**UNITEDSTATES**

**SECURITIESAND 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, 2002.**                                       |
|                                |                                                                                          |
| **or**                              |
|                                |
| **o**                               | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                |                                                                                          |
| **Commission  File Number 1-11853** |

 

| **ARGOSY  GAMING COMPANY**                                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as Specified in its Charter)                                                                       |
|                                                                                                                         |   |   |
| 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 by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     Yes ý    No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

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

 

 

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, ExceptShare and Per Share Data)

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

 

See accompanying notes tocondensed consolidated financial statements.

 

1

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, ExceptShare and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

2

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, ExceptShare and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, ExceptShare and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

(Unaudited - InThousands, Except Share and Per Share Data)

 

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ARGOSY GAMING COMPANY**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

(In Thousands,Except Share and Per Share Data)

 

**1.   Basis of Presentation**

 

Argosy Gaming Company provides casino-style gaming and relatedentertainment to the public and, through our subsidiaries, operates casinos inAlton and Joliet, Illinois; Lawrenceburg, Indiana; Riverside, Missouri; BatonRouge, Louisiana; and Sioux City, Iowa. Except where otherwise noted, the words “we”, “us”, “our” and similarterms, as well as “Argosy” or the “Company”, refer to Argosy Gaming Company andall of its subsidiaries.

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with the instructions to Form 10-Q and Article10 of Regulation S-X.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  Interim results may not necessarily beindicative of results which may be expected for any other interim period or forthe year as a whole.  For furtherinformation, refer to the financial statements and footnotes thereto for theyear ended December 31, 2001, included in our Annual Report on Form 10-K (FileNo. 1-11853).  The accompanyingunaudited condensed consolidated financial statements contain all adjustments,which are, in the opinion of management, necessary to present fairly thefinancial position and the results of operations for the periodsindicated.  Such adjustments include onlynormal recurring accruals.  Certain 2001amounts have been reclassified to conform to the 2002 financial statementpresentation.

 

**2.   Long-Term Debt**

 

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

 

On July 26, 2001, we issued $200,000 of 9.0% seniorsubordinated notes due 2011.  OnFebruary 1, 2001, we issued $150,000 of additional 103⁄4% senior subordinatednotes due 2009.  Prior to this issuance,we had $200,000 of outstanding 103⁄4% subordinated notes (all “subordinatednotes”).  On July 31, 2001, we enteredinto an amended and restated senior secured line of credit, maintaining ouravailable line of credit at $400,000 and adding a term loan of $275,000(“credit facility”).  The creditfacility 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 the credit facility containcertain restrictions on the payment of dividends on our common stock and theincurrence of additional indebtedness, as well as other customary debtcovenants.   In addition, the creditfacility requires us to maintain certain financial ratios as follows: (1) TotalFunded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior LeverageRatio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of1.25 to 1.0.  As of September 30, 2002,we are in compliance with these ratios.

 

6

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**3.  Goodwill and Other Intangible Assets**

 

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

 

We have completed the first step of transitionalgoodwill impairment testing.  Thistransitional testing used discounted cash flow methodology and marketcomparisons to determine a fair market value for each reporting entity withgoodwill.  The results of ourtransitional testing indicated no reporting entities with impairment.

 

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

 

Both the transitional and interim impairment testingare based upon our estimates of (1) the value of the applicable reportingentity, (2) future operating performance and (3) discount rates.  Should our estimates differ materially fromactual results, we may be required to record impairment charges in futureperiods.

 

**4.  Earnings Per Share**

 

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

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

 

7

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**5.   Acquisitions**

 

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

 

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 were accounted for under the purchase method.  The allocation of the purchase priceresulted in approximately $298,000 in goodwill, which was being amortized overa 40-year life.  In accordance with SFAS142, amortization of the remaining book value of goodwill ceased as of January1, 2002, and will be tested for impairment at least annually.  The purchases were funded with approximately$155,000 of net proceeds from the issuance of subordinated notes and borrowingsof approximately $210,000 under our credit facility.

 

On July 31, 2001, wediversified our operations and cash flows by acquiring 100% of the Empress(with casino operations located in Joliet, Illinois) for approximately $453,880,net of cash acquired.  The purchaseprice was determined based upon estimates of future cash flows and the networth of the assets acquired.  We fundedthis acquisition through the issuance of subordinated notes and borrowingsunder the credit facility.

 

The Empress acquisitionwas accounted for using the purchase method under SFAS Statement 141.  The allocation of the purchase price, usingappraised values, resulted in approximately $409,000 in goodwill and $5,400 inintangible assets.  In accordance withSFAS 142, the goodwill is not amortized but instead subject to impairmenttesting at least annually.

 

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

 

|                          |   | **For the  nine months ended** |    | **For the  three months ended** |   |
|-------------------------------|--------|--------------------------------|---------|---------------------------------|--------|
|                          |   | **September  30,  2002**       |    | **September  30,  2001**        |   | **September  30,  2002** |   | **September  30,  2001** |   |
|                          |   | **(unaudited)**                |    | **(unaudited)**                 |   | **(unaudited)** |   | **(unaudited)** |   |
| Net revenues                  |   | $                              | 719,875 |                            | $      | 714,737 |   | $ | 239,756 |   | $ | 240,893 |   |
| Income from  operations       |   | $                              | 160,671 |                            | $      | 175,856 |   | $ | 54,622 |   | $ | 57,602 |   |
| Net income                    |   | $                              | 55,094  |                            | $      | 60,272 |   | $ | 19,128 |   | $ | 19,911 |   |
| Diluted net  income per share |   | $                              | 1.87    |                            | $      | 2.06 |   | $ | 0.65 |   | $ | 0.68 |   |

 

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.

 

**6.   Commitments and Contingent Liabilities**

 

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

 

8

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**ARGOSY GAMING COMPANY**

**MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

 

*Except where otherwise noted, thewords, “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 Reportcontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. When used in this document, the words “anticipate”, “believe”,“estimate” and “expect” and other 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) increased competitive pressures in themarkets in which the Company operates, (iv) the effect of future legislation orregulatory changes on the Company’s operations, including but not limited togaming tax increases and issuances of additional gaming licenses and (v) otherrisks detailed from time to time in the Company’s Securities and ExchangeCommission filings.  The Company does notintend to update these forward-looking statements.*

 

 

**Overview**

 

We own and operate the Alton Belle Casino, in Alton, Illinois; theEmpress Casino Joliet 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,we became the sole owner of the Argosy Casino in Lawrenceburg, Indiana, throughthe 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 July 31, 2001, we acquired theEmpress Casino Joliet in Joliet, Illinois on a 300-acre siteapproximately 40 miles southwest of Chicago. We funded this acquisition through the issuance of $200 million of 9.0%senior subordinated notes due 2011 and a $275 million term loan through ouramended and restated credit facility dated July 31, 2001.

 

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

 

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(1)          As we acquired theEmpress Casino Joliet on July 31, 2001, the nine months and three months endedSeptember 30, 2001 includes only two months of operations under ourownership.  In accordance with FASBStatement 142, Accounting for Goodwill and Intangible Assets, no amortizationexpense has been recorded on the goodwill portion of the purchase price.

 

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

 

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

 

(4)          “EBITDA” is defined asearnings before interest, taxes, depreciation and amortization and is presentedbefore any management fees paid to Argosy. EBITDA should not be construed as an alternative to operating income, ornet income (as determined in accordance with generally accepted accountingprinciples) as an indicator of our operating performance, or as an alternativeto cash flows generated by operating, investing and financing activities (as anindicator of cash 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 othercompanies.  We have other significantuses of cash flows, including debt service and capital expenditures, which arenot reflected in EBITDA.

 

(5)          The Lawrenceburgpartnership paid a financial advisory fee equal to 5.0% of its EBITDA to aminority partner prior to our acquisition of this minority interest in February2001.

 

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

 

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# **Critical Accounting Policies**

 

Our consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States, which requires our management to makeestimates and 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 million of goodwillrecorded on our balance sheet at September 30, 2002, related toacquisitions.  We regularly evaluate ouracquired businesses for potential impairment indicators.  Additionally, we adopted the provisions ofSFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002, thatrequires 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 andEquipment –*Our operationsare capital intensive and we have made significant capital investments in eachof our properties.  At September 30,2002, we have approximately $446 million of net property and equipment recordedon our balance sheet.  We depreciate ourassets on a straight-line basis over their estimated useful lives.  The estimates of the useful lives are basedon the nature of the assets as well as our current operating strategy.  Future events, such as property expansions,new competition and new regulations, could result in a change in the manner inwhich we are using certain assets requiring a change in the estimated usefullives of such assets.  In assessing therecoverability of the carrying value of property and equipment, we must makeassumptions regarding 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 –*Ourinsurance policies for employee health, workers’ compensation and generalpatron liability have significant deductible levels on an individual claimbasis.  We accrue a liability for knownworkers’ compensation and general patron liability based upon claims reservesestablished by the third party administrator processing our claims.  Additionally, we accrue an amount forincurred but not reported claims based on our historical experience and otherfactors.  Our employee health insurancebenefit accrual is based on our historical claims experience rate including anestimated lag factor.  These accrualsinvolve complex estimates and could be significantly affected should currentclaims vary from historical levels.  Managementreviews our insurance accruals for adequacy at the end of each reportingperiod.

 

*Effective Gaming Tax Rates –*We record gaming taxes based upon effective gaming tax rates for each of ourcasinos.  These effective rates arebased upon statutory 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 couldrequire changes to our effective gaming tax rates.  Management reviews our effective gaming tax rates at the end ofeach reporting period.

 

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

 

*Casino –* Casinorevenues for the nine months ended September 30, 2002, increased $162.0million, or 29.2% to $716.4 million from $554.4 million for the nine monthsended September 30, 2001.  Lawrenceburgcasino revenues increased $22.4 million, or 8.7%, to $280.9 million for thenine months ended September 30, 2002, from $258.5 million for the nine monthsended September 30, 2001.  Lawrenceburgcommenced dockside gaming effective August 1, 2002.  Our Empress Casino Joliet (“Joliet”), acquired July 31, 2001,recorded $182.4 million in casino revenues for the nine months ended September30, 2002.  As of September 30, 2001, wehad owned Joliet for two months and recorded $43.6 million in casino revenues.  The commencement of dockside gaming inIndiana and facility renovations by two competitors of our Joliet casino haveresulted in a decrease in Joliet’s casino revenues of $5.7 million, from the$43.6 million for the two months ended September 30, 2001 to $37.9 million forthe two months ended September 30, 2002. Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 0.4%increase in casino revenues from $252.3 million to $253.2 million.

 

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

 

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

 

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

 

*Selling, General and Administrative –*Selling, general andadministrative expenses increased $12.6 million to $99.7 million for the ninemonths ended September 30, 2002, from $87.1 million for the nine months endedSeptember 30, 2001, due primarily to Joliet’s expenses of $12.2 million for thenine months ended September 30, 2002, as compared to $3.9 million for the ninemonths ended September 30, 2001 (an $8.3 million increase).  The remaining increase is due primarily to a$3.4 million increase in city development fees at Lawrenceburg due to theincrease in revenues related to the switch to dockside gaming effective August1, 2002.

 

*Other OperatingExpenses –*Other operatingexpenses increased by $5.1 million to $31.3 million for the nine months endedSeptember 30, 2002, as compared to $26.2 million for the nine months endedSeptember 30, 2001.  Joliet incurred$7.9 million of other operating expenses during the nine months ended September30, 2002 as compared to $1.8 million for the nine months ended September 30,2001.

 

*Depreciationand Amortization –*Depreciationand amortization increased $1.1 million from $33.9 million for the nine monthsended September 30, 2001, to $35.0 million for the nine months ended September30, 2002.  Increases for the nine monthsended September 30, 2002 consisted of Joliet adding $5.7 million ofdepreciation and intangible asset amortization, accelerated depreciation of$0.3 million on planned asset retirements and $0.4 million of depreciation forour new data warehouse put in service during the third quarter 2002.  These increases are offset by a decrease ingoodwill amortization due to its elimination in accordance with SFAS 142,effective as of January 1, 2002 for all goodwill.  If SFAS 142 had been in effect January 1, 2001, pre-tax goodwillamortization of $5.6 million would not have been recorded for the nine monthsended September 30, 2001.

 

*InterestExpense –*Net interestexpense increased $15.8 million to $61.4 million for the nine months ended September30, 2002, from $45.6 million for the nine months ended September 30, 2001.  This increase is primarily attributable toadditional borrowings in connection with the Lawrenceburg and Jolietacquisitions.

 

*MinorityInterests –*We had nominority interest expense for the nine months ended September 30, 2002, ascompared to $4.1 million for the nine months ended September 30, 2001.  This decrease is attributable to ourLawrenceburg casino minority interests acquisitions during the first quarter2001, and as the sole owner, we no longer incur minority interest expense.

 

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

 

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

 

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

 

*Casino –* Casinorevenues for the three months ended September 30, 2002, increased $23.0million, or 10.6% to $239.1 million from $216.1 million for the three monthsended September 30, 2001.  Lawrenceburgcasino revenues increased $11.3 million, or 12.9%, to $98.9 million for thethree months ended September 30, 2002, from $87.6 million for the three monthsended September 30, 2001.  Lawrenceburgcommenced dockside gaming effective August 1, 2002.  Joliet, acquired July 31, 2001, recorded $57.9 million in casinorevenue for the three months ended September 30, 2002.  As of September 30, 2001, we owned Jolietfor two months and recorded $43.6 million in casino revenues.  The commencement of dockside gaming inIndiana and facility renovations by two competitors of our Joliet casino haveresulted in a decrease in Joliet’s casino revenues of $5.7 million, from the$43.6 million for the two months ended September 30, 2001 to $37.9 million forthe two months ended September 30, 2002. Alton, Riverside, Sioux City and Baton Rouge reported an aggregate 3.1%decrease in casino revenues from $84.9 million to $82.3 million.  Our Alton casino was affected by increasedcompetitive pressures due to an expanded facility by a competitor in August2002 and our Baton Rouge casino experienced construction disruptions during arecently completed three-month refurbishment.

 

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

 

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

 

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

 

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

 

*Other OperatingExpenses –*Other operatingexpenses increased by $0.1 million to $10.3 million for the three months endedSeptember 30, 2002, as compared to $10.2 million for the three months endedSeptember 30, 2001.  Joliet’s

increase of  $0.7 million of other operating expensesduring the three months ended September 30, 2002 was offset by slight decreasesat all the other properties.

 

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*Depreciationand Amortization –*Depreciationand amortization decreased $0.6 million from $12.7 million for the three monthsended September 30, 2001, to $12.1 million for the three months ended September30, 2002.  Increases for the threemonths ended September 30, 2002 consisted of Joliet adding $0.9 million ofdepreciation and intangible asset amortization as we owned Joliet for only twomonths for the three months ended September 30, 2001, accelerated depreciationof $0.3 million on planned asset retirements and $0.4 million of depreciationfor our new data warehouse put in service during the third quarter 2002.  This net increase was offset by a decreasein goodwill amortization due to its elimination in accordance with SFAS 142,effective as of January 1, 2002.  IfSFAS 142 had been in effect January 1, 2001, pre-tax goodwill amortization of$2.2 million would not have been recorded for the three months ended September30, 2001.

 

*InterestExpense –*Net interestexpense decreased $0.2 million to $20.2 million for the three months endedSeptember 30, 2002, from $20.4 million for the three months ended September 30,2001.  This decrease is primarilyattributable to repayments on our credit facility throughout 2002 resulting inless interest expense for the three months ended September 30, 2002.

 

*Income TaxExpense –*Income taxexpense increased by $3.3 million to $15.3 million for the three months endedSeptember 30, 2002, from $12.0 million for the three months ended September 30,2001, due to increased pre-tax earnings and an increase in our effective taxrate due to an increase in Indiana tax rates.

 

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

 

**Competition**

 

Our Alton Casino faces competition from four other riverboat casinooperators in the St. Louis area.  One ofthese competitors recently completed a major casino and facility renovation,which opened in early August 2002. Another competitor recently announced a $75 million hotel expansion,which is expected to open in mid-to-late 2004. Our Riverside Casino faces competition from three casino companies 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. Two of these competitors have opened major expansion projects within thelast twelve months.  Additionally, fourcompetitors in Indiana were allowed to begin dockside gaming in August2002.  There could be furtherunanticipated competition in any market in which we operate as a result oflegislative changes or other events.  Weexpect each market, in which we participate, both current and prospective, tobe highly competitive.

 

**Liquidity andCapital Resources**

 

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

 

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

 

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

 

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

 

During October2001, we effectively fixed the interest rate on approximately $200.0 million ofour term loan through three interest rate swap agreements expiring on September30, 2004.  For each swap agreement, weagree to receive a floating rate of interest on the notional principal amountbased upon a three month LIBOR rate (plus a 2.75% spread) in exchange for fixedrates ranging from 6.19% to 6.27%.  Asof September 30, 2002, the notional principal amounts were $199.0 million.  These notional amounts do not representamounts exchanged by the parties and, thus, are not a measure of our exposureto credit loss.  In accordance with SFAS133, “Accounting for Derivative Instruments and Hedging Activities”, werecorded, as of September 30, 2002, the fair value of these interest rate swapagreements in the consolidated balance sheet in other long-term obligations($5.5 million pretax) and the related change in fair value of these agreementsis deferred in stockholders’ equity as a component of accumulated othercomprehensive income ($3.1 million net of deferred taxes of $2.4 million).

 

The subordinatednotes and the credit facility contain certain restrictions on the payment ofdividends on our common stock and the occurrence of additional indebtedness, aswell as other typical debt covenants. In addition, the credit facility requires us to maintain certainfinancial ratios as follows:  (1) TotalFunded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior LeverageRatio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of1.25 to 1.0.  As of September 30, 2002,we are in compliance with these ratios.

 

We have made asignificant investment in property and equipment and plan to make significantadditional investments at our existing properties. As of September 30, 2002, wehave begun construction on major projects at our Riverside and Jolietproperties.  During the fourth quarter2002, we expect to spend approximately $40.0 million to $50.0 million on theseprojects.  We expect to fund theseexpenditures from internally generated cash and availability under our creditfacility.

 

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Consistent withgaming industry practice, we conduct our operations with a net working capitaldeficit.  Unlike traditional industrialcompanies, a gaming company’s balance sheet has limited accounts receivable andinventories.  In addition, casinos generatesignificant cash on a daily basis.  Wegenerally apply our daily cash flows to pay down indebtedness under ourrevolving 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-termdebt, as of September 30, 2002, matures as follows:

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

 

 

**Controls andProcedures**

 

(a)       *****Evaluationof 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 reported, 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 Chief Executive Officer and Senior Vice President and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

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

 

(b)       *Changes in internal controls:*

 

        There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these internal controls subsequent to the evaluationdate.

 

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**ARGOSY GAMING 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 haveoccurred since our last filing.

 

 

Item 2.    *Changes in Securities and Use ofProceeds*-**None

 

Item 3.    *Defaults Upon Senior Securities -*None

 

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

 

Item 5.    *Other Information -*None

 

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

 

(a)        *        Exhibit*

 

                                                Exhibit99.1     Certifications pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

 

(b)       *        Reports on Form 8-K –* None

 

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**ARGOSYGAMING COMPANY**

**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

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

 

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

 

I, James B. Perry, Chief Executive Officer, certifythat:

 

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

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

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

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

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

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

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

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

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

 

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

 

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

 

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

 

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

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

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

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

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

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

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

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

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

 

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

 

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