                                                                                                                           |   | $                 | 1,310,106 |             | $      | 537,236 |   |
|                                                                                                                                                                       |   |              |      |             |   |
| **Current liabilities:**                                                                                                                                                   |   |              |      |             |   |
| Accounts payable                                                                                                                                                           |   | $                 | 14,000    |             | $      | 15,304 |   |
| Accrued payroll  and related expenses                                                                                                                                      |   | 20,734            |      | 11,677           |   |
| Accrued interest  payable                                                                                                                                                  |   | 16,750            |      | 2,659            |   |
| Other accrued  liabilities                                                                                                                                                 |   | 68,341            |      | 52,275           |   |
| Current  maturities of long-term debt                                                                                                                                      |   | 4,214             |      | 23,775           |   |
| Total current  liabilities                                                                                                                                                 |   | 124,039           |      | 105,690          |   |
|                                                                                                                                                                       |   |              |      |             |   |
| **Long-term debt**                                                                                                                                                         |   | 1,017,321         |      | 252,561          |   |
| **Deferred income taxes**                                                                                                                                                  |   | 17,471            |      | 10,762           |   |
| **Other long-term obligations**                                                                                                                                            |   | 560               |      | 236              |   |
| **Minority interests in equity of  consolidated subsidiaries**                                                                                                             |   | -                 |      | 64,035           |   |
|                                                                                                                                                                       |   |              |      |             |   |
| **Stockholders' equity:**                                                                                                                                                  |   |              |      |             |   |
| Common stock,  $.01 par; 60,000,000 shares authorized; 28,773,270 and 28,394,423 shares  issued and outstanding at September 30, 2001 and December 31, 2000,  respectively |   | 288               |      | 284              |   |
| Capital in  excess of par                                                                                                                                                  |   | 82,031            |      | 80,693           |   |
| Retained  earnings                                                                                                                                                         |   | 68,396            |      | 22,975           |   |
| Total  stockholders' equity                                                                                                                                                |   | 150,715           |      | 103,952          |   |
| **Total liabilities and stockholders'  equity**                                                                                                                            |   | $                 | 1,310,106 |             | $      | 537,236 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, ExceptShare and Per Share Data)

 
|                                                                   |   | **Nine Months Ended** |    |
|------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                   |   | **September 30,**     |    | **September 30,** |   |
|                                                                   |   | **2001**              |    | **2000** | ** ** |
|                                                                   |   | **(unaudited)**       |    | **(unaudited)** | ** ** |
| **Revenues:**                                                          |   |                  |    |   |   |
| Casino                                                                 |   | $                     | 554,389 |   | $ | 502,428 |   |
| Admissions                                                             |   | 13,945                |    | 14,772 |   |
| Food, beverage  and other                                              |   | 57,586                |    | 50,348 |   |
|                                                                   |   | 625,920               |    | 567,548 |   |
| Less promotional  allowances                                           |   | (74,528               | )       | (72,053 | ) |
| Net revenues                                                           |   | 551,392               |    | 495,495 |   |
|                                                                   |   |                  |    |   |   |
| **Costs and expenses:**                                                |   |                  |    |   |   |
| Casino                                                                 |   | 216,120               |    | 184,568 |   |
| Selling, general  and administrative                                   |   | 105,207               |    | 105,344 |   |
| Food, beverage  and other                                              |   | 43,166                |    | 35,151 |   |
| Other operating  expenses                                              |   | 26,216                |    | 22,615 |   |
| Depreciation and  amortization                                         |   | 33,923                |    | 26,923 |   |
| Write down of  assets                                                  |   | -                     |    | 6,800 |   |
|                                                                   |   | 424,632               |    | 381,401 |   |
| Income from  operations                                                |   | 126,760               |    | 114,094 |   |
|                                                                   |   |                  |    |   |   |
| **Other income (expense):**                                            |   |                  |    |   |   |
| Interest income                                                        |   | 706                   |    | 1,160 |   |
| Interest expense                                                       |   | (46,342               | )       | (27,417 | ) |
|                                                                   |   | (45,636               | )       | (26,257 | ) |
|                                                                   |   |                  |    |   |   |
| Income before  income taxes, minority interests and extraordinary item |   | 81,124                |    | 87,837 |   |
| Minority  interests                                                    |   | (4,086                | )       | (30,994 | ) |
| Income tax  expense                                                    |   | (31,617               | )       | (22,538 | ) |
| Income before  extraordinary item                                      |   | 45,421                |    | 34,305 |   |
| Extraordinary  loss on extinguishment of debt                          |   | -                     |    | (1,154 | ) |
| **Net income**                                                         |   | $                     | 45,421  |   | $ | 33,151 |   |
|                                                                   |   |                  |    |   |   |
| **Basic  income per share before extraordinary loss**                  |   |                  |    |   |   |
| Basic income per  share before extraordinary loss                      |   | $                     | 1.59    |   | $ | 1.22 |   |
| Extraordinary  loss                                                    |   | -                     |    | (0.04 | ) |
| **Basic income per share**                                             |   | $                     | 1.59    |   | $ | 1.18 |   |
|                                                                   |   |                  |    |   |   |
| **Diluted  income per share before extraordinary loss**                |   |                  |    |   |   |
| Diluted income  per share before extraordinary loss                    |   | $                     | 1.55    |   | $ | 1.18 |   |
| Extraordinary  loss                                                    |   | -                     |    | (0.04 | ) |
| **Diluted income per share**                                           |   | $                     | 1.55    |   | $ | 1.14 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, ExceptShare and Per Share Data)

 
|                                               |   | **Three Months Ended** |       |
|----------------------------------------------------|--------|------------------------|------------|
|                                               |   | **September 30,**      |       | **September 30,** |   |
|                                               |   | **2001**               | ** ** | **2000** | ** ** |
|                                               |   | **(unaudited)**        |       | **(unaudited)** |   |
| **Revenues:**                                      |   |                   |       |   |   |
| Casino                                             |   | $                      | 216,127    |   | $ | 172,152 |   |
| Admissions                                         |   | 4,834                  |       | 5,068 |   |
| Food, beverage  and other                          |   | 22,356                 |       | 17,614 |   |
|                                               |   | 243,317                |       | 194,834 |   |
| Less promotional  allowances                       |   | (28,625                | )          | (25,517 | ) |
| Net revenues                                       |   | 214,692                |       | 169,317 |   |
|                                               |   |                   |       |   |   |
| **Costs and expenses:**                            |   |                   |       |   |   |
| Casino                                             |   | 87,886                 |       | 62,844 |   |
| Selling, general  and administrative               |   | 37,245                 |       | 36,814 |   |
| Food, beverage  and other                          |   | 17,103                 |       | 12,421 |   |
| Other operating  expenses                          |   | 10,196                 |       | 7,659 |   |
| Depreciation and  amortization                     |   | 12,694                 |       | 8,874 |   |
|                                               |   | 165,124                |       | 128,612 |   |
| Income from  operations                            |   | 49,568                 |       | 40,705 |   |
|                                               |   |                   |       |   |   |
| **Other income (expense):**                        |   |                   |       |   |   |
| Interest income                                    |   | 81                     |       | 229 |   |
| Interest expense                                   |   | (20,515                | )          | (7,905 | ) |
|                                               |   | (20,434                | )          | (7,676 | ) |
|                                               |   |                   |       |   |   |
| Income before  income taxes and minority interests |   | 29,134                 |       | 33,029 |   |
| Minority  interests                                |   | -                      |       | (10,756 | ) |
| Income tax  expense                                |   | (11,977                | )          | (9,138 | ) |
|                                               |   |                   |       |   |   |
| **Net income**                                     |   | $                      | 17,157     |   | $ | 13,135 |   |
|                                               |   |                   |       |   |   |
| **Basic income per share**                         |   | $                      | 0.60       |   | $ | 0.46 |   |
|                                               |   |                   |       |   |   |
| **Diluted income per share**                       |   | $                      | 0.58       |   | $ | 0.45 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, ExceptShare and Per Share Data)

 
|                                                                               |   | **Nine Months Ended** |   |
|------------------------------------------------------------------------------------|--------|-----------------------|--------|
|                                                                               |   | **September 30,**     |   | **September 30,** |   |
|                                                                               |   | **2001**              |   | **2000** | ** ** |
|                                                                               |   | **(unaudited)**       |   | **(unaudited)** |   |
| **Cash flows from operating activities:**                                          |   |                  |   |   |   |
| Net  income                                                                   |   | $                     | 45,421 |   | $ | 33,151 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                  |   |   |   |
| Extraordinary  loss                                                                |   | -                     |   | 1,154 |   |
| Depreciation                                                                       |   | 27,011                |   | 24,623 |   |
| Amortization                                                                       |   | 8,617                 |   | 2,826 |   |
| Compensation expense  recognized on issuance of stock                              |   | -                     |   | 39 |   |
| Write down of  assets                                                              |   | -                     |   | 6,800 |   |
| Minority  interests                                                                |   | 4,086                 |   | 30,994 |   |
| Deferred income  taxes                                                             |   | 5,336                 |   | 13,519 |   |
| Changes in  operating assets and liabilities, net of effect from acquisition:      |   |                  |   |   |   |
| Accounts  receivable and other current assets                                      |   | (663                  | )      | 9,663 |   |
| Accounts payable  and other current liabilities                                    |   | 20,156                |   | 11,872 |   |
| Net cash  provided by operating activities                                         |   | 109,964               |   | 134,641 |   |
|                                                                               |   |                  |   |   |   |
| **Cash flows from investing  activities:**                                         |   |                  |   |   |   |
| Purchases of property  and equipment                                               |   | (20,455               | )      | (22,465 | ) |
| Purchases of  Minority Interests in Partnership                                    |   | (366,700              | )      | (9,058 | ) |
| Purchase of  Empress Casino Joliet, net of cash acquired                           |   | (453,880              | )      | - |   |
| Other                                                                              |   | 89                    |   | (713 | ) |
| Net cash used in  investing activities                                             |   | (840,946              | )      | (32,236 | ) |
|                                                                               |   |                  |   |   |   |
| **Cash flows from financing  activities:**                                         |   |                  |   |   |   |
| Proceeds  (repayment) of line of credit, net                                       |   | 135,400               |   | (62,800 | ) |
| Proceeds from  issuance of long-term debt                                          |   | 634,000               |   | - |   |
| Payments on  long-term debt                                                        |   | (14,642               | )      | (3,844 | ) |
| Repurchase of  First Mortgage Notes                                                |   | -                     |   | (23,716 | ) |
| Decrease in  restricted cash held in escrow                                        |   | -                     |   | 25,244 |   |
| Payments of  deferred finance costs                                                |   | (20,807               | )      | - |   |
| Repayment of  partner loans                                                        |   | (266                  | )      | (16,535 | ) |
| Partnership  equity distributions                                                  |   | (5,199                | )      | (12,816 | ) |
| Repayment of partner  capital contribution                                         |   | -                     |   | (3,964 | ) |
| Payment of  preferred equity return and dividends to partner                       |   | (456                  | )      | (1,548 | ) |
| Proceeds from  stock option exercises                                              |   | 1,342                 |   | 281 |   |
| Other                                                                              |   | 27                    |   | (212 | ) |
| Net cash  provided by (used in) financing activities                               |   | 729,399               |   | (99,910 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |   | (1,583                | )      | 2,495 |   |
| Cash and cash  equivalents, beginning of period                                    |   | 59,374                |   | 47,090 |   |
| Cash and cash  equivalents, end of period                                          |   | $                     | 57,791 |   | $ | 49,585 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY**

(In Thousands, ExceptShare and Per Share Data)

 
|                                                     |   | **Shares** |   | **Common Stock** | ** ** | **Capital in Excess of Par** | ** ** | **Retained Earnings** | ** ** | **Total Stockholders' Equity** | ** ** |
|----------------------------------------------------------|--------|------------|--------|------------------|------------|------------------------------|------------|-----------------------|------------|--------------------------------|------------|
|                                                     |   |       |   |             |       |                         |       |                  |       |                           |       |
| Balance,  December 31, 2000                              |   | 28,394,423 |   | $                | 284        |                         | $          | 80,693                |       | $                              | 22,975     |   | $ | 103,952 |   |
| Stock options  exercised                                 |   | 378,847    |   | 4                |       | 1,338                        |       |                  |       | 1,342                          |       |
| Net income for  the nine months ended September 30, 2001 |   |       |   |             |       |                         |       | 45,421                |       | 45,421                         |       |
| Balance,  September 30, 2001                             |   | 28,773,270 |   | $                | 288        |                         | $          | 82,031                |       | $                              | 68,396     |   | $ | 150,715 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

**ARGOSY GAMING COMPANY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

(In Thousands,Except Share and Per Share Data)

 

**1.         Basis of Presentation**

 

            Argosy Gaming Company(collectively with its subsidiaries, "Argosy" or "Company")is engaged in the business of providing casino style gaming and relatedentertainment to the public, through its riverboat casinos in Alton and Joliet,Illinois; Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana;and Sioux City, Iowa.

 

            The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. Interim results may not necessarily be indicative of results which maybe expected for any other interim period or for the year as a whole.  For further information, refer to thefinancial statements and footnotes thereto for the year ended December 31,2000, included in the Company's Annual Report on Form 10-K (File No.1-11853).  The accompanying unauditedcondensed consolidated financial statements contain all adjustments which are,in the opinion of management, necessary to present fairly the financialposition and the results of operations for the periods indicated.  Such adjustments include only normalrecurring accruals.  Certain 2000amounts have been reclassified to conform to the 2001 financial statement presentation.

 

            The FinancialAccounting Standards Board recently issued FASB Statement 142, Accounting forGoodwill and Intangible Assets.  Uponadoption of the statement, amortization of the remaining book value of goodwillwill cease as of January 1, 2002 and will be tested for impairment at leastannually.  The provisions of the statementare effective for fiscal years beginning after December 15, 2001.  Goodwill and intangible assets acquired intransactions completed after June 30, 2001, will follow the new requirementsimmediately.  Based on the Company’spreliminary review, application of the non-amortization provisions of thestatement would have increased diluted income per share by $0.04 and $0.11 forthe three months and nine months ended September 30, 2001, respectively.  The diluted income per share effect for thethree months and nine months ended September 30, 2000, would have been lessthan $0.01 and $0.01, respectively. During 2002, the Company will perform the first of the requiredimpairment tests of goodwill and indefinite lived intangible assets as ofJanuary 1, 2002, and has not yet determined what the effect of these tests willbe on the earnings and financial position of the Company.

 

            The Company adopted new accounting guidance (EITF 00-14 andEITF 00-22) issued in, and effective beginning with the first quarter 2001,which requires that the cost of the cash-back component of the Company’s‘Argosy Preferred Card’ customer loyalty program, including promotionalcoupons, be treated as a reduction of revenues.  These costs had previously been treated as a casino expense.  The new guidance impacts only theclassification of these costs on Argosy’s income statement.  It does not impact operating profit orEBITDA.  The prior year’s results havebeen reclassified to reflect the impact of implementing this new guidance.

 

**2.  Long-Term Debt**

 

**           **Long-term debt consists of thefollowing:

 
|                                                                                                                                                |   | **September 30,** |          | **December 31,** |          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------------|------------------|---------------|
|                                                                                                                                                |   | **2001**          |          | **2000**         |          |
| Senior  Subordinated notes, due September 2011, interest payable semi-annually  at 9.0%                                                        |   | $                 | 200,000       |             | $             | **-** |   |
| Senior  Subordinated Notes, including unamortized premium of $8,522 at September 30,  2001, due June 2009, interest payable semi-annually at 10.75% |   | 358,522           |          | 200,000          |          |
| Senior secured  line of credit, expires July 31, 2006, interest payable at least quarterly at  either LIBOR or prime plus a margin                  |   | 182,800           |     | 47,400           |     |
| Term Loan,  matures July 31, 2008, principal and interest payments due quarterly with  interest at LIBOR and/or Base Rate                           |   | 275,000           |     | -                |     |
| Notes payable,  principal and interest payments due quarterly through September 2015, discounted  at 10.5%                                          |   | 5,213             |          | 5,831            |          |
| Notes payable,  principal and interest payments due monthly, interest payable at prime + 1%,  secured by gaming vessel and certain equipment        |   | -                 |          | 14,024           |          |
| Loans from  partner, principal due in annual installments, interest payable at prime + 6%                                                           |   | -                 |          | 9,081            |          |
|                                                                                                                                                |   | 1,021,535         |          | 276,336          |          |
| Less:  current maturities                                                                                                                      |   | 4,214             |          | 23,775           |          |
| Long-term debt,  less current maturities                                                                                                            |   | $                 | 1,017,321     |             | $             | 252,561 |   |

 

            On July 26, 2001, theCompany issued $200,000 of 9.0% Senior Subordinated Notes due 2011.  On February 1, 2001, the Company issued$150,000 of additional 103⁄4% Senior Subordinated Notes due 2009.  Prior to this issuance, the Company had$200,000 of outstanding 103⁄4% Subordinated Notes (all “SubordinatedNotes”).  On July 31, 2001, the Companyentered into an amended and restated Senior Secured Line of Credit Agreement,maintaining the Company’s available line of credit at $400,000 and adding aTerm Loan Commitment of $275,000 (“Credit Facility”).  The Credit Facility is secured by liens on substantially all ofthe Company’s assets and the Company’s subsidiaries are co-borrowers.  Substantially all of the Company’swholly-owned operating subsidiaries guarantee the Subordinated Notes.  The Subordinated Notes rank junior to all ofthe senior indebtedness of the Company, including borrowings under the CreditFacility.

 

            The Subordinated Notesand the Credit Facility contain certain restrictions on the payment ofdividends on the Company’s common stock and the incurrence of additionalindebtedness, as well as other customary debt covenants.  In addition, the Credit Facility requiresthe Company to maintain certain financial ratios.

 

 

**3.  Earnings Per Share**

 

**           **The following table sets forth thecomputation of basic and diluted earnings per share:

 
|                                                                       |   | **Nine Months Ended** |   | **Three Months Ended** |   |
|----------------------------------------------------------------------------|--------|-----------------------|--------|------------------------|--------|
|                                                                       |   | **September 30,**     |   | **September 30,**      |   | **September 30,** |   | **September 30,** |   |
|                                                                       |   | **2001**              |   | **2000**               |   | **2001** |   | **2000** | ** ** |
|                                                                       |   | **(unaudited)**       |   | **(unaudited)**        |   | **(unaudited)** |   | **(unaudited)** |   |
| **Numerator:**                                                             |   |                  |   |                   |   |   |   |   |   |
| Numerator for  basic and diluted earnings per share -                      |   |                  |   |                   |   |   |   |   |   |
| Net Income  before extraordinary item                                      |   | $                     | 45,421 |                   | $      | 34,305 |   | $ | 17,157 |   | $ | 13,135 |   |
| **Denominator:**                                                           |   |                  |   |                   |   |   |   |   |   |
| Denominator for  basic earnings per share -                                |   |                  |   |                   |   |   |   |   |   |
| Weighted-average  shares outstanding                                       |   | 28,595,457            |   | 28,306,336             |   | 28,762,020 |   | 28,379,063 |   |
| Effect of  dilutive securities (computed using the treasury stock method): |   |                  |   |                   |   |   |   |   |   |
| Restricted stock                                                           |   | -                     |   | 46,110                 |   | - |   | - |   |
| Employee and  directors stock options                                      |   | 615,971               |   | 689,700                |   | 495,655 |   | 605,664 |   |
| Warrants                                                                   |   | 76,925                |   | 65,807                 |   | 78,018 |   | 61,140 |   |
| Dilutive  potential common shares                                          |   | 692,896               |   | 801,617                |   | 573,673 |   | 666,804 |   |
|                                                                       |   |                  |   |                   |   |   |   |   |   |
| Denominator for  diluted earnings per share - adjusted                     |   |                  |   |                   |   |   |   |   |   |
| Weighted-average  shares and assumed conversions                           |   | 29,288,353            |   | 29,107,953             |   | 29,335,693 |   | 29,045,867 |   |
| Basic income per  share before extraordinary loss                          |   | $                     | 1.59   |                   | $      | 1.22 |   | $ | 0.60 |   | $ | 0.46 |   |
| Extraordiary  loss                                                         |   | -                     |   | (0.04                  | )      | - |   | - |   |
| Basic income per  share                                                    |   | $                     | 1.59   |                   | $      | 1.18 |   | $ | 0.60 |   | $ | 0.46 |   |
| Diluted earnings  per share before extraordinary loss                      |   | $                     | 1.55   |                   | $      | 1.18 |   | $ | 0.58 |   | $ | 0.45 |   |
| Extraordinary  loss                                                        |   | -                     |   | (0.04                  | )      | - |   | - |   |
| Diluted earnings  per share                                                |   | $                     | 1.55   |                   | $      | 1.14 |   | $ | 0.58 |   | $ | 0.45 |   |

 

 

**4.     Acquisitions**

 

In2001, the Company purchased the 42.5% limited partnership interests in the ArgosyCasino and Hotel in Lawrenceburg, Indiana ( the “Lawrenceburg Casino”) for anaggregate price of $365 million including all preferred equity interest andoutstanding partner loans.  As a resultof these acquisitions, the Company now owns 100% of the Lawrenceburg casino.

 

The purchase prices for the minority interests weredetermined based upon estimates of future cash flows and evaluations of the networth of the assets acquired.  Thepurchases are being accounted for under the purchase method.  The allocation of the purchase priceresulted in approximately $296 million in goodwill, which is being amortizedover a 40-year life.  In accordance withFASB Statement 142, amortization of the remaining book value of goodwill willcease as of January 1, 2002, and will be tested for impairment at leastannually.  The purchases were fundedwith approximately $155 million of net proceeds from the issuance ofSubordinated Notes and borrowings of approximately $210 million under CreditFacility.

 

On July 31, 2001, theCompany diversified its operations and cash flows by completing the acquisitionof 100% of the Empress Casino Joliet Corporation (with casino operationslocated in Joliet, Illinois) for approximately $469 million.  The purchase price was determined based uponestimates of future cash flows and the net worth of the assets acquired.  This acquisition was funded through theissuance of Senior Subordinated Notes due 2011 and borrowings under the CreditFacility.  The results of operations forthe Empress Casino Joliet for the two months ending September 30, 2001, sincethe acquisition, are included in the Company’s condensed consolidatedstatements of income.

 

The Empress CasinoJoliet acquisition is being accounted for using the purchase method under FASBStatement 141.  The preliminaryallocation of the purchase price, using appraised values, resulted inapproximately $410,842 in goodwill and $5,400 in intangibles.  Finalization of the allocation requirescompletion of appraisals and a change in working capital adjustment to thepurchase price.  In accordance with FASBStatement 142, the goodwill will not be amortized but instead subject to annualimpairment tests.

 

The following unaudited pro forma consolidated financial information forthe Company has been prepared assuming the acquisitions had occurred on thefirst day of the respective year.

 
|                          |   | **For the nine months ended** |    | **For the three months ended** |   |
|-------------------------------|--------|-------------------------------|---------|--------------------------------|--------|
|                          |   | **September 30,**             |    | **September 30,**              |   | **September 30,** |   | **September 30,** |   |
|                          |   | **2001**                      |    | **2000**                       |   | **2001** |   | **2000** | ** ** |
|                          |   | **(unaudited)**               |    | **(unaudited)**                |   | **(unaudited)** |   | **(unaudited)** |   |
|                          |   |                          |    |                           |   |   |   |   |   |
| Net revenues                  |   | $                             | 714,737 |                           | $      | 675,745 |   | $ | 240,893 |   | $ | 229,090 |   |
|                          |   |                          |    |                           |   |   |   |   |   |
| Income from  operations       |   | $                             | 169,502 |                           | $      | 161,096 |   | $ | 55,592 |   | $ | 56,109 |   |
|                          |   |                          |    |                           |   |   |   |   |   |
| Net income                    |   | $                             | 55,455  |                           | $      | 45,016 |   | $ | 17,722 |   | $ | 17,274 |   |
|                          |   |                          |    |                           |   |   |   |   |   |
| Diluted net  income per share |   | $                             | 1.89    |                           | $      | 1.55 |   | $ | 0.60 |   | $ | 0.59 |   |

 

These unaudited pro forma results are presented for comparative purposesonly.  The pro forma results are notnecessarily indicative of what our actual results would have been had theacquisitions been completed as of the beginning of the respective year, or offuture results.

 

 

**5.     Commitments and Contingent Liabilities**

 

***       ***The Company issubject to, from time to time, various legal and regulatory proceedings in theordinary course of its business.  

The Company believes that current proceedings will not have a materialeffect on the financial condition of the Company or the 

results of its operations.

 

**6.     SubsidiaryGuarantors**

 

**       **The Credit Facility is secured by a firstlien on substantially all of the Company’s assets and the Company’ssubsidiaries are co-borrowers.  TheSubordinated Notes are fully and unconditionally guaranteed, on a joint andseveral basis, by substantially all of the Company’s subsidiaries.  The Subordinated Notes rank junior to all ofthe senior indebtedness of the Company, including borrowings under the CreditFacility.

 

        The Company’s subsidiary which operatesthe Lawrenceburg Casino & Hotel is now a guarantor.  Prior to the Company’s acquisition of theminority interests in Lawrenceburg, the subsidiary was a non-guarantor.  As such, previous financial statements 

havebeen reclassified to reflect this subsidiary as a guarantor.

 

        Condensed balance sheets as of September30, 2001, and December 31, 2000, are as follows:

 
|                                                                                                                   |   | **September 30, 2001**  |      |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|
|                                                                                                                   |   | **Parent**

**Company** |      | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                                                   |   |                    |      |   |   |   |   |   |   |
| **Current assets:**                                                                                                    |   |                    |      |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                             |   | $                       | 7,781     |   | $ | 50,010 |   | $ | - |   | $ | 57,791 |   |
| Other current  assets                                                                                                  |   | 6,274                   |      | 9,764 |   | - |   | 16,038 |   |
| Total current  assets                                                                                                  |   | 14,055                  |      | 59,774 |   | - |   | 73,829 |   |
|                                                                                                                   |   |                    |      |   |   |   |   |   |   |
| **Net property and equipment**                                                                                         |   | 4,320                   |      | 440,220 |   | - |   | 444,540 |   |
|                                                                                                                   |   |                    |      |   |   |   |   |   |   |
| **Other assets:**                                                                                                      |   |                    |      |   |   |   |   |   |   |
| Goodwill, net                                                                                                          |   | -                       |      | 731,428 |   | - |   | 731,428 |   |
| Intangible and other  assets, net                                                                                      |   | 219                     |      | 33,699 |   | - |   | 33,918 |   |
| Deferred finance  costs, net                                                                                           |   | 26,391                  |      | - |   | - |   | 26,391 |   |
| Investment in  subsidiaries                                                                                            |   | 1,153,387               |      | - |   | (1,153,387 | ) | - |   |
| Total other  assets                                                                                                    |   | 1,179,997               |      | 765,127 |   | (1,153,387 | ) | 791,737 |   |
| Total assets                                                                                                           |   | $                       | 1,198,372 |   | $ | 1,265,121 |   | $ | (1,153,387 | ) | $ | 1,310,106 |   |
| **Current liabilities:**                                                                                               |   |                    |      |   |   |   |   |   |   |
| Accounts payable                                                                                                       |   | $                       | 2,160     |   | $ | 11,840 |   | $ | - |   | $ | 14,000 |   |
| Other current  liabilities                                                                                             |   | 24,125                  |      | 81,700 |   | - |   | 105,825 |   |
| Current  maturities of long-term debt                                                                                  |   | 3,544                   |      | 670 |   | - |   | 4,214 |   |
| Total current  liabilities                                                                                             |   | 29,829                  |      | 94,210 |   | - |   | 124,039 |   |
|                                                                                                                   |   |                    |      |   |   |   |   |   |   |
| **Long-term debt**                                                                                                     |   | 1,012,778               |      | 4,543 |   | - |   | 1,017,321 |   |
| **Deferred income taxes**                                                                                              |   | 5,050                   |      | 12,421 |   | - |   | 17,471 |   |
| **Intercompany advances and****investments, net**                                                                      |   | -                       |      | 705,735 |   | (705,735 | ) | - |   |
| **Other long-term obligations**                                                                                        |   | -                       |      | 560 |   | - |   | 560 |   |
|                                                                                                                   |   |                    |      |   |   |   |   |   |   |
| **Stockholders' equity:**                                                                                              |   |                    |      |   |   |   |   |   |   |
| Common stock,  $.01 par; 60,000,000 shares authorized; 28,773,270 shares issued and  outstanding at September 30, 2001 |   | 288                     |      | 1 |   | (1 | ) | 288 |   |
| Capital in  excess of par                                                                                              |   | 82,031                  |      | 5,256 |   | (5,256 | ) | 82,031 |   |
| Retained  earnings                                                                                                     |   | 68,396                  |      | 442,395 |   | (442,395 | ) | 68,396 |   |
| Total  stockholders' equity                                                                                            |   | 150,715                 |      | 447,652 |   | (447,652 | ) | 150,715 |   |
| Total  liabilities and stockholders' equity                                                                            |   | $                       | 1,198,372 |   | $ | 1,265,121 |   | $ | (1,153,387 | ) | $ | 1,310,106 |   |

 
|                                                                                                                  |   | **December 31, 2000**   |    |
|-----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                                  |   | **Parent**

**Company** |    | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Current assets:**                                                                                                   |   |                    |    |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                            |   | $                       | 3,476   |   | $ | 55,898 |   | $ | - |   | $ | 59,374 |   |
| Other current  assets                                                                                                 |   | 4,842                   |    | 7,978 |   | - |   | 12,820 |   |
| Total current  assets                                                                                                 |   | 8,318                   |    | 63,876 |   | - |   | 72,194 |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Net property and equipment**                                                                                        |   | 2,181                   |    | 395,808 |   | - |   | 397,989 |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Other assets:**                                                                                                     |   |                    |    |   |   |   |   |   |   |
| Goodwill, net                                                                                                         |   | -                       |    | 29,482 |   | - |   | 29,482 |   |
| Intangible and  other assets, net                                                                                     |   | 271                     |    | 29,533 |   | - |   | 29,804 |   |
| Deferred finance  costs, net                                                                                          |   | 7,657                   |    | 110 |   | - |   | 7,767 |   |
| Investment in  subsidiaries                                                                                           |   | 343,751                 |    | - |   | (343,751 | ) | - |   |
| Total other  assets                                                                                                   |   | 351,679                 |    | 59,125 |   | (343,751 | ) | 67,053 |   |
| Total assets                                                                                                          |   | $                       | 362,178 |   | $ | 518,809 |   | $ | (343,751 | ) | $ | 537,236 |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Current liabilities:**                                                                                              |   |                    |    |   |   |   |   |   |   |
| Accounts payable                                                                                                      |   | $                       | 1,960   |   | $ | 13,344 |   | $ | - |   | $ | 15,304 |   |
| Other current  liabilities                                                                                            |   | 7,283                   |    | 59,328 |   | - |   | 66,611 |   |
| Current  maturities of long-term debt                                                                                 |   | -                       |    | 23,775 |   | - |   | 23,775 |   |
| Total current  liabilities                                                                                            |   | 9,243                   |    | 96,447 |   | - |   | 105,690 |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Long-term debt**                                                                                                    |   | 247,400                 |    | 5,161 |   | - |   | 252,561 |   |
| **Intercompany advances and****investments, net**                                                                     |   | -                       |    | 102,241 |   | (102,241 | ) | - |   |
| **Deferred income taxes**                                                                                             |   | 1,583                   |    | 9,179 |   | - |   | 10,762 |   |
| **Other long-term obligations**                                                                                       |   | -                       |    | 236 |   | - |   | 236 |   |
| **Minority interests in equity****of consolidated subsidiaries**                                                      |   | -                       |    | - |   | 64,035 |   | 64,035 |   |
|                                                                                                                  |   |                    |    |   |   |   |   |   |   |
| **Stockholders' equity:**                                                                                             |   |                    |    |   |   |   |   |   |   |
| Common stock,  $.01 par; 60,000,000 shares authorized; 28,394,423 shares issued and  outstanding at December 31, 2000 |   | 284                     |    | 1 |   | (1 | ) | 284 |   |
| Capital in  excess of par                                                                                             |   | 80,693                  |    | 5,256 |   | (5,256 | ) | 80,693 |   |
| Retained  earnings                                                                                                    |   | 22,975                  |    | 300,288 |   | (300,288 | ) | 22,975 |   |
| Total  stockholders' equity                                                                                           |   | 103,952                 |    | 305,545 |   | (305,545 | ) | 103,952 |   |
| Total  liabilities and stockholders' equity                                                                           |   | $                       | 362,178 |   | $ | 518,809 |   | $ | (343,751 | ) | $ | 537,236 |   |

 

**       **Condensed statements of income for thenine and three months ended September 30, 2001 and 2000, are as follows

** **
|                                                                                                               |   | **Nine months ended September 30,  2001** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                                               |   | **Parent**

**Company**                   |       | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                                               |   |                                      | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Revenues:**                                                                                                      |   |                                      |       |   |   |   |   |   |   |
| Casino                                                                                                             |   | $                                         | -          |   | $ | 554,389 |   | $ | - |   | $ | 554,389 |   |
| Admissions                                                                                                         |   | -                                         |       | 13,945 |   | - |   | 13,945 |   |
| Food, beverage  and other                                                                                          |   | 3,474                                     |       | 57,586 |   | (3,474 | ) | 57,586 |   |
|                                                                                                               |   | 3,474                                     |       | 625,920 |   | (3,474 | ) | 625,920 |   |
| Less promotional  allowances                                                                                       |   | (6                                        | )          | (74,522 | ) | - |   | (74,528 | ) |
| Net revenues                                                                                                       |   | 3,468                                     |       | 551,398 |   | (3,474 | ) | 551,392 |   |
|                                                                                                               |   |                                      |       |   |   |   |   |   |   |
| **Costs and expenses:**                                                                                            |   |                                      |       |   |   |   |   |   |   |
| Casino                                                                                                             |   | -                                         |       | 216,120 |   | - |   | 216,120 |   |
| Selling, general  and administrative                                                                               |   | 14,961                                    |       | 93,720 |   | (3,474 | ) | 105,207 |   |
| Food, beverage  and other                                                                                          |   | -                                         |       | 43,166 |   |   |   | 43,166 |   |
| Other operating  expenses                                                                                          |   | 169                                       |       | 26,047 |   |   |   | 26,216 |   |
| Depreciation and  amortization                                                                                     |   | 306                                       |       | 33,617 |   |   |   | 33,923 |   |
|                                                                                                               |   | 15,436                                    |       | 412,670 |   | (3,474 | ) | 424,632 |   |
| Income (loss)  from operations                                                                                     |   | (11,968                                   | )          | 138,728 |   | - |   | 126,760 |   |
|                                                                                                               |   |                                      |       |   |   |   |   |   |   |
| **Other income (expense):**                                                                                        |   |                                      |       |   |   |   |   |   |   |
| Interest income                                                                                                    |   | 3,514                                     |       | 1,001 |   | (3,809 | ) | 706 |   |
| Interest expense                                                                                                   |   | (17,546                                   | )          | (32,605 | ) | 3,809 |   | (46,342 | ) |
|                                                                                                               |   | (14,032                                   | )          | (31,604 | ) | - |   | (45,636 | ) |
|                                                                                                               |   |                                      |       |   |   |   |   |   |   |
| Income (loss)  before income taxes, minority interests and equity in  net income of consolidated subsidiaries |   | (26,000                                   | )          | 107,124 |   | - |   | 81,124 |   |
| Equity in net  income of consolidated subsidiaries                                                                 |   | 63,801                                    |       | - |   | (63,801 | ) | - |   |
| Minority  interests                                                                                                |   | -                                         |       | (4,086 | ) | - |   | (4,086 | ) |
| Income tax  (expense) benefit                                                                                      |   | 7,620                                     |       | (39,237 | ) | - |   | (31,617 | ) |
|                                                                                                               |   |                                      |       |   |   |   |   |   |   |
| Net income                                                                                                         |   | $                                         | 45,421     |   | $ | 63,801 |   | $ | (63,801 | ) | $ | 45,421 |   |

 
|                                                                                                                             |   | **Nine months ended September 30, 2000** |       |
|----------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|------------|
|                                                                                                                             |   | **Parent**

**Company**                  |       | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                                                             |   |                                     | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Revenues:**                                                                                                                    |   |                                     |       |   |   |   |   |   |   |
| Casino                                                                                                                           |   | $                                        | -          |   | $ | 502,428 |   | $ | - |   | $ | 502,428 |   |
| Admissions                                                                                                                       |   | -                                        |       | 14,772 |   | - |   | 14,772 |   |
| Food, beverage and other                                                                                                         |   | 3,131                                    |       | 50,148 |   | (2,931 | ) | 50,348 |   |
|                                                                                                                             |   | 3,131                                    |       | 567,348 |   | (2,931 | ) | 567,548 |   |
| Less promotional allowances                                                                                                      |   | (8                                       | )          | (72,045 | ) | - |   | (72,053 | ) |
| Net revenues                                                                                                                     |   | 3,123                                    |       | 495,303 |   | (2,931 | ) | 495,495 |   |
|                                                                                                                             |   |                                     |       |   |   |   |   |   |   |
| **Costs and expenses:**                                                                                                          |   |                                     |       |   |   |   |   |   |   |
| Casino                                                                                                                           |   | -                                        |       | 184,568 |   | - |   | 184,568 |   |
| Selling, general and administrative                                                                                              |   | 12,046                                   |       | 96,229 |   | (2,931 | ) | 105,344 |   |
| Food, beverage and other                                                                                                         |   | -                                        |       | 35,151 |   | - |   | 35,151 |   |
| Other operating expenses                                                                                                         |   | 212                                      |       | 22,403 |   | - |   | 22,615 |   |
| Depreciation and amortization                                                                                                    |   | 281                                      |       | 26,642 |   | - |   | 26,923 |   |
| Write down of assets                                                                                                             |   | 6,800                                    |       | - |   | - |   | 6,800 |   |
|                                                                                                                             |   | 19,339                                   |       | 364,993 |   | (2,931 | ) | 381,401 |   |
| Income (loss) from operations                                                                                                    |   | (16,216                                  | )          | 130,310 |   | - |   | 114,094 |   |
|                                                                                                                             |   |                                     |       |   |   |   |   |   |   |
| **Other income (expense):**                                                                                                      |   |                                     |       |   |   |   |   |   |   |
| Interest income                                                                                                                  |   | 4,473                                    |       | 3,998 |   | (7,311 | ) | 1,160 |   |
| Interest expense                                                                                                                 |   | (23,097                                  | )          | (11,631 | ) | 7,311 |   | (27,417 | ) |
|                                                                                                                             |   | (18,624                                  | )          | (7,633 | ) | - |   | (26,257 | ) |
| Income (loss) before income taxes, minority interests,  extraordinary item and equity in net income of consolidated subsidiaries |   | (34,840                                  | )          | 122,677 |   | - |   | 87,837 |   |
| Equity in net income of consolidated subsidiaries                                                                                |   | 56,866                                   |       | - |   | (56,866 | ) | - |   |
| Minority interests                                                                                                               |   | -                                        |       | (30,994 | ) | - |   | (30,994 | ) |
| Income tax (expense) benefit                                                                                                     |   | 12,279                                   |       | (34,817 | ) | - |   | (22,538 | ) |
| Income (loss) before extraordinary item                                                                                          |   | 34,305                                   |       | 56,866 |   | (56,866 | ) | 34,305 |   |
| Extraordinary item                                                                                                               |   | (1,154                                   | )          | - |   | - |   | (1,154 | ) |
|                                                                                                                             |   |                                     |       |   |   |   |   |   |   |
| Net income (loss)                                                                                                                |   | $                                        | 33,151     |   | $ | 56,866 |   | $ | (56,866 | ) | $ | 33,151 |   |

 
|                                                                                               |   | **Three  months ended September 30, 2001** |       |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                               |   | **Parent**

**Company**                    |       | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                               |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Revenues:**                                                                                      |   |                                       |       |   |   |   |   |   |   |
| Casino                                                                                             |   | $                                          | -          |   | $ | 216,127 |   | $ | - |   | $ | 216,127 |   |
| Admissions                                                                                         |   | -                                          |       | 4,834 |   | - |   | 4,834 |   |
| Food, beverage  and other                                                                          |   | 1,446                                      |       | 22,356 |   | (1,446 | ) | 22,356 |   |
|                                                                                               |   | 1,446                                      |       | 243,317 |   | (1,446 | ) | 243,317 |   |
| Less promotional  allowances                                                                       |   | (1                                         | )          | (28,624 | ) | - |   | (28,625 | ) |
| Net revenues                                                                                       |   | 1,445                                      |       | 214,693 |   | (1,446 | ) | 214,692 |   |
|                                                                                               |   |                                       |       |   |   |   |   |   |   |
| **Costs  and expenses:**                                                                           |   |                                       |       |   |   |   |   |   |   |
| Casino                                                                                             |   | -                                          |       | 87,886 |   | - |   | 87,886 |   |
| Selling, general  and administrative                                                               |   | 5,741                                      |       | 32,950 |   | (1,446 | ) | 37,245 |   |
| Food, beverage  and other                                                                          |   | -                                          |       | 17,103 |   |   |   | 17,103 |   |
| Other operating  expenses                                                                          |   | 49                                         |       | 10,147 |   |   |   | 10,196 |   |
| Depreciation and  amortization                                                                     |   | 130                                        |       | 12,564 |   |   |   | 12,694 |   |
|                                                                                               |   | 5,920                                      |       | 160,650 |   | (1,446 | ) | 165,124 |   |
| Income (loss)  from operations                                                                     |   | (4,475                                     | )          | 54,043 |   | - |   | 49,568 |   |
|                                                                                               |   |                                       |       |   |   |   |   |   |   |
| **Other  income (expense):**                                                                       |   |                                       |       |   |   |   |   |   |   |
| Interest income                                                                                    |   | 959                                        |       | 47 |   | (925 | ) | 81 |   |
| Interest expense                                                                                   |   | (5,028                                     | )          | (16,412 | ) | 925 |   | (20,515 | ) |
|                                                                                               |   | (4,069                                     | )          | (16,365 | ) | - |   | (20,434 | ) |
|                                                                                               |   |                                       |       |   |   |   |   |   |   |
| Income (loss)  before income taxes and equity in net income of consolidated subsidiaries |   | (8,544                                     | )          | 37,678 |   | - |   | 29,134 |   |
| Equity in net  income of consolidated subsidiaries                                            |   | 22,189                                     |       | - |   | (22,189 | ) | - |   |
| Income tax  (expense) benefit                                                                      |   | 3,512                                      |       | (15,489 | ) | - |   | (11,977 | ) |
|                                                                                               |   |                                       |       |   |   |   |   |   |   |
| Net income                                                                                         |   | $                                          | 17,157     |   | $ | 22,189 |   | $ | (22,189 | ) | $ | 17,157 |   |

** **

 
|                                                                                                                          |   | **Three  months ended September 30, 2000** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                                                          |   | **Parent**

**Company**                    |       | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                                                                                          |   |                                       | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Revenues:**                                                                                                                 |   |                                       |       |   |   |   |   |   |   |
| Casino                                                                                                                        |   | $                                          | -          |   | $ | 172,152 |   | $ | - |   | $ | 172,152 |   |
| Admissions                                                                                                                    |   | -                                          |       | 5,068 |   | - |   | 5,068 |   |
| Food, beverage  and other                                                                                                     |   | 1,060                                      |       | 17,614 |   | (1,060 | ) | 17,614 |   |
|                                                                                                                          |   | 1,060                                      |       | 194,834 |   | (1,060 | ) | 194,834 |   |
| Less promotional  allowances                                                                                                  |   | (2                                         | )          | (25,515 | ) | - |   | (25,517 | ) |
| Net revenues                                                                                                                  |   | 1,058                                      |       | 169,319 |   | (1,060 | ) | 169,317 |   |
|                                                                                                                          |   |                                       |       |   |   |   |   |   |   |
| **Costs  and expenses:**                                                                                                      |   |                                       |       |   |   |   |   |   |   |
| Casino                                                                                                                        |   | -                                          |       | 62,844 |   | - |   | 62,844 |   |
| Selling, general  and administrative                                                                                          |   | 4,971                                      |       | 32,903 |   | (1,060 | ) | 36,814 |   |
| Food, beverage  and other                                                                                                     |   | -                                          |       | 12,421 |   | - |   | 12,421 |   |
| Other operating  expenses                                                                                                     |   | 58                                         |       | 7,601 |   | - |   | 7,659 |   |
| Depreciation and  amortization                                                                                                |   | 95                                         |       | 8,779 |   | - |   | 8,874 |   |
|                                                                                                                          |   | 5,124                                      |       | 124,548 |   | (1,060 | ) | 128,612 |   |
| Income (loss)  from operations                                                                                                |   | (4,066                                     | )          | 44,771 |   | - |   | 40,705 |   |
|                                                                                                                          |   |                                       |       |   |   |   |   |   |   |
| **Other  income (expense):**                                                                                                  |   |                                       |       |   |   |   |   |   |   |
| Interest income                                                                                                               |   | 1,210                                      |       | 1,040 |   | (2,021 | ) | 229 |   |
| Interest expense                                                                                                              |   | (6,700                                     | )          | (3,226 | ) | 2,021 |   | (7,905 | ) |
|                                                                                                                          |   | (5,490                                     | )          | (2,186 | ) | - |   | (7,676 | ) |
|                                                                                                                          |   |                                       |       |   |   |   |   |   |   |
| Income (loss)  before income taxes, minority interests, and equity in net income  of consolidated subsidiaries |   | (9,556                                     | )          | 42,585 |     | - |     | 33,029 |     |
| Equity in net  income of consolidated subsidiaries                                                                            |   | 19,859                                     |       | - |   | (19,859 | ) | - |   |
| Minority  interests                                                                                                           |   | -                                          |       | (10,756 | ) | - |   | (10,756 | ) |
| Income tax  (expense) benefit                                                                                                 |   | 2,832                                      |       | (11,970 | ) | - |   | (9,138 | ) |
|                                                                                                                          |   |                                       |       |   |   |   |   |   |   |
| Net income  (loss)                                                                                                            |   | $                                          | 13,135     |   | $ | 19,859 |   | $ | (19,859 | ) | $ | 13,135 |   |

 

 

Condensedstatements of cash flows  for the ninemonths ended September 30, 2001 and 2000, are as follows:

 
|                                                              |   | **Nine  months ended September 30, 2001** |   |
|-------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                              |   | **Parent**

**Company**                   |   | **Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|                                                              |   |                                      |   |   |   |   |   |   |   |
| **Net  cash provided by operating** **activities**           |   | $                                         | 1,279  |   | $ | 108,685 |   | $ | - |   | $ | 109,964 |   |
|                                                              |   |                                      |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**                        |   |                                      |   |   |   |   |   |   |   |
| Purchases of  property and equipment                              |   | (2,448                                    | )      | (18,007 | ) | - |   | (20,455 | ) |
| Purchase of  minority interests in Partnership                    |   | 1,373                                     |   | (303,011 | ) | (65,062 | ) | (366,700 | ) |
| Purchase of  Empress Casino Joliet, net of cash acquired          |   | -                                         |   | (453,880 | ) | - |   | (453,880 | ) |
| Investments in  and advances from (to) subsidiaries          |   | (745,834                                  | )      | 680,772 |   | 65,062 |   | - |   |
| Other                                                             |   | -                                         |   | 89 |   | - |   | 89 |   |
| Net cash used in  investing activities                            |   | (746,909                                  | )      | (94,037 | ) | - |   | (840,946 | ) |
|                                                              |   |                                      |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**                        |   |                                      |   |   |   |   |   |   |   |
| Proceeds from  line of credit, net                                |   | 135,400                                   |   | - |   | - |   | 135,400 |   |
| Proceeds from  issuance of long-term debt                         |   | 634,000                                   |   | - |   | - |   | 634,000 |   |
| Payments on  long-term debt                                       |   | -                                         |   | (14,642 | ) | - |   | (14,642 | ) |
| Payments of  deferred finance costs                               |   | (20,807                                   | )      | - |   | - |   | (20,807 | ) |
| Repayment of  partner loans                                       |   | -                                         |   | (266 | ) | - |   | (266 | ) |
| Partnership  equity distributions                                 |   | -                                         |   | (5,199 | ) | - |   | (5,199 | ) |
| Payment of  preferred equity return and dividends to partner |   | -                                         |   | (456 | ) | - |   | (456 | ) |
| Proceeds from  stock option exercises                             |   | 1,342                                     |   | - |   | - |   | 1,342 |   |
| Other                                                             |   | -                                         |   | 27 |   | - |   | 27 |   |
|                                                              |   |                                      |   |   |   |   |   |   |   |
| Net cash  provided by (used in) financing activities         |   | 749,935                                   |   | (20,536 | ) | - |   | 729,399 |   |
|                                                              |   |                                      |   |   |   |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents             |   | 4,305                                     |   | (5,888 | ) | - |   | (1,583 | ) |
| Cash and cash  equivalents, beginning of period                   |   | 3,476                                     |   | 55,898 |   | - |   | 59,374 |   |
| Cash and cash  equivalents, end of period                         |   | $                                         | 7,781  |   | $ | 50,010 |   | $ | - |   | $ | 57,791 |   |

 
|                                                               |   | **Nine  months ended September 30, 2000** |   |
|--------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                               |   | **Parent**

**Company**                   |   | **Guarantors** |   | **Eliminations** |   | **Consolidated** | ** ** |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| **Net  cash provided by operating activities**                     |   | $                                         | 3,549  |   | $ | 131,092 |   | $ | - |   | $ | 134,641 |   |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| **Cash  flows from investing activities:**                         |   |                                      |   |   |   |   |   |   |   |
| Purchases of  property and equipment                               |   | (1,197                                    | )      | (21,268 | ) | - |   | (22,465 | ) |
| Purchases of  minority interests in partnership                    |   | -                                         |   | (9,058 | ) | - |   | (9,058 | ) |
| Investments in  and advances (to) from subsidiaries           |   | 60,625                                    |   | (60,625 | ) | - |   | - |   |
| Other                                                              |   | -                                         |   | (713 | ) | - |   | (713 | ) |
| Net cash (used  in) provided by investing activities          |   | 59,428                                    |   | (91,664 | ) | - |   | (32,236 | ) |
|                                                               |   |                                      |   |   |   |   |   |   |   |
| **Cash  flows from financing activities:**                         |   |                                      |   |   |   |   |   |   |   |
| Repayment of  line of credit, net                                  |   | (62,800                                   | )      | - |   | - |   | (62,800 | ) |
| Payments on  long-term debt                                        |   | -                                         |   | (3,844 | ) | - |   | (3,844 | ) |
| Repurchase of  First Mortgage Notes                                |   | (23,716                                   | )      | - |   | - |   | (23,716 | ) |
| Decrease in  restricted cash held in escrow                        |   | 25,244                                    |   | - |   | - |   | 25,244 |   |
| Repayment of  partner loans                                        |   | -                                         |   | (16,535 | ) | - |   | (16,535 | ) |
| Partnership  equity distributions                                  |   | -                                         |   | (12,816 | ) | - |   | (12,816 | ) |
| Repayment of  partner capital contribution                         |   | -                                         |   | (3,964 | ) | - |   | (3,964 | ) |
| Payment of  preferred equity return and dividends to partners |   | -                                         |   | (1,548 | ) | - |   | (1,548 | ) |
| Proceeds from  stock option exercises                              |   | 281                                       |   | - |   | - |   | 281 |   |
| Other                                                              |   | -                                         |   | (212 | ) | - |   | (212 | ) |
| Net cash used in  financing activities                             |   | (60,991                                   | )      | (38,919 | ) | - |   | (99,910 | ) |
| Net increase in  cash and cash equivalents                         |   | 1,986                                     |   | 509 |   | - |   | 2,495 |   |
| Cash and cash  equivalents, beginning of period                    |   | 531                                       |   | 46,559 |   | - |   | 47,090 |   |
| Cash and cash  equivalents, end of period                          |   | $                                         | 2,517  |   | $ | 47,068 |   | $ | - |   | $ | 49,585 |   |

 

 

**ARGOSY GAMING COMPANY**

**MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

*        Exceptwhere otherwise noted, the words, “we,” “us,” “our” and similar terms, as wellas references to “Argosy” or the “Company” refer to Argosy Gaming Company andall of its subsidiaries.*

 

**Overview**

 

                Through oursubsidiaries, we own and operate the Alton Belle Casino, in Alton, Illinois;the Empress Casino in Joliet, Illinois; the Argosy Casino in Riverside,Missouri; the Argosy Casino in Baton Rouge, Louisiana; the Belle of Sioux CityCasino in Sioux City, Iowa; and the Argosy Casino in Lawrenceburg,Indiana.  In the first quarter of 2001,the Company 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 themajority owner of the Lawrenceburg casino and, as such, our historicalconsolidated financial statements included the assets, liabilities and resultsof operations for the Lawrenceburg casino on a consolidated basis.  On February 5, 2001, we opened our 300-roomhotel at our Baton Rouge location.

 

                On July 31, 2001, we completed our acquisition ofthe Empress Casino in Joliet, Illinois on a 300-acre site approximately40 miles southwest of Chicago and approximately two miles from the intersectionof Interstate 55 and Interstate 80.  Theacquisition was funded through the issuance of $200 million of 9.0% SeniorSubordinated Notes due 2011 and a $275 million Term Loan through our amendedand restated Credit Facility dated July 31, 2001.  The results of operations for the Empress Casino Joliet for thetwo months ending September 30, 2001, since the acquisition, are included inthe Company’s condensed consolidated statements of income.

 
|                                     |   | **Nine  Months Ended** |    | **Three  Months Ended** |   |
|------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                     |   | **September 30,**      |    | **September  30,**      |   | **September  30,** |   | **September  30,** | ** ** |
|                                     |   | **2001**               |    | **2000**                |   | **2001** |   | **2000** | ** ** |
|                                     |   | **(unaudited)**        |    | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited****)** |   |
| **Casino  Revenues**                     |   |                   |    |                    |   |   |   |   |   |
| Alton Belle  Casino                      |   | $                      | 92,491  |                    | $      | 85,761 |   | $ | 30,915 |   | $ | 29,385 |   |
| Argosy Casino -  Riverside               |   | 73,747                 |    | 72,983                  |   | 24,478 |   | 24,632 |   |
| Argosy Casino -  Baton Rouge             |   | 58,526                 |    | 54,189                  |   | 19,973 |   | 18,212 |   |
| Belle of Sioux  City Casino              |   | 27,509                 |    | 26,450                  |   | 9,541 |   | 8,829 |   |
| Argosy Casino -  Lawrenceburg            |   | 258,496                |    | 263,045                 |   | 87,600 |   | 91,094 |   |
| Empress Casino  Joliet (7)               |   | 43,620                 |    | -                       |   | 43,620 |   | - |   |
| Total                                    |   | $                      | 554,389 |                    | $      | 502,428 |   | $ | 216,127 |   | $ | 172,152 |   |
| **Net  Revenues (1)**                    |   |                   |    |                    |   |   |   |   |   |
| Alton Belle  Casino                      |   | $                      | 88,948  |                    | $      | 82,176 |   | $ | 29,709 |   | $ | 28,066 |   |
| Argosy Casino -  Riverside               |   | 70,620                 |    | 69,627                  |   | 23,406 |   | 23,422 |   |
| Argosy Casino -  Baton Rouge             |   | 58,485                 |    | 51,138                  |   | 20,112 |   | 17,037 |   |
| Belle of Sioux  City Casino              |   | 26,803                 |    | 25,614                  |   | 9,299 |   | 8,592 |   |
| Argosy Casino -  Lawrenceburg            |   | 263,883                |    | 266,463                 |   | 89,728 |   | 92,058 |   |
| Empress Casino  Joliet (7)               |   | 42,338                 |    | -                       |   | 42,338 |   | - |   |
| Other                                    |   | 315                    |    | 477                     |   | 100 |   | 142 |   |
| Total (1)                                |   | $                      | 551,392 |                    | $      | 495,495 |   | $ | 214,692 |   | $ | 169,317 |   |
| **Income  (loss) from Operations(2)**    |   |                   |    |                    |   |   |   |   |   |
| Alton Belle  Casino                      |   | $                      | 27,386  |                    | $      | 24,905 |   | $ | 8,928 |   | $ | 8,549 |   |
| Argosy Casino -  Riverside               |   | 15,181                 |    | 13,086                  |   | 4,662 |   | 4,637 |   |
| Argosy Casino -  Baton Rouge             |   | 7,418                  |    | 8,940                   |   | 2,859 |   | 2,570 |   |
| Belle of Sioux  City Casino              |   | 5,947                  |    | 4,961                   |   | 2,225 |   | 1,871 |   |
| Argosy Casino -  Lawrenceburg            |   | 84,507                 |    | 86,021                  |   | 28,925 |   | 29,757 |   |
| Empress Casino  Joliet (7)               |   | 11,163                 |    | -                       |   | 11,163 |   | - |   |
| Jazz  Enterprises, Inc. (5)              |   | (3,526                 | )       | (3,821                  | )      | (1,026 | ) | (1,236 | ) |
| Corporate                                |   | (18,306                | )       | (12,346                 | )      | (5,879 | ) | (5,126 | ) |
| Other                                    |   | (1,088                 | )       | (852                    | )      | (367 | ) | (317 | ) |
| Total (6)                                |   | $                      | 128,682 |                    | $      | 120,894 |   | $ | 51,490 |   | $ | 40,705 |   |
|                                     |   |                   |    |                    |   |   |   |   |   |
| **EBITDA(2)(3)**                         |   |                   |    |                    |   |   |   |   |   |
| Alton Belle  Casino                      |   | $                      | 31,788  |                    | $      | 29,436 |   | $ | 10,437 |   | $ | 10,025 |   |
| Argosy Casino -  Riverside               |   | 18,340                 |    | 17,230                  |   | 5,716 |   | 6,042 |   |
| Argosy Casino -  Baton Rouge             |   | 11,914                 |    | 12,287                  |   | 4,397 |   | 3,654 |   |
| Belle of Sioux  City Casino              |   | 7,110                  |    | 6,133                   |   | 2,609 |   | 2,275 |   |
| Argosy Casino -  Lawrenceburg            |   | 96,452                 |    | 101,773                 |   | 32,599 |   | 34,944 |   |
| Lawrenceburg  financial advisory fee (4) |   | (927                   | )       | (5,089                  | )      | - |   | (1,747 | ) |
| Empress Casino  Joliet (7)               |   | 12,746                 |    | -                       |   | 12,746 |   | - |   |
| Jazz  Enterprises, Inc. (5)              |   | (1,559                 | )       | (1,795                  | )      | (435 | ) | (560 | ) |
| Corporate                                |   | (13,216                | )       | (12,065                 | )      | (3,871 | ) | (5,031 | ) |
| Other                                    |   | (43                    | )       | (93                     | )      | (14 | ) | (23 | ) |
| Total (6)                                |   | $                      | 162,605 |                    | $      | 147,817 |   | $ | 64,184 |   | $ | 49,579 |   |

 

 

(1)       New accounting guidance issued in, andeffective beginning with the first quarter 2001 requires that the cost of thecash-back component of the Company’s ‘Argosy Preferred Card’ customer loyaltyprogram, including promotional coupons, be treated as a reduction ofrevenues.  These costs had previouslybeen treated as a casino expense.  Thenew guidance impacts only the classification of these costs on Argosy’s incomestatement.  It does not impact operatingprofit or property EBITDA.  The prioryear’s results have been reclassified to reflect the impact of implementingthis new guidance.

 

(2)       Income from operations and EBITDA exclude(i) consideration of any management fee paid to us, (ii) 42.5% minorityinterest in our Lawrenceburg casino for periods prior to our February 2001acquisition of Conseco Entertainment, L.L.C.’s 29.0% minority interest and ourMarch 2001, acquisition of Centaur, Inc.’s 13.5% minority interest and (iii)the 30% minority interest in our Sioux City casino for the period prior to ourJuly 2000 acquisition of this interest.

 

(3)      “EBITDA” is defined as earnings beforeinterest, taxes, depreciation and amortization and is presented before anymanagement fees paid to Argosy.  EBITDAshould not be construed as an alternative to operating income, or net income(as determined in accordance with generally accepted accounting principles) asan indicator of our operating performance, or as an alternative to cash flowsgenerated by operating, investing and financing activities (as an indicator ofcash flow or a measure of liquidity). EBITDA is presented solely as a supplemental disclosure becausemanagement believes that it is a widely used measure of operating performancein the gaming industry and for companies with a significant amount ofdepreciation and amortization.  EBITDAmay not be comparable to similarly titled measures reported by other companies.  We have other significant uses of cashflows, including debt service and capital expenditures, which are not reflectedin EBITDA.

 

(4)       The Lawrenceburg partnership paid afinancial advisory fee equal to 5.0% of its EBITDA to a minority partner priorto our acquisition of Conseco’s minority interest in February, 2001.

 

(5)       Jazz Enterprises, Inc. is a wholly-ownedsubsidiary that owns and operates the Catfish Town real estate developmentadjacent to the Company’s Baton Rouge casino.

 

(6)       The three and nine months ended September30, 2001, exclude a $1.9 million pretax charge related to the abandoned Kenoshacasino development.  The nine monthsended September 30, 2000, exclude a $6.8 million pretax charge related to thewrite-off of assets.

 

(7)       Amounts reflect two months of operationssince Argosy’s purchase of the Empress Casino Joliet on July 31, 2001.  Preliminary purchase accounting has beencompleted with certain amounts classified as intangibles and goodwill.  In accordance with FASB Statement 142,Accounting for Goodwill and Intangible Assets, no amortization expense has beenrecorded on the goodwill portion of the purchase price.  Income from operations could be affected iffuture reclassifications are required upon finalization of the purchaseaccounting.

**Nine months ended September 30, 2001compared to nine months ended September 30, 2000**

 

                *Casino*—Casinorevenues for the nine months ended September 30, 2001, increased $52.0 million,or 10.3%, to $554.4 million from $502.4 million for the nine months endedSeptember 30, 2000.  Alton, Riverside,Sioux City and Baton Rouge reported an aggregate 5.4% increase in casinorevenues from $239.4 million to $252.3 million. In particular, Alton casinorevenues increased from $85.8 million to $92.5 million, Riverside casinorevenues increased from $73.0 million to $73.8 million, Sioux City casinorevenues increased from $26.4 million to $27.5 million, and Baton Rouge casinorevenues increased from $54.2 million to $58.5 million. Lawrenceburg casinorevenues decreased $4.5 million, or 1.7%, to $258.5 million for the nine monthsended September 30, 2001, from $263.0 million for the nine months endedSeptember 30, 2000.  Our Empress CasinoJoliet, acquired July 31, 2001, recorded $43.6 million in casino revenue forthe two months since acquisition through September 30, 2001.  Each of our casinos reported increases inthe average win per passenger for the nine months ended September 30, 2001,versus the nine months ended September 30, 2000.

 

                Casino expensesincreased $31.5 million to $216.1 million for the nine months ended September30, 2001, from $184.6 million for the nine months ended September 30,2000.  Joliet had $21.5 million incasino expenses for their two months of operations since our acquisition.  The remaining increase is due to increasedgaming taxes totaling $3.7 million and increases in other casino expenses of$6.3 million to support the overall increased revenues as well as increasedpayroll related costs at all properties.

 

                *Admissions*—Admissionsrevenues (net of complimentary admissions) decreased to $2.6 million for thenine months ended September 30, 2001, from $5.0 million for the nine monthsended September 30, 2000, due to an increase in complimentary admissions givento customers as part of Lawrenceburg’s marketing program.

 

                *Food,Beverage and Other*—Food, beverage and other revenues increased $7.3million to $57.6 million for the nine month period ended September 30, 2001,from $50.3 million for the nine month period ended September 30, 2000.  Joliet contributed $4.0 million of thisincrease.  Food, beverage and other netprofit decreased $0.8 million to $14.4 million for the nine months endedSeptember 30, 2001, from $15.2 million for the nine months ended September 30,2000.

 

                 *Selling, General and Administrative*—Selling,general and administrative expenses decreased $0.1 million to $105.2 millionfor the nine months ended September 30, 2001, from $105.3 million for the ninemonths ended September 30, 2000, due primarily to decreases in management feesof $4.2 million (due to Argosy’s acquisition of Lawrenceburg’s minorityinterests in the first quarter 2001) and in promotions expense of $3.5 millionat Lawrenceburg, offset by $3.1 million in expenses for Joliet, the $1.9million of expense to abandon the Kenosha casino development and other increases,primarily payroll, at our properties.

 

*                Other Operating Expenses*—Other operatingexpenses increased by $3.6 million to $26.2 million for the nine months endedSeptember 30, 2001, as compared to $22.6 million for the nine months endedSeptember 30, 2000.  Joliet accountedfor $1.8 million of the increase with the remaining portion of the increaserelating to the overall increase in revenues.

 

                *Depreciationand Amortization*—Depreciation and amortization increased $7.0million from $26.9 million for the nine months ended September 30, 2000, to$33.9 million for the nine months ended September 30, 2001, due primarily to$4.8 million in incremental goodwill amortization related to the Lawrenceburgacquisition in the first quarter 2001 and the acquisition of Joliet, whichadded $1.6 million of depreciation and intangible asset amortization for thetwo months of operations since the acquisition.

 

                *Write Downof Assets –*For the nine months ended September 30, 2000, $6.8million related to the Alton landing facility was written down.

 

 

                *InterestExpense*—Net interest expense increased $19.3 million to $45.6million for the nine months ended September 30, 2001, from $26.3 million forthe nine months ended September 30, 2000. This increase is primarily attributable to additional borrowings inconnection with the Lawrenceburg and Joliet acquisitions.

 

                *MinorityInterests –*Our minority interest expense decreased by $26.9 millionto $4.1 million for the nine months ended September 30, 2001, as compared to$31.0 million for the nine months ended September 30, 2000.  This decrease is attributable to ourLawrenceburg casino minority interest acquisitions during the first quarter2001, and as the sole owner, we will no longer incur minority interest expense.

 

                *Income TaxExpense –*Income tax expense increased by $9.1 million to $31.6million for the nine months ended September 30, 2001, from $22.5 million forthe nine months ended September 30, 2000, due to greater pre-tax earnings.

 

                *ExtraordinaryLoss –*We recorded an extraordinary loss of $1.2 million for thenine months ended September 30, 2000, related to the completion of the finalphase of the early extinguishment of debt in conjunction with the 1999refinancing.  This extraordinary loss isnet of a $0.8 million tax benefit.

 

                *Net Income –*Net income was $45.4 million for the nine months ended September 30,2001, compared to $33.2 million for the nine months ended September 30, 2000,due primarily to the factors discussed above.

 

**Three monthsended September 30, 2001 compared to three months ended September 30,  2000**

 

                *Casino*—Casinorevenues for the three months ended September 30, 2001, increased $43.9million, or 25.5%, to $216.1 million from $172.2 million for the three monthsended September 30, 2000.  Alton,Riverside, Sioux City and Baton Rouge reported an aggregate 4.7% increase incasino revenues from $81.1 million to $84.9 million. In particular, Altoncasino revenues increased from $29.4 million to $30.9 million, Riverside casinorevenues decreased from $24.6 million to $24.5 million, Sioux City casinorevenues increased from $8.8 million to $9.5 million, and Baton Rouge casinorevenues increased from $18.2 million to $20.0 million. Lawrenceburg casinorevenues decreased $3.5 million, or 3.8%, to $87.6 million for the three monthsended September 30, 2001, from $91.1 million for the three months endedSeptember 30, 2000.  Joliet reportedcasino revenues of $43.6 million for the two months of operations since ouracquisition on July 31, 2001.  Each ofour casinos reported increases in the average win per passenger for the threemonths ended September 30, 2001, versus the three months ended September 30,2000.

 

                Casino expensesincreased $25.1 million to $87.9 million for the three months ended September30, 2001, from $62.8 million for the three months ended September 30,2000.  Joliet had $21.5 million incasino expenses for their two months of operation.  The remaining increase is due to increased gaming taxes totaling$0.9 million and increases in other casino expenses of $2.7 million to supportthe overall increased revenues as well as increased payroll related costs atall properties.

 

                *Admissions*—Admissionsrevenues (net of complimentary admissions) decreased to $0.8 million for thethree months ended September 30, 2001, from $1.7 million for the three monthsended September 30, 2000, due to an increase in complimentary admissions givento customers as part of Lawrenceburg’s marketing program.

 

                *Food,Beverage and Other*—Food, beverage and other revenues increased $4.7million to $22.4 million for the three month period ended September 30, 2001,from $17.7 million for the three month period ended September 30, 2000.  Joliet contributed $4.0 million of thisincrease.  Food, beverage and other netprofit was $5.3 million for the three months ended September 30, 2001, and $5.2million for the three months ended September 30, 2000.

 

                *Selling,General and Administrative*—Selling, general and administrativeexpenses increased $0.4 million to $37.2 million for the three months endedSeptember 30, 2001, from $36.8 million for the three months ended September 30,2000, due primarily to a decrease in management fees of $1.7 million (due toArgosy’s acquisition of Lawrenceburg’s minority interest in the first quarter2001) offset by increases in general and administrative costs and the $1.9million write-off of expenses related to the abandonment of the Kenosha casinodevelopment.

 

*                Other Operating Expenses*—Other operatingexpenses increased by $2.5 million to $10.2 million for the three months endedSeptember 30, 2001, as compared to $7.7 million for the three months endedSeptember 30, 2000.  Joliet’s operationsaccounted for $1.8 million of the increase with the remaining $0.7 increase relatedto the overall increase in revenues.

 

                *Depreciationand Amortization*—Depreciation and amortization increased $3.8million from $8.9 million for the three months ended September 30, 2000, to$12.7 million for the three months ended September 30, 2001, due primarily to$1.9 million in incremental goodwill amortization related to the Lawrenceburgacquisition late in the first quarter 2001 and $1.6 million of depreciation andintangible asset amortization at Joliet.

 

                *InterestExpense*—Net interest expense increased $12.7 million to $20.4million for the three months ended September 30, 2001, from $7.7 million forthe three months ended September 30, 2000. This increase is primarily attributable to additional borrowings inconnection with the Lawrenceburg and Joliet acquisitions.

 

                *MinorityInterests –*We had no minority interest expense for the three monthsended September 30, 2001, as compared to $10.8 million for the three monthsended September 30, 2000.  This decreaseis attributable to our Lawrenceburg casino minority interest acquisitions duringthe first quarter 2001, and as the sole owner, we no longer incur minorityinterest expense.

 

                *Income TaxExpense –*Income tax expense increased by $2.9 million to $12.0million for the three months ended September 30, 2001, from $9.1 million for thethree months ended September 30, 2000, due to greater pre-tax earnings.

 

                *Net Income –*Net income was $17.2 million for the three months ended September30, 2001, compared to $13.1 million for the three months ended September 30,2000, due primarily to the factors discussed above.

 

**Competition**

 

                Our Alton Casinofaces competition from four other riverboat casino operators in the St. Louisarea.  Our Riverside Casino facescompetition from three casino companies in the Kansas City area.  Our Baton Rouge Casino faces competitionfrom one casino located in downtown Baton Rouge, a nearby Native Americancasino and multiple casinos throughout Louisiana. We face competition in SiouxCity, Iowa from video gaming devices in nearby South Dakota, from two land-basedNative American casinos and, to a lesser extent, from slot machines at apari-mutual race track in Council Bluffs, Iowa and from two riverboat casinosin the Council Bluffs, Iowa/Omaha, Nebraska market.  The Lawrenceburg casino faces competition from two riverboatcasinos in the Cincinnati market, the second of which opened in October2000.  Our Joliet casino facescompetition from eight other riverboat casino operators in the Chicago area.  There could be further unanticipatedcompetition in any market which we operate as a result of legislative changesor other events.  We expect each marketin which we participate, both current and prospective, to be highlycompetitive.

 

**Liquidity andCapital Resources**

 

**               **In the nine months endedSeptember 30, 2001, we generated cash flows from operating activities of $110.0million compared to $134.6 million for the same period in 2000.  This reduction is due primarily tobenefiting from the utilization of net operating loss carry forwards whichreduced cash tax payments by approximately $16.1 million during the nine monthsended September 30, 2000.

 

                In the nine months endedSeptember 30, 2001, we used cash flows for investing activities of $840.9million compared to $32.2 million for the nine months ended September 30, 2000.  The increase in the use of funds for thenine months ended September 30, 2001, is due primarily to our acquisition ofthe minority interests in the Lawrenceburg casino requiring the use of $375.7million in cash (including deferred financing fees) and our acquisition of theEmpress Casino Joliet requiring the use of $468.7 million in cash (includingdeferred financing fees).  During thenine months ended September 30, 2001, $6.0 million of cash was used for constructionof the Baton Rouge Hotel.

 

                During the nine months endedSeptember 30, 2001, cash of $729.4 million was provided by financing activitiescompared to using $99.9 million of cash flows for financing activities for thesame period in 2000.  $769.4 million wasprovided through the issuance of Senior Subordinated Notes and borrowings onour Credit Facility.  These funds wereused to fund the purchase of the Lawrenceburg casino minority interests and ouracquisition of the Empress Casino Joliet. Cash flows in 2001 and 2000 were used for repayment of long-term debt,repayment of partner loans, and distributions related to the Lawrenceburgpartnership.

 

                At September 30,2001, we had approximately $57.8 million of cash and cash equivalents.  At September 30, 2001, we had outstanding$558.5 million of Senior Subordinated Notes, including $8.5 million ofunamortized premium, $275.0 million of a Term Loan, and $182.8 million on asenior secured revolving credit facility. The Senior Subordinated Notes, due June 2009 and September 2011, bearinterest at 10.75% and 9.0%, respectively, and the Senior Secured CreditFacility (including the Term Loan) bears interest at LIBOR or prime plus amargin. As of September 30, 2001, availability under the credit facility wasapproximately $216.9 million.  During October2001 we effectively fixed the interest rate on approximately $200.0 million ofour Term Loan through interest rate swap agreements expiring on September 30,2004.  The Subordinated Notes and theCredit Facility contain certain restrictions on the payment of dividends on theCompany’s common stock and the occurrence of additional indebtedness, as wellas other typical debt covenants.  Inaddition, the Credit Facility requires the Company to maintain certain financialratios as follows:  (1) Total FundedDebt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio ofa maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.25 to1.0.  As of September 30, 2001, theCompany is in compliance with these ratios.

 

Consistent with gaming industrypractice, we conduct our operations with a net working capital deficit.  Unlike traditional industrial companies, agaming company’s balance sheet has limited accounts receivable and inventories.  In addition, casinos generate significantcash on a daily basis.  We generallyapply our daily cash flows to pay down indebtedness under our revolving creditfacility and pay our current liabilities pursuant to their normal cycles.  Given the significant daily cash flowsgenerated by our operations and the financial flexibility provided by ourcredit facility, the existence of a working capital deficit has no impact onour ability to operate our business or meet our obligations as they becomedue.  We believe that cash on hand,operating cash flows, and funds available under our Credit Facility will besufficient to fund our current operating, capital expenditure and debt serviceobligations for the next 12 months.

 

**CautionaryStatements for Purposes of the "Safe Harbor" Provisions of thePrivate Securities Litigation Reform Act of 1995**

 

*...... This Report containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Whenused in this document, the words "anticipate", "believe","estimate" and "expect" and similar expressions aregenerally intended to identify forward-looking statements.  Investors are cautioned that anyforward-looking statements, including those regarding the intent, belief orcurrent expectations of the Company or its management, are not guarantees offuture performance and involve risks and uncertainties, and that actual resultsmay differ materially from those in the forward-looking statements as a resultof various factors including, but not limited to, (i) competitive and general economicconditions in the markets in which the Company operates, (ii) increasedcompetitive pressures in the markets in which the Company operates, (iii) theeffect of future legislation or regulatory changes on the Company's operationsand (iv) other risks detailed from time to time in the Company's Securities andExchange Commission filings.  TheCompany does not intend to update these forward-looking statements.*

**ARGOSYGAMING COMPANY**

**OTHERINFORMATION**

 

**PART II.                          Other Information**

 

Item 1.                          *Legal Proceedings -*

 

            The Company is fromtime to time a party to legal proceedings arising in the ordinary course ofbusiness. No material changes have occurred in our legal proceedings since ourlast filing, and we are unaware of any legal proceedings, which, even if theoutcome were unfavorable to the Company, would have a material adverse impacton either its financial condition or results of operations.

 

Item 2.    *Changes in Securities*

 

*               *Effective July 26, 2001, 100% ofthe previously issued (February 1, 2001) private placement Senior SubordinatedNotes (“Restricted Notes”) were exchanged by the note holders for registerednotes with substantially identical terms.

 

Item 3.    *Defaults Upon Senior Securities -*None

 

Item 4.                *Submissionof Matters to a Vote of Security Holders -*None

 

Item 5.    *Other Information-*None

 

Item 6.    *Exhibits and reports on Form 8-K*

 

(a)   *        Exhibits -*None

 

(b)   *        Reports on Form 8-K*

 
| 1.     |   | Report on Form 8-K,  dated July 24, 2001, filed with the Securities and Exchange Commission,  containing a Press Release dated July 24, 2001, announcing the Company’s  second quarter operating results for the period ended June 30, 2001.                                                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                            |   |
| 2.     |   | Report on Form 8-K,  dated July 31, 2001, filed with the Securities and Exchange Commission,  containing the following related to the Company’s consummation of the  acquisition of the Empress Casino Joliet Corporation on July 31, 2001.                                                                |
|   |   |                                                                                                                                                                                                                                                                                                            |   |
|   |   | a.                                                                                                                                                                                                                                                                                                              | Financial statements of  business acquired. |
|   |   |                                                                                                                                                                                                                                                                                                            |   |
|   |   | b.                                                                                                                                                                                                                                                                                                              | Pro forma financial  information. |
|   |   |                                                                                                                                                                                                                                                                                                            |   |
| 3.     |   | Report on Form 8-K,  dated August 9, 2001, filed with the Securities and Exchange Commission,  containing the script of a conference call discussing the acquisition of the  Empress Casino Joliet and updating financial guidance for the third quarter  and fiscal 2001, taking into account the acquisition. |
|        |        |                                                                                                                                                                                                                                                                                                                 |  |  |

 

**ARGOSYGAMING COMPANY**

**SIGNATURES**

 

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

 

 

 
| Date:  November 14, 2001 |   | /s/ Dale R.  Black                                                                                       |
|-------------------------------|--------|----------------------------------------------------------------------------------------------------------|
|                          |   |     Dale R.  Black     Senior Vice President-Chief  Financial Officer |