** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.,20549**

### ** **

**FORM 10-Q**

 
| **ý**                         | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------------------------------|----------------------------------------------------------------------------------------------------|
|                               |                                                                                               |
|                               | **For the quarterly period ended September 30, 2003.**                                        |
|                               |                                                                                               |
| **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)

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   Yes ýNo o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý   No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock asof the latest practicable date: 29,312,846 shares of Common Stock, $.01 par value per share, as ofNovember 11, 2003.

 

 

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, Except Share andPer Share Data)

 
|                                                                                                                                                                                 |   | **Sept 30,  2003** |       | **December 31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                 |   | **(unaudited)**    | ** ** |                        | ** ** |
| **Current assets:**                                                                                                                                                                  |   |               |       |                        |       |
| Cash and cash equivalents                                                                                                                                                            |   | $                  | 56,401     |                        | $          | 59,720 |   |
| Accounts receivable, net                                                                                                                                                             |   | 3,000              |       | 3,833                       |       |
| Income taxes receivable                                                                                                                                                              |   | —             |       | 7,944                       |       |
| Deferred income taxes                                                                                                                                                                |   | 9,124              |       | 7,324                       |       |
| Other current assets                                                                                                                                                                 |   | 8,272              |       | 5,433                       |       |
| Total current assets                                                                                                                                                                 |   | 76,797             |       | 84,254                      |       |
|                                                                                                                                                                                 |   |               |       |                        |       |
| **Net property and equipment**                                                                                                                                                       |   | 525,460            |       | 455,894                     |       |
| **Other assets:**                                                                                                                                                                    |   |               |       |                        |       |
| Deferred finance costs, net                                                                                                                                                          |   | 17,697             |       | 20,143                      |       |
| Goodwill, net                                                                                                                                                                        |   | 727,470            |       | 727,470                     |       |
| Intangible assets, net                                                                                                                                                               |   | 26,681             |       | 28,451                      |       |
| Other, net                                                                                                                                                                           |   | 2,335              |       | 2,353                       |       |
| Total other assets                                                                                                                                                                   |   | 774,183            |       | 778,417                     |       |
| **Total assets**                                                                                                                                                                     |   | $                  | 1,376,440  |                        | $          | 1,318,565 |   |
|                                                                                                                                                                                 |   |               |       |                        |       |
| **Current liabilities:**                                                                                                                                                             |   |               |       |                        |       |
| Accounts payable                                                                                                                                                                     |   | $                  | 34,197     |                        | $          | 17,459 |   |
| Accrued payroll and related expenses                                                                                                                                                 |   | 20,777             |       | 24,279                      |       |
| Accrued gaming and admission taxes                                                                                                                                                   |   | 48,000             |       | 36,996                      |       |
| Income taxes payable                                                                                                                                                                 |   | 4,727              |       | —                      |       |
| Other accrued liabilities                                                                                                                                                            |   | 44,235             |       | 32,299                      |       |
| Accrued interest                                                                                                                                                                     |   | 14,166             |       | 9,427                       |       |
| Current maturities of long-term debt                                                                                                                                                 |   | 4,602              |       | 4,469                       |       |
| Total current liabilities                                                                                                                                                            |   | 170,704            |       | 124,929                     |       |
|                                                                                                                                                                                 |   |               |       |                        |       |
| **Long-term debt**                                                                                                                                                                   |   | 845,712            |       | 886,315                     |       |
| **Deferred income taxes**                                                                                                                                                            |   | 71,208             |       | 55,073                      |       |
| **Other long-term obligations**                                                                                                                                                      |   | 422                |       | 6,248                       |       |
|                                                                                                                                                                                 |   |               |       |                        |       |
| **Stockholders’ equity:**                                                                                                                                                       |   |               |       |                        |       |
| Common stock, $.01 par; 120,000,000 shares  authorized; 29,283,896 and 28,946,229 shares issued and outstanding at  September 30, 2003 and December 31, 2002, respectively |   | 293                |       | 289                         |       |
| Capital in excess of par                                                                                                                                                             |   | 92,094             |       | 88,686                      |       |
| Accumulated other comprehensive (loss)                                                                                                                                               |   | (2,700             | )          | (3,583                      | )          |
| Retained earnings                                                                                                                                                                    |   | 198,707            |       | 160,608                     |       |
| Total stockholders’ equity                                                                                                                                                      |   | 288,394            |       | 246,000                     |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                  |   | $                  | 1,376,440  |                        | $          | 1,318,565 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

2

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, Except Share and Per ShareData)

 
|                                |   | **Nine  Months Ended** |    | **Three  Months Ended** |   |
|-------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                |   | **Sept 30,  2003**     |    | **Sept 30,  2002**      |   | **Sept 30,  2003** |   | **Sept 30,  2002** |   |
|                                |   | **(unaudited)**        |    | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **Revenues:**                       |   |                   |    |                    |   |   |   |   |   |
| Casino                              |   | $                      | 738,938 |                    | $      | 716,409 |   | $ | 245,928 |   | $ | 239,121 |   |
| Admissions                          |   | 10,761                 |    | 8,482                   |   | 4,594 |   | 3,068 |   |
| Food, beverage and other            |   | 74,023                 |    | 73,315                  |   | 24,270 |   | 24,422 |   |
|                                |   | 823,722                |    | 798,206                 |   | 274,792 |   | 266,611 |   |
| Less promotional allowances         |   | (96,107                | )       | (86,630                 | )      | (31,854 | ) | (30,111 | ) |
| Net revenues                        |   | 727,615                |    | 711,576                 |   | 242,938 |   | 236,500 |   |
|                                |   |                   |    |                    |   |   |   |   |   |
| **Costs and expenses:**             |   |                   |    |                    |   |   |   |   |   |
| Gaming and admission taxes          |   | 257,448                |    | 222,595                 |   | 82,125 |   | 72,571 |   |
| Casino                              |   | 99,873                 |    | 107,392                 |   | 32,499 |   | 35,328 |   |
| Selling, general and administrative |   | 112,682                |    | 99,688                  |   | 37,412 |   | 33,665 |   |
| Food, beverage and other            |   | 52,953                 |    | 54,905                  |   | 17,394 |   | 17,849 |   |
| Other operating expenses            |   | 31,305                 |    | 31,287                  |   | 10,420 |   | 10,331 |   |
| Depreciation and amortization       |   | 38,757                 |    | 35,038                  |   | 13,235 |   | 12,134 |   |
| Write-down of assets                |   | 6,500                  |    | —                  |   | — |   | — |   |
|                                |   | 599,518                |    | 550,905                 |   | 193,085 |   | 181,878 |   |
| Income from operations              |   | 128,097                |    | 160,671                 |   | 49,853 |   | 54,622 |   |
|                                |   |                   |    |                    |   |   |   |   |   |
| **Other income (expense):**         |   |                   |    |                    |   |   |   |   |   |
| Interest income                     |   | 106                    |    | 115                     |   | 20 |   | 13 |   |
| Interest expense                    |   | (56,990                | )       | (61,517                 | )      | (19,054 | ) | (20,170 | ) |
|                                |   | (56,884                | )       | (61,402                 | )      | (19,034 | ) | (20,157 | ) |
|                                |   |                   |    |                    |   |   |   |   |   |
| Income before income taxes          |   | 71,213                 |    | 99,269                  |   | 30,819 |   | 34,465 |   |
|                                |   |                   |    |                    |   |   |   |   |   |
| Income tax expense                  |   | (33,114                | )       | (44,175                 | )      | (14,330 | ) | (15,337 | ) |
|                                |   |                   |    |                    |   |   |   |   |   |
| **Net income**                      |   | $                      | 38,099  |                    | $      | 55,094 |   | $ | 16,489 |   | $ | 19,128 |   |
|                                |   |                   |    |                    |   |   |   |   |   |
| **Basic income per share**          |   | $                      | 1.31    |                    | $      | 1.91 |   | $ | 0.56 |   | $ | 0.66 |   |
|                                |   |                   |    |                    |   |   |   |   |   |
| **Diluted income per share**        |   | $                      | 1.30    |                    | $      | 1.87 |   | $ | 0.56 |   | $ | 0.65 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, Except Share and Per ShareData)

 
|                                                                               |   | **Nine  Months Ended** |   |
|------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                               |   | **Sept 30,  2003**     |   | **Sept 30,  2002** |   |
|                                                                               |   | **(unaudited)**        |   | **(unaudited)** |   |
| **Cash flows from operating activities:**                                          |   |                   |   |   |   |
| Net income                                                                         |   | $                      | 38,099 |   | $ | 55,094 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                   |   |   |   |
| Depreciation                                                                       |   | 36,987                 |   | 33,279 |   |
| Amortization                                                                       |   | 4,864                  |   | 4,774 |   |
| Loss on sale of fixed assets                                                       |   | 204                    |   | 428 |   |
| Compensation expense recognized on issuance  of stock                              |   | 126                    |   | — |   |
| Write-down of assets                                                               |   | 6,500                  |   | — |   |
| Deferred income taxes                                                              |   | 15,235                 |   | 16,126 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:     |   |                   |   |   |   |
| Accounts receivable and other current  assets                                      |   | 6,801                  |   | 3,824 |   |
| Accounts payable and other current  liabilities                                    |   | 22,797                 |   | 22,597 |   |
| Net cash provided by operating activities                                          |   | 131,613                |   | 136,122 |   |
|                                                                               |   |                   |   |   |   |
| **Cash flows from investing activities:**                                          |   |                   |   |   |   |
| Purchases of property and equipment                                                |   | (95,838                | )      | (37,734 | ) |
| Other                                                                              |   | 226                    |   | 68 |   |
| Net cash used in investing activities                                              |   | (95,612                | )      | (37,666 | ) |
|                                                                               |   |                   |   |   |   |
| **Cash flows from financing activities:**                                          |   |                   |   |   |   |
| Repayment of line of credit, net                                                   |   | (37,100                | )      | (96,400 | ) |
| Payments on long-term debt                                                         |   | (2,708                 | )      | (2,754 | ) |
| Proceeds from stock option and warrant  exercises                                  |   | 1,798                  |   | 744 |   |
| Increase in deferred finance costs                                                 |   | (1,310                 | )      | — |   |
| Other                                                                              |   | —                 |   | (29 | ) |
| Net cash used in financing activities                                              |   | (39,320                | )      | (98,439 | ) |
| Net change in cash and cash equivalents                                            |   | (3,319                 | )      | 17 |   |
| Cash and cash equivalents, beginning of  period                                    |   | 59,720                 |   | 57,221 |   |
| Cash and cash equivalents, end of period                                           |   | $                      | 56,401 |   | $ | 57,238 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

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

 
|                                                          |   | **Shares** |       | **Common  Stock** |       | **Capital in  Excess of Par** |       | **Accumulated  Other  Comprehensive  (Loss) Income** |       | **Retained  Earnings** |       | **Total  Stockholders’s  Equity** |       |
|---------------------------------------------------------------|--------|------------|------------|-------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|----------------------------------------|------------|
|                                                          |   |       | ** ** |              | ** ** |                          | ** ** |                                                 | ** ** |                   | ** ** |                                   | ** ** |
| Balance, December 31, 2002                               |   | 28,946,229 |       | $                 | 289        |                          | $          | 88,686                                               |       | $                      | (3,583     | )                                      | $          | 160,608 |   | $ | 246,000 |   |
| Exercise of stock options, including tax  benefit             |   | 246,227    |       | 3                 |       | 2,928                         |       |                                                 |       |                   |       | 2,931                                  |       |
| Exercise of warrants                                          |   | 91,440     |       | 1                 |       | 354                           |       |                                                 |       |                   |       | 355                                    |       |
| Restricted stock compensation expense                         |   |       |       |              |       | 126                           |       |                                                 |       |                   |       | 126                                    |       |
| Comprehensive income:                                         |   |       |       |              |       |                          |       |                                                 |       |                   |       |                                   |       |
| Other comprehensive income - interest rate  swaps             |   |       |       |              |       |                          |       | 883                                                  |       |                   |       | 883                                    |       |
| Net income for the nine months ended  September 30, 2003 |   |       |       |              |       |                          |       |                                                 |       | 38,099                 |       | 38,099                                 |       |
| Comprehensive income                                          |   |       |       |              |       |                          |       |                                                 |       |                   |       | 38,982                                 |       |
|                                                          |   |       |       |              |       |                          |       |                                                 |       |                   |       |                                   |       |
| Balance, September 30, 2003                              |   | 29,283,896 |       | $                 | 293        |                          | $          | 92,094                                               |       | $                      | (2,700     | )                                      | $          | 198,707 |   | $ | 288,394 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

5

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**ARGOSY GAMING COMPANY**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

(In Thousands, Except Share andPer Share Data)

 

**1.****     Basisof Presentation**

 

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

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Interim results may not necessarily be indicative of results that may beexpected 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 31,2002, included in our Annual Report on Form 10-K (File No. 1-11853).  The accompanying unaudited condensedconsolidated financial statements contain all adjustments, which are, in theopinion of management, necessary to present fairly the financial position andthe results of operations for the periods indicated.  Such adjustments include normal recurring accruals as well as awrite-down of assets and adjustments to record our gaming taxes at oureffective annual rate.  Certain 2002amounts have been reclassified to conform to the 2003 financial statementpresentation.

 

**2.****     Long-TermDebt**

 

Long-term debt consists of the following:

** **
|                                                                                                                                                      |   | **Sept 30,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------------|--------|
|                                                                                                                                                      |   | **(unaudited)**    |    |                        |   |
| Senior secured line of credit, expires  July 31, 2006, interest payable at least quarterly at either LIBOR or  prime plus a margin                   |   | $                  | 21,200  |                        | $      | 58,300 |   |
| Term loan, matures July 31, 2008,  principal and interest payments due quarterly at either LIBOR and/or prime  plus a margin                         |   | 268,813            |    | 270,875                     |   |
| Subordinated notes, including unamortized  premium of $6,855 at September 30, 2003, due June 1, 2009, interest  payable semi-annually at 10.75% |   | 356,855            |    | 357,517                     |   |
| Subordinated notes, due  September 2011, interest payable semi-annually at 9.0%                                                                      |   | 200,000            |    | 200,000                     |   |
| Notes payable, principal and interest  payments due quarterly through September 2015, discounted at 10.5%                                            |   | 3,446              |    | 4,092                       |   |
|                                                                                                                                                      |   | 850,314            |    | 890,784                     |   |
| Less:   current maturities                                                                                                                           |   | 4,602              |    | 4,469                       |   |
| Long-term debt, less current maturities                                                                                                                   |   | $                  | 845,712 |                        | $      | 886,315 |   |

 

On July 31, 2001, we enteredinto an amended and restated senior secured line of credit, maintaining ouravailable line of credit and adding a term loan (“credit facility”). AtSeptember 30, 2003, the line of credit allows for borrowings up to$375,000 and is subject to reductions on a quarterly basis.  During 2003, we entered into the first andsecond amendments to the credit facility which updated and modified certaincapital expenditure limitations, financial ratios and other items of the creditfacility while maintaining our available line of credit and term loan. Thecredit facility is secured by liens on substantially all of our assets and oursubsidiaries are co-borrowers. Substantially all of our subsidiaries fully and unconditionallyguarantee the subordinated notes on a joint and several basis.  The subordinated notes rank junior to all ofour senior indebtedness, including borrowings under the credit facility.

 

The subordinated notes and thecredit facility contain certain restrictions on the payment of dividends on ourcommon stock and the incurrence of additional indebtedness, as well as othercustomary debt covenants.  In addition,the credit facility requires us to maintain certain financial ratios which, asof September 30, 2003, are as follows: (1) Total Funded Debt to EBITDARatio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of a maximum of2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.50 to 1.0.  As of September 30, 2003, we are incompliance with these ratios.  AtSeptember 30, 2003, based upon these financial ratios, additional availabilityunder the credit facility was $113,981.

 

6

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**3.****    ****Stock-based Compensation**

 

In December 2002, the Financial Accounting Standards Board issuedFAS 148, “Accounting for Stock-Based Compensation – Transition andDisclosure”.  We have a stock-basedemployee compensation plan and a stock-based director compensation plan.  As we continue to follow APB 25 for stockoptions granted to employees and directors, no stock-based compensation cost isreflected in net income, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.  The effect on net incomeand earnings per share if we had applied the fair value recognition provisionsof FAS 123 to stock-based employee compensation would be a decrease in netincome of $194 and $581 and a decrease in diluted earnings per share of $0.01and $0.02 for the three months and nine months ended September 30, 2003,respectively.  For the three months andnine months ended September 30, 2002, net income would have decreased by$159 and $379 and diluted earnings per share would have decreased by $0.01 and$0.01, respectively.

 

**4.****    ****Earnings Per Share**

 

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

 
|                                                                                                   |   | **Nine  Months Ended** |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                                                                                   |   | **Sept 30,  2003**     |   | **Sept 30,  2002**      |   | **Sept 30,  2003** |   | **Sept 30,  2002** |   |
|                                                                                                   |   | **(unaudited)**        |   | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **Numerator:**                                                                                         |   |                   |   |                    |   |   |   |   |   |
| Numerator for basic and diluted earnings  per share -  Net income                                 |   | $                      | 38,099 |                    | $      | 55,094 |   | $ | 16,489 |   | $ | 19,128 |   |
|                                                                                                   |   |                   |   |                    |   |   |   |   |   |
| **Denominator:**                                                                                       |   |                   |   |                    |   |   |   |   |   |
| Denominator for basic earnings per share  -  weighted average shares outstanding                  |   | 29,095,635             |   | 28,858,816              |   | 29,230,951 |   | 28,895,142 |   |
|                                                                                                   |   |                   |   |                    |   |   |   |   |   |
| Effect of dilutive securities (computed  using the treasury stock method):                             |   |                   |   |                    |   |   |   |   |   |
| Employee and directors stock options and  warrants                                                     |   | 235,162                |   | 593,823                 |   | 184,284 |   | 505,873 |   |
| Restricted stock                                                                                       |   | 9,091                  |   | —                  |   | 12,807 |   | — |   |
| Dilutive potential common shares                                                                       |   | 244,253                |   | 593,823                 |   | 197,091 |   | 505,873 |   |
| Denominator for diluted earnings per share  - adjusted weighted-average shares and assumed conversions |   | 29,339,888             |   | 29,452,639              |   | 29,428,042 |   | 29,401,015 |   |
|                                                                                                   |   |                   |   |                    |   |   |   |   |   |
| Basic earnings per share                                                                               |   | $                      | 1.31   |                    | $      | 1.91 |   | $ | 0.56 |   | $ | 0.66 |   |
|                                                                                                   |   |                   |   |                    |   |   |   |   |   |
| Diluted earnings per share                                                                             |   | $                      | 1.30   |                    | $      | 1.87 |   | $ | 0.56 |   | $ | 0.65 |   |

 

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

 

For the three months ended September 30,2003, employee options to purchase 66,471 shares of common stock priced at arange from $25.72 - $35.18 per share and director options to purchase 12,000shares of common stock priced at a range from $35.18 - $39.99 per share, werenot included in the computation of diluted earnings per share because theoption exercise price was greater than the average market price of theunderlying common shares and, therefore, the effect would be anti-dilutive.

 

For the nine months and three months endedSeptember 30, 2002, employee options to purchase 69,492 shares of commonstock priced at $35.18 per share were not included in the computation ofdiluted earnings per share because the option exercise price was greater thanthe average market price of the underlying common shares and, therefore, theeffect would be anti-dilutive.

 

7

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In February 2003, we issued 25,000shares of restricted common stock to a new employee.  These shares will vest 50% in February 2004 and 50% inFebruary 2005.  Compensationexpense of $409 is being amortized over the vesting period.  In April 2003, under the Argosy GamingCompany Stock Option Plan, we issued 259,821 shares of non-qualified stock optionsto certain key employees.

 

**5.****     Commitmentsand Contingent Liabilities**

 

We are subject to, from time to time, variouslegal and regulatory proceedings in the ordinary course of our business.  We believe that current proceedings will nothave a material effect on our financial condition or the results of ouroperations.

 

**ARGOSY GAMING COMPANY**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**CautionaryStatements for Purposes of the “Safe Harbor” Provisions of the PrivateSecurities Litigation Reform Act of 1995**

 

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

 

**Overview**

 

We own and operate the Alton Belle Casino, inAlton, Illinois; the Empress Casino Joliet in Joliet, Illinois; the ArgosyCasino in Riverside, Missouri; the Argosy Casino in Baton Rouge, Louisiana; theArgosy Casino in Sioux City, Iowa; and the Argosy Casino in Lawrenceburg,Indiana.

 

In 2003, we continue to invest significantlyin our properties.  InFebruary 2003, we completed a $6 million renovation in Sioux City. Netrevenues increased 9.1% for the nine months ended September 30, 2003 overthe nine months ended September 30, 2002. In May 2003, we opened a$40 million barge-based facility in Joliet. Joliet net revenues wereessentially unchanged over the same period despite operating measures taken asdescribed below. We continue construction on our $105 million barge-based facilityin Riverside with a targeted opening of December 11, 2003.  We also continue to invest in the cashlessor “TITO” slot machines.  Approximatelyone third of our total slot machines are TITO operational with an additionalone third TITO-ready.  Pending regulatoryapproval, we expect all locations to be partially TITO operational by the endof 2003 and continued expansion of TITO in 2004.

 

Effective July 1, 2003, Illinois enactednew legislation increasing gaming and admission tax rates.  Following passage of this new legislation,we wrote down, in the second quarter 2003, $6.5 million in barge assetspreviously held for future development at our Joliet facility.  In addition, in an effort to minimize theimpact of these tax increases, our Joliet and Alton properties, inAugust 2003, implemented a reduction in hours of operation and revisionsto certain marketing programs and Joliet implemented an admission fee.  In June 2003, Indiana enactedlegislation resulting in a $5.9 million charge at our Indiana facility regardingthe calculation of the 2002 Indiana gaming tax rate increase.  Dockside gaming has continued to positivelyimpact our Lawrenceburg casino revenues. In Illinois, the increased taxes and dockside gaming in Indiana havecontinued to negatively impact our Illinois casinos.

 

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In 2002, many factors affected our casinos’operations.  Effective August 1,2002, our Lawrenceburg casino commenced dockside gaming.  This had a positive impact on casinorevenues in the last half of 2002. During the second quarter 2002, Illinois and Indiana enacted legislationincreasing gaming tax rates.  Also, inlate 2001 and 2002, three competitors made significant renovations, which,coupled with the increased gaming tax rates, have negatively impacted our Altonand Joliet, Illinois casino operations. In addition, dockside gaming in Indiana, effective August 2002,negatively impacted our Joliet, Illinois casino operations.

 

 

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**ARGOSY GAMING COMPANY AND SUBSIDIARIES**

**SELECTED FINANCIAL INFORMATION**

**CASINO AND NET REVENUES**

**(In Thousands)**

 
|                         |   | **Nine  Months Ended** |    | **Three  Months Ended** |   |
|------------------------------|--------|------------------------|---------|-------------------------|--------|
|                         |   | **Sept 30,  2003**     |    | **Sept 30,  2002**      |   | **Sept 30,  2003** |   | **Sept 30,  2002** |   |
|                         |   | **(unaudited)**        |    | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **Casino Revenues**          |   |                   |    |                    |   |   |   |   |   |
| Alton Belle Casino           |   | $                      | 85,364  |                    | $      | 91,025 |   | $ | 26,778 |   | $ | 29,718 |   |
| Argosy Casino - Riverside    |   | 71,569                 |    | 75,296                  |   | 23,453 |   | 24,665 |   |
| Argosy Casino - Baton Rouge  |   | 60,598                 |    | 57,783                  |   | 20,109 |   | 18,147 |   |
| Argosy Casino - Sioux City   |   | 31,684                 |    | 29,055                  |   | 10,515 |   | 9,779 |   |
| Argosy Casino - Lawrenceburg |   | 307,014                |    | 280,860                 |   | 106,817 |   | 98,878 |   |
| Empress Casino Joliet        |   | 182,709                |    | 182,390                 |   | 58,256 |   | 57,934 |   |
| Total                        |   | $                      | 738,938 |                    | $      | 716,409 |   | $ | 245,928 |   | $ | 239,121 |   |
|                         |   |                   |    |                    |   |   |   |   |   |
| **Net Revenues**             |   |                   |    |                    |   |   |   |   |   |
| Alton Belle Casino           |   | $                      | 81,718  |                    | $      | 87,673 |   | $ | 25,583 |   | $ | 28,539 |   |
| Argosy Casino - Riverside    |   | 68,738                 |    | 72,304                  |   | 22,724 |   | 23,665 |   |
| Argosy Casino - Baton Rouge  |   | 62,160                 |    | 59,001                  |   | 20,358 |   | 18,324 |   |
| Argosy Casino - Sioux City   |   | 30,765                 |    | 28,208                  |   | 10,190 |   | 9,420 |   |
| Argosy Casino - Lawrenceburg |   | 310,228                |    | 285,957                 |   | 107,805 |   | 100,364 |   |
| Empress Casino Joliet        |   | 174,006                |    | 178,433                 |   | 56,278 |   | 56,188 |   |
| Total                        |   | $                      | 727,615 |                    | $      | 711,576 |   | $ | 242,938 |   | $ | 236,500 |   |

 

 

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**ARGOSY GAMING COMPANY AND SUBSIDIARIES**

**SELECTED FINANCIAL INFORMATION**

**RECONCILIATION OF INCOME FROM OPERATIONS TOEBITDA**

**(In Thousands)**

 
|                                      |   | **Nine  Months Ended** |    | **Three  Months Ended** |   |
|-------------------------------------------|--------|------------------------|---------|-------------------------|--------|
|                                      |   | **Sept 30,  2003**     |    | **Sept 30,  2002**      |   | **Sept 30,  2003** |   | **Sept 30,  2002** |   |
|                                      |   | **(unaudited)**        |    | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **Income (loss) from Operations**         |   |                   |    |                    |   |   |   |   |   |
| Alton Belle Casino                        |   | $                      | 13,027  |                    | $      | 22,189 |   | $ | 3,694 |   | $ | 6,469 |   |
| Argosy Casino - Riverside                 |   | 11,216                 |    | 16,075                  |   | 3,814 |   | 5,168 |   |
| Argosy Casino - Baton Rouge (1)           |   | 4,215                  |    | 5,205                   |   | 1,226 |   | 693 |   |
| Argosy Casino - Sioux City                |   | 5,338                  |    | 4,860                   |   | 1,748 |   | 1,295 |   |
| Argosy Casino - Lawrenceburg              |   | 82,733                 |    | 85,077                  |   | 32,302 |   | 32,222 |   |
| Empress Casino Joliet (2)                 |   | 29,020                 |    | 42,398                  |   | 12,802 |   | 13,829 |   |
| Corporate                                 |   | (17,452                | )       | (15,133                 | )      | (5,733 | ) | (5,054 | ) |
| Total                                     |   | $                      | 128,097 |                    | $      | 160,671 |   | $ | 49,853 |   | $ | 54,622 |   |
|                                      |   |                   |    |                    |   |   |   |   |   |
| **Depreciation and Amortization Expense** |   |                   |    |                    |   |   |   |   |   |
| Alton Belle Casino                        |   | $                      | 5,009   |                    | $      | 4,891 |   | $ | 1,598 |   | $ | 1,644 |   |
| Argosy Casino - Riverside                 |   | 4,297                  |    | 3,215                   |   | 1,479 |   | 1,086 |   |
| Argosy Casino - Baton Rouge (1)           |   | 6,514                  |    | 6,005                   |   | 2,282 |   | 2,059 |   |
| Argosy Casino - Sioux City                |   | 3,306                  |    | 2,658                   |   | 1,119 |   | 1,092 |   |
| Argosy Casino - Lawrenceburg              |   | 9,710                  |    | 10,098                  |   | 3,216 |   | 3,354 |   |
| Empress Casino Joliet                     |   | 8,319                  |    | 7,264                   |   | 2,986 |   | 2,441 |   |
| Corporate                                 |   | 1,602                  |    | 907                     |   | 555 |   | 458 |   |
| Total                                     |   | $                      | 38,757  |                    | $      | 35,038 |   | $ | 13,235 |   | $ | 12,134 |   |
|                                      |   |                   |    |                    |   |   |   |   |   |
| **EBITDA(3)**                             |   |                   |    |                    |   |   |   |   |   |
| Alton Belle Casino                        |   | $                      | 18,036  |                    | $      | 27,080 |   | $ | 5,292 |   | $ | 8,113 |   |
| Argosy Casino - Riverside                 |   | 15,513                 |    | 19,290                  |   | 5,293 |   | 6,254 |   |
| Argosy Casino - Baton Rouge (1)           |   | 10,729                 |    | 11,210                  |   | 3,508 |   | 2,752 |   |
| Argosy Casino - Sioux City                |   | 8,644                  |    | 7,518                   |   | 2,867 |   | 2,387 |   |
| Argosy Casino - Lawrenceburg              |   | 92,443                 |    | 95,175                  |   | 35,518 |   | 35,576 |   |
| Empress Casino Joliet (2)                 |   | 37,339                 |    | 49,662                  |   | 15,788 |   | 16,270 |   |
| Corporate                                 |   | (15,850                | )       | (14,226                 | )      | (5,178 | ) | (4,596 | ) |
| Total                                     |   | $                      | 166,854 |                    | $      | 195,709 |   | $ | 63,088 |   | $ | 66,756 |   |

 

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(1)       Baton Rouge includes ourCentroplex Centre Hotel and Jazz Enterprises, Inc., a wholly owned subsidiarythat owns and operates the Catfish Town real estate development adjacent to ourBaton Rouge casino.

 

(2)       Joliet includes a $6.5million write down of assets (recorded in the second quarter 2003) related tothe original planned expansion.

 

(3)       “EBITDA” is defined asearnings before interest, taxes, depreciation and amortization.  EBITDA is presented solely as a supplementaldisclosure because management believes it is 1) a widely used measure ofoperating performance in the gaming industry, and 2) a principal basis forvaluation of gaming companies. Management uses property-level EBITDA (EBITDA before corporate expense)as the primary measure of our properties’ performance, including the evaluationof operating personnel.  EBITDA shouldnot be construed as an alternative to operating income, as an indicator of ouroperating performance, or as an alternative to cash flows from operatingactivities, as a measure of liquidity, or as any other measure determined inaccordance with generally accepted accounting principles.  We have significant uses of cash flows,including capital expenditures, interest payments, taxes and debt principalrepayments, which are not reflected in EBITDA. We believe the performance of our operating units is more appropriatelymeasured before these expenses, since the allocation of our capital is decidedby corporate management and is subject to the approval of the board ofdirectors.  In addition, we manage cashand finance our operations at the

 

 

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consolidated level and we file a consolidated incometax return.  We do not consider EBITDAin isolation.  Our calculation of EBITDAmay not be comparable to similarly titled measures reported by other companies.

 

**Ninemonths ended September 30, 2003 compared to nine months ended September 30,2002**

 

*Casino Revenues –*Casino revenues for the ninemonths ended September 30, 2003, increased $22.5 million, or 3.1% to$738.9 million from $716.4 million for the nine months ended September 30,2002.  Components of this increase areas follows:  Lawrenceburg casinorevenues increased $26.2 million, or 9.3%, to $307.0 million from $280.8million reflecting the commencement of dockside gaming effective August 1,2002 and revisions to our marketing programs. Joliet casino revenues were up slightly to $182.7 million from $182.4million.  Joliet’s casino revenuesincreased with our new barge-based facility opening in May 2003, but hadbeen negatively affected previously due to facility renovations by twocompetitors and the commencement of dockside gaming in Indiana and have alsobeen decreasing since the implementation of reduced hours of operations, theimplementation of an admission fee and changes in marketing efforts commencingin August 2003 in response to Illinois tax legislation increasing gamingand admission tax rates effective July 2003.  Sioux City casino revenues increased $2.6 million, or 9.0%, to$31.7 million from $29.1 million while Baton Rouge casino revenues increased$2.8 million, or 4.9%, to $60.6 million from $57.8 million.  Both properties underwent renovations withinthe last year, Sioux City in the first quarter 2003 and Baton Rouge in thethird quarter 2002, which have positively impacted these properties.  Alton’s casino revenues decreased $5.6million, or 6.2%, to $85.4 million compared to $91.0 million as increasedcompetitive pressures and the implementation of reduced hours commencing inAugust 2003 in response to Illinois tax legislation have negativelyimpacted our results.  Riverside’scasino revenues decreased $3.7 million, or 4.9%, to $71.6 million from $75.3million due primarily to construction disruption related to our ongoingrenovation.

 

*Admissions –* Admissions revenues (net ofcomplimentary admissions) increased to $2.0 million for the nine months endedSeptember 30, 2003, from $1.4 million for the nine months endedSeptember 30, 2002, due to an increase in the number of admissions atLawrenceburg following the commencement of dockside gaming effectiveAugust 1, 2002 and to our Joliet casino now charging admission (as aresult of increased gaming and admission tax rates legislated by the state ofIllinois effective July 2003) commencing in August 2003.

 

*Food, Beverage and Other* – Food, beverage andother revenues increased by $0.7 million to $74.0 million for the nine monthsended September 30, 2003 compared to $73.3 million for the nine monthsended September 30, 2002.  Food,beverage and other net profit increased $2.7 million to $21.1 million for thenine months ended September 30, 2003, from $18.4 million for the ninemonths ended September 30, 2002. Joliet’s food, beverage and other net profit increased $2.0 million andLawrenceburg had an increase of $0.3 million.

 

*Promotional Allowances* – Promotionalallowances for the nine months ended September 30, 2003, were $96.1million compared to $86.6 million for the nine months ended September 30,2002, an increase of $9.5 million or 11.0%. The majority of this increase, $5.7 million, is at our Joliet facility.  We increased our promotional spending at ourJoliet facility in anticipation of the opening of our new barge-based casino inMay 2003 as well as in reaction to increased competitive pressures in thefirst part of the year.  Jolietcomplimentary admissions also increased as, beginning in August 2003,Joliet commenced charging an admission fee following gaming and admission taxrate increases enacted by the Illinois legislature effective July 1, 2003.Lawrenceburg’s promotional allowances increased $3.8 million across all linesof complimentary programs due to changes in marketing programs and overallincreases in casino revenues.

 

*Gaming and Admission Taxes –* Gaming andadmission taxes increased $34.8 million to $257.4 million for the nine monthsended September 30, 2003 from $222.6 million for the nine months endedSeptember 30, 2002.  An increase inthe Illinois tax rates effective July 1, 2003 and the full year impact ofrate increases effective July 1, 2002 increased our annual effective taxrates at both our Illinois casinos. Although casino revenues were down $5.6 million at Alton and increasedslightly at Joliet for the nine months ended September 30, 2003 comparedto the nine months ended September 30, 2002, gaming and admission taxesincreased a combined $11.6 million at these properties due to the increased taxrates in Illinois.  The remainingportion of this increase is due primarily to increased gaming and admissiontaxes of $23.6 million at our Lawrenceburg casino.  This includes a $5.9 million charge due to new legislation inJune 2003 amending the calculation of the 2002 increase in Indiana gamingtaxes. The remaining increase in gaming taxes at Lawrenceburg is due to anincrease in the gaming tax rates and increased casino revenues.

 

*Casino Expenses –*Casino expenses decreased$7.5 million to $99.9 million for the nine months ended September 30,2003, from $107.4 million for the nine months ended September 30,2002.  This decrease is due primarily toJoliet where we have reduced payroll and other casino operating expenses.

 

 

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*Selling, General and*Administrative*–*Selling, general and administrative expenses increased $13.0 million to $112.7million for the nine months ended September 30, 2003, from $99.7 millionfor the nine months ended September 30, 2002.  The factors contributing to this increase are primarily a $3.4million increase in city development fees at Lawrenceburg corresponding to theincrease in revenues related to the commencement of dockside gaming effectiveAugust 1, 2002, a $2.7 million increase in advertising and promotionsexpense at Joliet to promote the opening in May 2003 of our newbarge-based facility as well as in reaction to increased competitive pressuresin the first half of the year and an additional $0.7 million of expensesrelated to our development department at our corporate office.  The remaining increase is spread throughoutour other properties.

 

*Other Operating Expenses –* Other operatingexpenses remained constant at $31.3 million for both the nine months ended September 30,2003 and the nine months ended September 30, 2002.

 

*Depreciation and Amortization –* Depreciationand amortization increased $3.8 million from $35.0 million for the nine monthsended September 30, 2002, to $38.8 million for the nine months ended September 30,2003.  This increase is primarily due toaccelerated depreciation on planned asset retirements, depreciation for our newdata warehouse placed in service during the third quarter 2002 and depreciationon project capital placed in service during 2003 at our Sioux City and Jolietfacilities.

 

*Write-down of Assets –* As a result of theincreased gaming and admission tax rates enacted by the State of Illinois,which were effective July 1, 2003, we have decided not to further developadditional barge platforms under construction for our expansion projectinitially planned at our Joliet facility. Therefore, during the nine months ended September 30, 2003, werecorded a $6.5 million write-down of these barge platforms to their estimatednet realizable value.

 

*Interest Expense –* Net interest expensedecreased $4.5 million to $56.9 million for the nine months endedSeptember 30, 2003, from $61.4 million for the nine months endedSeptember 30, 2002.  This decreaseis primarily attributable to reduced borrowings on our revolving line of creditdue to debt repayments with free cash flow and lower interest rates on ourvariable debt.  We capitalized $2.3million of interest related to our casino construction projects for the ninemonths ended September 30, 2003 compared to $0.6 million for the ninemonths ended September 30, 2002.

 

*Income Tax Expense –*Income tax expensedecreased by $11.1 million to $33.1 million for the nine months endedSeptember 30, 2003, from $44.2 million for the nine months ended September 30,2002, due to reduced pre-tax earnings offset by an increase in our effectivetax rate from 44.5% for the nine months ended September 30, 2002 to 46.5%for the nine months ended September 30, 2003.  This increase in our overall effective income tax rate isprimarily due to the impact on our estimated annual income tax expense ofgaming tax legislation enacted by Illinois and Indiana duringJune 2003.  Our net incomedecreased approximately $0.05 per diluted share due to the change in theeffective income tax rate.

 

*Net Income –*Net income was $38.1 million forthe nine months ended September 30, 2003, compared to $55.1 million forthe nine months ended September 30, 2002, due primarily to the factorsdiscussed above.

 

**Threemonths ended September 30, 2003 compared to three months endedSeptember 30, 2002**

 

*Casino Revenues –*Casino revenues for thethree months ended September 30, 2003, increased $6.8 million, or 2.8% to$245.9 million from $239.1 million for the three months endedSeptember 30, 2002.  Components ofthis increase are as follows: Lawrenceburg casino revenues increased $7.9 million, or 8.0%, to $106.8million from $98.9 million, reflecting the commencement of dockside gamingeffective August 1, 2002 and revisions to certain marketing programs.  Joliet remained relatively constant at $58.3million compared to $57.9 million. Joliet completed its first full quarter of operations from its newbarge-based casino, which has positively impacted our third quarter casinorevenues.  This positive impact has beenoffset by actions taken, commencing in August 2003, following the increasein Illinois tax rates in July 2003, such as: a reduction in operatinghours, the implementation of an admission fee and changes in marketing efforts.  Baton Rouge casino revenues increased $2.0million, or 10.8%, to $20.1 million from $18.1 million due primarily to theconstruction disruption during the third quarter 2002.  Sioux City casino revenues increased $0.7million, or 7.5%, to $10.5 million from $9.8 million as the renovationscompleted during the first quarter 2003 continue to return positiveresults.  Alton recorded casino revenuesof $26.8 million compared to $29.7 million, a $2.9 million or 9.9% decrease, asAlton has been negatively impacted by increased competitive pressures fromother operators in the market and a reduction in hours of operation, commencingAugust 2003, following the Illinois tax rate increase inJuly 2003.  Riverside casinorevenues decreased $1.2 million or 4.9% to $23.5 million from $24.7 million asa result of construction disruption related to our ongoing renovation.

 

 

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*Admissions* – Admissions revenues (net ofcomplimentary admissions) increased $0.5 million for the three months endedSeptember 30, 2003 to $1.0 million compared to $0.5 million for the threemonths ended September 30, 2002. This increase is due entirely to our Joliet facility charging anadmission fee commencing in August 2003 following increases in theIllinois gaming and admission tax rates effective July 2003.

 

*Food, Beverage and Other* – Food, beverage andother revenues remained relatively constant at $24.3 million for the threemonths ended September 30, 2003 compared to $24.4 million for the threemonths ended September 30, 2002. Food, beverage and other net profit increased $0.3 million to $6.9million for the three months ended September 30, 2003, from $6.6 millionfor the three months ended September 30, 2002.

 

*Promotional Allowances* – Promotionalallowances for the three months ended September 30, 2003, were $31.9million compared to $30.1 million for the three months ended September 30,2002, an increase of $1.8 million or 6.0%. The majority of this increase occurred at our Lawrenceburg and Jolietfacilities ($1.0 million and $0.7 million, respectively).  The increase in promotional allowances atLawrenceburg is a result of our overall increase in casino revenues and certainchanges in our marketing programs.  AtJoliet, we increased our promotional spending in connection with the opening ofour new barge-based casino in May 2003 and we increased our complimentaryadmissions as we implemented an admission fee, beginning in August 2003,following gaming and admission tax rate increases enacted in Illinois effectiveJuly 1, 2003.

 

*Gaming and Admission Taxes –* Gaming andadmission taxes increased $9.5 million to $82.1 million for the three monthsended September 30, 2003 from $72.6 million for the three months endedSeptember 30, 2002.  An increase inthe Illinois gaming and admission tax rates effective July 1, 2003increased our annual effective tax rates in both our Illinois casinos.  Our two Illinois casinos’ gaming andadmission taxes increased a combined $2.6 million ($0.5 million at Alton and$2.1 million at Joliet) primarily due to the rate increases, as casino revenuesat Alton decreased $2.9 million and Joliet’s increased by $0.3 million.  Lawrenceburg’s gaming and admission taxesincreased $6.7 million due primarily to increased gaming tax rates.

 

*Casino Expenses*–**Casino expenses decreased$2.8 million to $32.5 million for the three months ended September 30,2003, from $35.3 million for the three months ended September 30,2002.  The majority of this decrease isat Joliet, $1.9 million, where we have reduced payroll and other casinooperating expenses.

 

*Selling, General and Administrative*– Selling, general and administrative expensesincreased $3.7 million to $37.4 million for the three months endedSeptember 30, 2003, from $33.7 million for the three months endedSeptember 30, 2002, due primarily to a $1.1 million increase in citydevelopment fees at Lawrenceburg due to the increase in revenues related to thecommencement of dockside gaming effective August 1, 2002, increasedadvertising and promotions expense of $1.0 million at Joliet related to theopening of our barge-based facility and additional expenses of $0.3 million inour development department at our corporate office.  The remaining increase is spread throughout our other properties.

 

*Other Operating Expenses*–**Other operating expensesremained relatively constant at $10.4 million for the three months endedSeptember 30, 2003 and $10.3 million for the three months endedSeptember 30, 2002.

 

*Depreciation and Amortization*–**Depreciationand amortization increased $1.1 million from $12.1 million for the three monthsended September 30, 2002, to $13.2 million for the three months endedSeptember 30, 2003.  This increaseis due primarily to accelerated depreciation on planned asset retirements anddepreciation on project capital placed in service during 2003 at our Jolietfacility.

 

*Interest Expense*– Net interest expensedecreased $1.2 million to $19.0 million for the three months endedSeptember 30, 2003, from $20.2 million for the three months ended September 30,2002.  This decrease is primarilyattributable to reduced borrowings on our revolving line of credit due to debtrepayments with free cash flow.  Wecapitalized $0.7 million of interest related to our casino constructionprojects for the three months ended September 30, 2003 compared to $0.3million for the three months ended September 30, 2002.

 

*Income Tax Expense –*Income tax expensedecreased by $1.0 million to $14.3 million for the three months endedSeptember 30, 2003, from $15.3 million for the three months endedSeptember 30, 2002, due to reduced pre-tax earnings offset by an increasein our effective tax rate from 44.5% for the three months endedSeptember 30, 2002 to 46.5% for the three months ended September 30,2003 due to the impact on our estimated annual income tax expense of gaming taxlegislation enacted in Indiana and Illinois. Our net income decreased approximately $0.02 per diluted share due tothe change in the effective income tax rate.

 

 

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*Net Income –*Net income was $16.5 million forthe three months ended September 30, 2003, compared to $19.1 million forthe three months ended September 30, 2002, due primarily to the factorsdiscussed above.

 

**Competition**

 

Our Alton Casino faces competition from fourother riverboat casino operators in the St. Louis area.  One of these competitors completed a majorcasino and facility renovation in early August 2002.  Another competitor plans to open a $75million hotel expansion mid-to-late 2004. Our Riverside Casino faces competition from three barge-based casinos inthe Kansas City area.  Our Baton RougeCasino faces competition from one casino located in downtown Baton Rouge, anearby Native American casino and multiple casinos throughout Louisiana. Weface competition in Sioux City, Iowa from video gaming devices in nearby SouthDakota, from two land-based Native American casinos and, to a lesser extent,from slot machines at a pari-mutuel racetrack in Council Bluffs, Iowa and fromtwo riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraska market.  The Lawrenceburg casino faces competitionfrom two riverboat casinos in the Cincinnati market.  Our Joliet casino faces competition from eight other riverboatcasino operators in the Chicago area. One of these competitors has opened a major expansion project within thelast twelve months.  Additionally, fourcompetitors in Indiana were allowed to begin dockside gaming inAugust 2002.

 

There could be further unanticipatedcompetition in any market in which we operate as a result of legislativechanges or other events.  For instance,several states have discussed adopting or expanding gaming in various forms,which could cause increased competition in our markets.  We expect each market, in which weparticipate, both current and prospective, to be highly competitive.

 

**Liquidityand Capital Resources**

 

In the nine months ended September 30,2003, we generated cash flows from operating activities of $131.6 millioncompared to $136.1 million for the nine months ended September 30,2002.  This decrease is due to anoverall reduction in net income primarily due to increased gaming and admissiontaxes offset by increases from working capital.

 

In the nine months endedSeptember 30, 2003, we used cash flows for investing activities of $95.6million compared to $37.7 million for the nine months ended September 30,2002.  During the nine months endedSeptember 30, 2003, our investing activities included purchases ofproperty and equipment of $95.8 million, a $58.1 million increase over propertyand equipment purchases for the nine months ended September 30, 2002.  This increase is due primarily toconstruction and expansion projects at our Riverside, Joliet and Sioux Cityfacilities.

 

During the nine months endedSeptember 30, 2003, we used cash flows of $39.3 million for financingactivities compared to using $98.4 million for the nine months endedSeptember 30, 2002.  For the ninemonths ended September 30, 2003 and September 30, 2002, we used $37.1million and $96.4 million, respectively, for repayments on our line ofcredit.  Additionally, for the ninemonths ended September 30, 2003, we used $1.3 million for deferredfinancing fees related to the amendment to our credit agreement.

 

At September 30, 2003, we hadapproximately $56.4 million of cash and cash equivalents. At September 30,2003, $290.0 million was outstanding on our senior secured credit facility($21.2 million on our revolving credit facility and $268.8 million on our termloan) and $556.9 million of subordinated notes (due in June 2009 andSeptember 2011), including $6.9 million of unamortized premium.  As of September 30, 2003, we hadoutstanding letters of credit of $7.5 million and additional availability underthe credit facility was approximately $114.0 million.  We have no off-balance sheet debt.

 

During October 2001, weeffectively fixed the interest rate on approximately $200.0 million of our termloan through three interest rate swap agreements expiring on September 30,2004.  For each swap agreement, we agreeto receive a floating rate of interest on the notional principal amount basedupon a three month LIBOR rate (plus a 2.75% spread) in exchange for fixed ratesranging from 6.19% to 6.27%.  As ofSeptember 30, 2003, the notional principal amounts were $198.3million.  These notional amounts do notrepresent amounts exchanged by the parties and, thus, are not a measure of ourexposure to credit loss.  In accordancewith SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,”we recorded, as of September 30, 2003, the fair value of these interestrate swap agreements in the consolidated balance sheet in other currentobligations ($4.5 million pretax) and the related change in fair value of theseagreements is deferred in stockholders’ equity as a component of accumulatedother comprehensive income ($2.7 million, net of a current deferred tax assetof $1.8 million).  These swap agreementsand their related deferred tax benefits have been reclassified from long-term ina previous balance sheet to current to reflect their maturity on September 30,2004.

 

 

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During 2003, we entered into thefirst and second amendments to our second amended and restated credit agreementdated July 31, 2001.  Theseamendments modified certain capital expenditure limitations and financialratios while maintaining our available line of credit and our term loan.  The subordinated notes and the creditfacility contain certain restrictions on the payment of dividends on our commonstock and the occurrence of additional indebtedness, as well as other customarydebt covenants.  In addition, the creditfacility requires us to maintain certain financial ratios as ofSeptember 30, 2003, as follows:  (1)Total Funded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) SeniorLeverage Ratio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of aminimum of 1.50 to 1.0.  As ofSeptember 30, 2003, we are in compliance with these ratios.

 

During May 2003, we announcedBoard of Directors approval of a stock repurchase program authorizing us torepurchase up to $30.0 million of our common stock.  The repurchases can be made at management’s discretion withoutprior notice from time to time in the open market or through privatelynegotiated third party transactions in compliance with applicable laws anddepending on market conditions.  As ofNovember 11, 2003, we have made no stock repurchases under this program.

 

We have made a significantinvestment in property and equipment and plan to make additional investments atour existing properties.  As ofSeptember 30, 2003, construction continues on the major expansion projectat our Riverside property.  Our SiouxCity renovation was completed in February 2003 and our new barge-basedcasino in Joliet was completed and opened in May 2003.  During the remainder of 2003, we expect tospend approximately $40 million to $50 million in capital expenditures, themajority of which will be to complete our Riverside project and also continuingimplementation of our cashless (“TITO”) slot product.  We plan on opening our Riverside barge facility inDecember 2003.  We expect to fundthese expenditures from internally generated cash and availability under ourcredit facility.

 

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 fund capital expenditures or pay down debt underour revolving credit facility and pay our current liabilities pursuant to theirnormal cycles.  Given the significantdaily cash flows generated by our operations and the financial flexibilityprovided by our credit facility, the existence of a working capital deficit hasno impact on our ability to operate our business or meet our obligations asthey become due.  We believe that cashon hand, operating cash flows, and funds available under our credit facilitywill be sufficient to fund our current operating, capital expenditure and debtservice obligations for the next 12 months.

 

Our long-term debt, as of September 30, 2003,matures as follows:

 
| One year and less |   | $       | 4,602   |   |
|-------------------|--------|---------|---------|--------|
| 1 - 3 years       |   | 29,879  |    |
| 4 - 5 years       |   | 263,683 |    |
| After 5 years     |   | 552,150 |    |
| Total             |   | $       | 850,314 |   |

 

# **Critical Accounting Estimates**

# ** **

Our consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, which requires our management to make estimatesand assumptions about the effects of matters that are inherentlyuncertain.  Of our accounting policies,we believe the following may involve a higher degree of judgment andcomplexity.

 

*Goodwill –*We have approximately $727 millionof goodwill recorded on our balance sheet at September 30, 2003, relatedto acquisitions.  We regularly evaluateour acquired businesses for potential impairment indicators.  Additionally, we adopted the provisions ofSFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002,that requires us to perform impairment testing at least annually.  Our judgments regarding the existence ofimpairment indicators are based on, among other things, the regulatory andcompetitive status and operational performance of each of our acquiredbusinesses.  Future events couldsignificantly impact our judgments and any resulting impairment loss could havea material adverse impact on our financial condition and results of operations.

 

*Property and Equipment –*Our operations arecapital intensive and we have made significant capital investments in each ofour properties.  At September 30,2003, we have approximately $525 million of net property and equipment recorded

 

 

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on our balance sheet.  We depreciate our assets on a straight-linebasis over their estimated useful lives. The estimates of the useful lives are based on the nature of the assetsas well as our current operating strategy. Future events, such as property expansions, new competition and newregulations, could result in a change in the manner in which we are usingcertain assets requiring a change in the estimated useful lives of suchassets.  In assessing the recoverabilityof the carrying value of property and equipment, we must make assumptionsregarding estimated future cash flows and other factors.  If these estimates or the relatedassumptions change in the future, we may be required to record impairmentcharges for these assets.

 

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

 

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

 

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

 

We have received proposed assessments fromthe Indiana Department of Revenue (“IDR”) in connection with our Indiana incometax returns for the years 1997 through 2001. Those assessments are based on the IDR’s position that state gamingtaxes are based on gaming revenues and are not deductible for Indiana incometax purposes.  We have filed a formalprotest of the proposed assessment with the IDR.  Additionally, another company and the IDR have litigated thismatter in Indiana Tax Court during 2001. The court has yet to issue an opinion in this case.  At September 30, 2003, we have accruedapproximately $14.1 million, net of federal tax benefit, for the proposed IDRassessments including amounts for additional pending assessments for the years2002 and 2003.  We continue to reviewthe facts and circumstances leading to our determination of the probability theIDR will prevail in their proposed assessments.  Should our evaluation of the IDR prevailing in their positionchange, we could discontinue accrual for future income taxes based upon the IDRposition and could reverse the current accrual of approximately $14.1 million.

 

**Controlsand Procedures**

 

(a)**          ***Evaluation of disclosure controls and procedures:*

 

We maintain disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules and forms,and that such information is accumulated and communicated to our managementincluding our President and Chief Executive Officer and Senior Vice Presidentand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

As of the end of the period coveredby this Report, September 30, 2003, (the “Evaluation Date”), we carriedout an evaluation, under the supervision and with the participation of theCompany’s management, including  Richard J. Glasier, our President andChief Executive Officer and Dale R. Black, our Senior Vice President and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures. Based upon that evaluation, the President and Chief Executive Officerand the Senior Vice President and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the Evaluation Date.

 

 

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(b)**  ***Changes in internalcontrols:*

 

There was no change in the Company’s internalcontrols during the period covered by this Report that could materially affect,or could reasonably be expected to materially affect, the Company’s internalcontrol over financial reporting.

 

**ARGOSY GAMING COMPANY**

**OTHER INFORMATION**

 

**PARTII.****                Other Information**

 

Item 1.    *LegalProceedings –*

 

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

 

Item 2.    *Changes inSecurities and Use of Proceeds*–**None

 

Item 3.    *DefaultsUpon Senior Securities –* None

 

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

 

Item 5.    *OtherInformation –*None

 

Item 6.    *Exhibits andReports on Form 8-K*

 

(a)           *Exhibits*

 
| Exhibit 10   |   | Second Amendment to the Second Amended and Restated  Credit Agreement dated September 26, 2003                                |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                               |
| Exhibit 31.1 |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                      |
| Exhibit 31.2 |   | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                      |
| Exhibit 32.1 |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

(b)           *Reports on Form 8-K*

 

Report on Form 8-K dated July 30, 2003,filed with the Securities and Exchange Commission, furnishing the press releasedated July 30, 2003, announcing the Company’s second quarter operatingresults for the three and six months ended June 30, 2003.

 

 

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**ARGOSY GAMING COMPANY**

**SIGNATURES**

 

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

 
|                                     | Argosy Gaming Company                            |   |
|------------------------------------------|--------------------------------------------------|--------|
|                                     | Registrant                                       |   |
|                                     |                                             |
| Date:   November 12, 2003 | /s/ Dale R.  Black                               |   |
|                                     | Dale R. Black                                    |
|                                     | Senior Vice President - Chief Financial  Officer |
|                                          |                                                  |        |  |

 

 

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