**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C., 20549**

** **

**FORM 10-Q**

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

 

**Commission File Number 1-11853**

 

**ARGOSY GAMING COMPANY**

(Exact name of Registrant as Specified in its Charter)

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

 

Indicate by check 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:  28,846,229shares of Common Stock, $.01 par value per share, as of August 12, 2002.

 

 

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In Thousands, Except Share and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

(In Thousands,Except Share and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

(In Thousands, ExceptShare and Per Share Data)

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, ExceptShare and Per Share Data)

 
|                                                                               |   | **Six Months Ended** |   |
|------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                               |   | **June 30,  2002**   |   | **June 30,  2001** |   |
|                                                                               |   | **(unaudited)**      |   | **(unaudited)** |   |
| **Cash  flows from operating activities:**                                         |   |                 |   |   |   |
| Net  income                                                                   |   | $                    | 35,966 |   | $ | 28,264 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                 |   |   |   |
| Depreciation                                                                       |   | 21,731               |   | 17,026 |   |
| Amortization                                                                       |   | 3,180                |   | 4,889 |   |
| Loss (gain) on  sale of fixed assets                                               |   | 341                  |   | (6 | ) |
| Minority  interests                                                                |   | —               |   | 4,086 |   |
| Deferred income  taxes                                                             |   | 5,777                |   | (259 | ) |
| Changes in  operating assets and liabilities:                                      |   |                 |   |   |   |
| Accounts  receivable and other current assets                                      |   | (1,452               | )      | (182 | ) |
| Accounts payable  and other current liabilities                                    |   | 13,054               |   | (3,169 | ) |
| Net cash  provided by operating activities                                         |   | 78,597               |   | 50,649 |   |
|                                                                               |   |                 |   |   |   |
| **Cash  flows from investing activities:**                                         |   |                 |   |   |   |
| Purchases of property  and equipment                                               |   | (18,341              | )      | (14,089 | ) |
| Purchases of  Minority Interests in Partnership                                    |   | —               |   | (366,699 | ) |
| Other                                                                              |   | 663                  |   | (1,825 | ) |
| Net cash used in  investing activities                                             |   | (17,678              | )      | (382,613 | ) |
|                                                                               |   |                 |   |   |   |
| **Cash  flows from financing activities:**                                         |   |                 |   |   |   |
| Proceeds from  (repayment of) line of credit, net                                  |   | (59,000              | )      | 179,800 |   |
| Proceeds from  issuance of subordinated notes                                      |   | —               |   | 159,000 |   |
| Payments on  long-term debt                                                        |   | (1,781               | )      | (14,414 | ) |
| Payments of  deferred finance costs                                                |   | —               |   | (6,386 | ) |
| Repayment of  partner loans                                                        |   | —               |   | (266 | ) |
| Partnership  equity distributions                                                  |   | —               |   | (5,199 | ) |
| Payment of  preferred equity return and dividends to partner                       |   | —               |   | (456 | ) |
| Proceeds from  stock option exercises                                              |   | 221                  |   | 1,229 |   |
| Other                                                                              |   | (29                  | )      | 27 |   |
| Net cash (used  in) provided by financing activities                               |   | (60,589              | )      | 313,335 |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | 330                  |   | (18,629 | ) |
| Cash and cash  equivalents, beginning of period                                    |   | 57,221               |   | 59,374 |   |
| Cash and cash  equivalents, end of period                                          |   | $                    | 57,551 |   | $ | 40,745 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

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

 

See accompanyingnotes to condensed consolidated financial statements.

 

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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**

 

ArgosyGaming Company provides casino-style gaming and related entertainment to thepublic and, through our subsidiaries, operates casinos in Alton and Joliet,Illinois; Lawrenceburg, Indiana; Riverside, Missouri; Baton Rouge, Louisiana;and Sioux City, Iowa.  Except whereotherwise noted, the words “we”, “us”, “our” and similar terms, as well as“Argosy” or the “Company”, refer to Argosy Gaming Company and all of itssubsidiaries.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting 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 adjustmentswhich are, in the opinion of management, necessary to present fairly thefinancial position and the results of operations for the periods indicated.  Such adjustments include only normalrecurring accruals.  Certain 2001amounts have been reclassified to conform to the 2002 financial statementpresentation.

 

**2.****              Long-Term Debt**

 

Long-termdebt consists of the following:

 
|                                                                                                                                           |   | **June 30,  2002** |    | **December 31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
| Senior secured  line of credit, expires July 31, 2006, interest payable at least quarterly at  either LIBOR and/or prime plus a margin         |   | $                  | 103,200 |                   | $      | 162,200 |   |
|                                                                                                                                           |   |               |    |                   |   |
| Term loan,  matures July 31, 2008, principal and interest payments due quarterly at  either LIBOR and/or prime plus a margin                   |   | 272,250            |    | 273,625                |   |
|                                                                                                                                           |   |               |    |                   |   |
| Senior  subordinated notes, including unamortized premium of $7,937 at June 30, 2002,  due June 2009, interest payable semi-annually at 10.75% |   | 357,937            |    | 358,331                |   |
|                                                                                                                                           |   |               |    |                   |   |
| Senior  subordinated notes, due September 2011, interest payable semi-annually at 9%                                                           |   | 200,000            |    | 200,000                |   |
|                                                                                                                                           |   |               |    |                   |   |
| Notes payable,  principal and interest payments due quarterly through September 2015,  discounted at 10.5%                                     |   | 4,590              |    | 4,996                  |   |
|                                                                                                                                           |   | 937,977            |    | 999,152                |   |
| Less:  current maturities                                                                                                                 |   | 4,365              |    | 4,307                  |   |
| Long-term debt,  less current maturities                                                                                                       |   | $                  | 933,612 |                   | $      | 994,845 |   |

 

On July 26, 2001, weissued $200,000 of 9.0% senior subordinated notes due 2011.  On February 1, 2001, we issued $150,000 ofadditional 103⁄4% senior subordinated notes due 2009.  Prior to this issuance, we had $200,000 of outstanding 103⁄4%subordinated notes (all “subordinated notes”). On July 31, 2001, we entered into an amended and restated senior securedline of credit, maintaining our available line of credit at $400,000 and addinga term loan of $275,000 (“credit facility”). The credit facility is secured by liens on substantially all of ourassets and our subsidiaries 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 notesand the credit facility contain certain restrictions on the payment ofdividends on our common stock and the incurrence of additional indebtedness, aswell as other customary debt covenants.  In addition, the credit facility

 

6

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requiresus to maintain certain financial ratios as follows: (1) Total Funded Debt toEBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of amaximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.25 to1.0.  As of June 30, 2002, we are incompliance with these ratios.

 

**3.****              Goodwilland Other Intangible Assets**

 

The Financial AccountingStandards Board issued SFAS Statement 142, “Goodwill and Other IntangibleAssets”  (“SFAS 142”).  Under this statement, amortization of theremaining book value of goodwill ceased as of January 1, 2002 and will betested for impairment at least annually. We adopted the provisions of SFAS 142 effective January 1, 2002.  If SFAS 142 had been in effect January 1,2001, pre-tax goodwill amortization of $3,461 and $2,151 would not have been recordedfor the six months and three months ended June 30, 2001, respectively.  This would have increased our net income by$2,042 to $30,306 and our diluted net income per share by $0.07 to $1.04 forthe six months ended June 30, 2001.  Forthe three months ended June 30, 2001, this would have increased our net incomeby $1,269 to $14,950 and our diluted net income per share by $0.04 to $0.51.

 

We have completed thefirst step of transitional goodwill impairment testing.  This transitional testing used discountedcash flow methodology and market comparisons to determine a fair market valuefor each reporting entity with goodwill. The results of our transitional testing indicated no reporting entitieswith impairment.

 

Additionally, a gamingtax increase enacted during the second quarter 2002 resulted in additionalinterim impairment testing for goodwill and other intangible assets for ourEmpress Casino Joliet (“Empress”).  Thisadditional interim impairment testing indicated no impairment for Empress at June30, 2002.

 

Both the transitional andinterim impairment testing are based upon our estimates of (1) the value of theapplicable reporting entity, (2) future operating performance and (3) discountrates.  Should our estimates differmaterially from actual results, we may be required to record impairment chargesin future periods.

 

**4.****              EarningsPer Share**

 

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

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

 

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**5.****              Acquisitions**

 

In 2001, we purchased the42.5% limited partnership interests in the Argosy Casino in Lawrenceburg,Indiana (the “Lawrenceburg Casino”) for an aggregate price of $365,000including all preferred equity interest and outstanding partner loans.  As a result of these acquisitions, we nowown 100% of the Lawrenceburg Casino.

 

The purchase prices forthe minority interests were determined based upon estimates of future cash flowsand evaluations of the net worth of the assets acquired.  The purchases were accounted for under thepurchase method.  The allocation of thepurchase price resulted in approximately $298,000 in goodwill, which was beingamortized over a 40-year life.  Inaccordance with SFAS 142, amortization of the remaining book value of goodwillceased as of January 1, 2002, and will be tested for impairment at leastannually.  The purchases were fundedwith approximately $155,000 of net proceeds from the issuance of subordinatednotes and borrowings of 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 $463,764.  The purchase price was determined based uponestimates of future cash flows and the net worth of the assets acquired.  We funded this acquisition through theissuance of subordinated notes and borrowings under 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.

 

Thefollowing unaudited pro forma consolidated financial information for the sixmonths and the three months ended June 30, 2001 has been prepared assuming theacquisitions and implementation of SFAS Statements 141 and 142 had occurred onJanuary 1, 2001 (for the six months and three months ended June 30, 2001,pre-tax amortization of goodwill of $3,461 and $2,151, respectively, has beenexcluded).

 

|                          |   | **For the six months ended** |    | **For the three months ended** |   |
|-------------------------------|--------|------------------------------|---------|--------------------------------|--------|
|                          |   | **June 30, 2002**            |    | **June 30, 2001**              |   | **June 30, 2002** |   | **June 30, 2001** |   |
|                          |   | **(unaudited)**              |    | **(unaudited)**                |   | **(unaudited)** |   | **(unaudited)** |   |
| Net revenues                  |   | $                            | 480,119 |                           | $      | 473,844 |   | $ | 236,253 |   | $ | 235,798 |   |
| Income from  operations       |   | $                            | 106,049 |                           | $      | 118,254 |   | $ | 43,030 |   | $ | 57,445 |   |
| Net income                    |   | $                            | 35,966  |                           | $      | 40,361 |   | $ | 11,266 |   | $ | 19,779 |   |
| Diluted net  income per share |   | $                            | 1.22    |                           | $      | 1.38 |   | $ | 0.38 |   | $ | 0.68 |   |

 

Theseunaudited pro forma results are presented for comparative purposes only.  The pro forma results are not necessarilyindicative of what our actual results would have been had the acquisitions beencompleted as of the beginning of the respective year, or of future results.

 

**6.****              Commitments and Contingent Liabilities**

 

Weare subject to, from time to time, various legal and regulatory proceedings inthe ordinary course of our business.  Webelieve that current proceedings will not have a material effect on ourfinancial condition or the results of our operations.

 

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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.*

 

**Overview**

 

Weown and operate the Alton Belle Casino, in Alton, Illinois; the Empress CasinoJoliet in Joliet, Illinois; the Argosy Casino in Riverside, Missouri; theArgosy Casino in Baton Rouge, Louisiana; the Belle of Sioux City Casino inSioux City, Iowa; and the Argosy Casino in Lawrenceburg, Indiana.  In the first quarter of 2001, we became thesole owner of the Argosy Casino in Lawrenceburg, Indiana, through the purchaseof the 42.5% minority interests in the property.  Prior to this acquisition, we were the majority owner of theLawrenceburg Casino and, as such, our historical consolidated financialstatements included the assets, liabilities and results of operations for theLawrenceburg Casino on a consolidated basis.

 

OnJuly 31, 2001, we acquired the Empress Casino Joliet in Joliet, Illinoison a 300-acre site approximately 40 miles southwest of Chicago andapproximately two miles from the intersection of Interstate 55 and Interstate80.  We funded this acquisition throughthe issuance of $200 million of 9.0% senior subordinated notes due 2011 and a$275 million term loan through our amended and restated credit facility datedJuly 31, 2001.

 

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

 

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(1)          As we acquired theEmpress Casino Joliet on July 31, 2001, the six months ended June 30, 2001 doesnot include any operations under our ownership.  In accordance with FASB Statement 142, Accounting for Goodwilland Intangible Assets, no amortization expense has been recorded on thegoodwill 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)          During the secondquarter of 2002, Indiana and Illinois enacted legislation increasing gaming taxrates.  Our Income from Operations andEBITDA for our Alton Belle Casino, Argosy Casino — Lawrenceburg and EmpressCasino Joliet included additional gaming tax expenses of $0.8 million, $9.8million and $6.4 million, respectively, for the six months and three monthsended June 30, 2002.  These additionalgaming taxes reflect the impact of increased effective annualized gaming tax rateson our 2002 casino revenues through June 30, 2002 resulting from thislegislation.

 

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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 June 30, 2002, related to acquisitions.  We regularly evaluate our acquiredbusinesses for potential impairment indicators.  Additionally, we adopted the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,” on January 1, 2002, that requires us toperform impairment testing at least annually. Our judgments regarding the existence of impairment indicators are basedon, among other things, the regulatory and market status and operationalperformance of each of our acquired businesses.  Future events could significantly impact our judgments and anyresulting impairment loss could have a material adverse impact on our financialcondition and results of operations.

 

*Property andEquipment—*Our operationsare capital intensive and we have made significant capital investments in eachof our properties.  At June 30, 2002, wehave approximately $438 million of net property and equipment recorded on ourbalance sheet.  We depreciate our assetson a straight-line basis over their estimated useful lives.  The estimate of the useful lives is based onthe nature of the asset as well as our current operating strategy.  Future events, such as property expansions,new competition and new regulations, could result in a change in the manner 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 has 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.

 

**Six months ended June 30, 2002 comparedto six months ended June 30, 2001**

 

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

 

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

 

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

 

*Food, Beverageand Other*—Food, beverageand other revenues increased $13.7 million to $48.9 million for the six monthsended June 30, 2002, from $35.2 million for the six month period ended June 30,2001.  Joliet contributed $10.5 millionof this increase.  Food, beverage andother net profit increased $2.6 million to $11.8 million for the six monthsended June 30, 2002, from $9.2 million for the six months ended June 30,2001.  Joliet contributed $1.5 millionof this increase.  The remainder of theincreases is an overall increase in revenues and profits spread throughout ourother properties.

 

*Selling, General and Administrative*—Selling,general and administrative expenses increased $10.3 million to $66.0 millionfor the six months ended June 30, 2002, from $55.7 million for the six monthsended June 30, 2001, due primarily to Joliet’s expenses of $8.5 million for thesix months ended June 30, 2002.

 

*Other OperatingExpenses*—Other operatingexpenses increased by $5.0 million to $21.0 million for the six months endedJune 30, 2002, as compared to $16.0 million for the six months ended June 30,2001.  Joliet incurred $5.4 million ofother operating expenses during the six months ended June 30, 2002.

 

*Depreciationand Amortization*—Depreciationand amortization increased $1.7 million from $21.2 million for the six monthsended June 30, 2001, to $22.9 million for the six months ended June 30, 2002.  Joliet added $4.8 million of depreciationand intangible asset amortization and the other properties combined added $0.4million for the six months ended June 30, 2002.  These increases are offset by a decrease in goodwill amortizationdue to its elimination in accordance with SFAS 142, effective as of January 1,2002 for all goodwill.  If SFAS 142 hadbeen in effect January 1, 2001, pre-tax goodwill amortization of $3.5 millionwould not have been recorded for the six months ended June 30, 2001.  This would have increased our net income by$2.0 million to $30.3 million and our diluted net income per share by $0.07 to$1.04 for the six months ended June 30, 2001.

 

*InterestExpense*—Net interestexpense increased $16.0 million to $41.2 million for the six months ended June30, 2002, from $25.2 million for the six months ended June 30, 2001.  This increase is primarily attributable toadditional borrowings in connection with the Lawrenceburg and Jolietacquisitions.

 

*MinorityInterests—*We had nominority interest expense for the six months ended June 30, 2002, as comparedto $4.1 million for the six months ended June 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 tax expenseincreased by $9.2 million to $28.8 million for the six months ended June 30,2002, from $19.6 million for the six months ended June 30, 2001, due toincreased pre-tax earnings (net of minority interests expense in 2001) and anincrease in our effective tax rate due to state tax issues related to thegaming tax rate increases in Indiana and Illinois.

 

*Net Income—*Net income was $36.0 million for the six monthsended June 30, 2002, compared to $28.3 million for the six months ended June30, 2001, due primarily to the factors discussed above.

 

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

 

*Casino*—Casino revenues for the three months ended June30, 2002, increased $68.7 million, or 41.3% to $235.2 million from $166.5million for the three months ended June 30, 2001.  Our Empress Casino Joliet, acquired July 31, 2001, recorded $62.2million in casino revenue for the three months ended June 30, 2002.  Lawrenceburg casino revenues increased $5.4million, or 6.5%, to $88.9 million for the three months ended June 30, 2002,from $83.5 million for the three months ended June 30, 2001.  Alton, Riverside, Sioux City and Baton Rougereported an aggregate 1.3% increase in casino revenues from $83.0 million to$84.0 million.  Each of our casinosreported increases in the average win per passenger for the three months endedJune 30, 2002, versus the three months ended June 30, 2001.

 

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Casinoexpenses increased $50.6 million to $120.4 million for the three months endedJune 30, 2002, from $69.8 million for the three months ended June 30,2001.  Joliet had $38.4 million incasino expenses ($24.9 million in gaming taxes) for the three months ended June30, 2002.  The remaining increase is dueto increased gaming taxes totaling $11.5 million and increases in other casinoexpenses of $0.7 million to support the overall increased revenues as well asincreased payroll related costs at all properties.  As we record our gaming tax expense using an estimated annualizedeffective rate, included in the gaming tax expense for our Indiana and Illinoisproperties for the three months ended June 30, 2002, is $17.0 million ofadditional gaming tax expense due to increased rates in Indiana and Illinoisbased on legislation passed in the second quarter 2002.

 

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

 

*Food, Beverageand Other*—Food, beverageand other revenues increased $6.1 million to $24.2 million for the three monthsended June 30, 2002, from $18.1 million for the three month period ended June30, 2001.  Joliet contributed $5.4million of this increase.  Food,beverage and other net profit increased $1.2 million to $5.8 million for thethree months ended June 30, 2002, from $4.6 million for the three months endedJune 30, 2001.  Joliet contributed $0.9million of this increase.  The remainderof the increases is an overall increase in revenues and profits spreadthroughout our other properties.

 

*Selling, General and Administrative*—Selling,general and administrative expenses increased $6.2 million to $32.7 million forthe three months ended June 30, 2002, from $26.5 million for the three monthsended June 30, 2001, due primarily to Joliet’s expenses of $4.2 million for thethree months ended June 30, 2002.

 

*Other OperatingExpenses*—Other operatingexpenses increased by $2.5 million to $10.5 million for the three months endedJune 30, 2002, as compared to $8.0 million for the three months ended June 30,2001.  Joliet incurred $2.6 million ofother operating expenses during the three months ended June 30, 2002.

 

*Depreciationand Amortization*—Depreciationand amortization increased $0.1 million from $11.2 million for the three monthsended June 30, 2001, to $11.3 million for the three months ended June 30,2002.  Joliet added $2.4 million ofdepreciation and intangible asset amortization and the other propertiescombined decreased $0.1 million for the three months ended June 30, 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 for all goodwill.  If SFAS 142 had been in effect January 1, 2001, pre-tax goodwillamortization of $2.2 million would not have been recorded for the three monthsended June 30, 2001.  This would haveincreased our net income by $1.3 million to $15.0 million and our diluted netincome per share by $0.04 to $0.51 for the three months ended June 30, 2001.

 

*InterestExpense*—Net interestexpense increased $6.6 million to $20.4 million for the three months ended June30, 2002, from $13.8 million for the three months ended June 30, 2001.  This increase is primarily attributable toadditional borrowings in connection with the Lawrenceburg and Jolietacquisitions.

 

*Income TaxExpense—*Income tax expenseincreased by $1.8 million to $11.3 million for the three months ended June 30,2002, from $9.5 million for the three months ended June 30, 2001, due primarilyto an increase in our effective tax rate due to state tax issues related to thegaming tax rate increases in Indiana and Illinois.

 

*Net Income—*Net income was $11.3 million for the three monthsended June 30, 2002, compared to $13.7 million for the three months ended June30, 2001, due primarily to the factors discussed above.

 

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**Competition**

 

OurAlton Casino faces competition from four other riverboat casino operators inthe St. Louis area.  One of thesecompetitors recently completed a major casino and facility renovation, whichopened August 6, 2002.  Our RiversideCasino faces competition from three casino companies in the Kansas Cityarea.  Our Baton Rouge Casino facescompetition from one casino located in downtown Baton Rouge, a nearby NativeAmerican casino and multiple casinos throughout Louisiana. We face competitionin Sioux City, Iowa from video gaming devices in nearby South Dakota, from twoland-based Native American casinos and, to a lesser extent, from slot machinesat a pari-mutuel racetrack in Council Bluffs, Iowa and from two riverboatcasinos 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. There could be further unanticipated competition in any market, which weoperate as a result of legislative changes or other events.  We expect each market in which we participate,both current and prospective, to be highly competitive.

 

**Liquidity and Capital Resources**

 

Inthe six months ended June 30, 2002, we generated cash flows from operatingactivities of $78.6 million compared to $50.6 million for the same period in2001.  This increase is due primarily toincreases in our net income of $7.7 million and working capital of $15.0million for the six months ended June 30, 2002 over the six months ended June30, 2001, throughout our properties.

 

In the six months ended June30, 2002, we used cash flows for investing activities of $17.7 million comparedto $382.6 million for the six months ended June 30, 2001.  The greater use of funds for the six monthsended June 30, 2001, is due primarily to our acquisition of the minorityinterests in the Lawrenceburg casino requiring the use of $366.7 million incash.

 

During the six monthsended June 30, 2002, cash of $60.6 million was used by financing activitiescompared to $313.3 million of cash flows provided by financing activities forthe same period in 2001.  In 2001,$338.8 million was provided through the issuance of senior subordinated notesand borrowings on our credit facility. These funds were used to fund the purchases of the Lawrenceburg casinominority interests.  For the six monthsended June 30, 2002, we used $59.0 million for repayments on our creditfacility.  Cash flows in 2001 were alsoused for repayment of partner loans and distributions related to theLawrenceburg partnership.

 

At June 30, 2002, we hadapproximately $57.6 million of cash and cash equivalents.  At June 30, 2002, we had outstanding $375.5million on our senior secured credit facility ($103.2 million on our revolverand $272.3 million on our term loan). Additionally, we had outstanding $557.9 million of subordinated notes(due in June 2009 and September 2011), including $7.9 million of unamortizedpremium.  As of June 30, 2002,availability under the credit facility was approximately $291.1 million.  We have no off balance sheet debt.

 

During October 2001, 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 of June30, 2002, the notional principal amounts were $199.3 million.  These notional amounts do not represent amountsexchanged by the parties and, thus, are not a measure of our exposure to creditloss.  In accordance with SFAS 133,“Accounting for Derivative Instruments and Hedging Activities”, we recorded, asof June 30, 2002, the fair value of these interest rate swap agreements in theconsolidated balance sheet in other long-term obligations ($.6 million pretax)and the related change in fair value of these agreements is deferred instockholders’ equity as a component of accumulated other comprehensive income ($.4million net of deferred taxes of $.2 million).

 

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The subordinated notesand 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 June 30, 2002, weare 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 June 30, 2002, we havebegun construction on a major project at our Riverside property.  We expect to begin a project at our Jolietproperty in the third quarter 2002.  Asa result of these construction projects and our long-term investment plans, wewill evaluate, as appropriate, the remaining useful lives and carrying valuesof our property and equipment.  As aresult, we could record additional depreciation expense or write-downs on ourproperty and equipment.  Over the nextseven quarters, we expect to spend approximately $140 million to $150 millionon these projects with approximately $50 million to $60 million to be spent in2002.

 

Consistent with gamingindustry 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, casinosgenerate significant cash on a daily basis. We generally apply our daily cash flows to pay down indebtedness 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 ofJune 30, 2002, matures as follows:

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

 

**Cautionary Statements for Purposes ofthe “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of1995**

 

*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 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) competitive and general economic conditions in the markets inwhich the Company operates, (ii) increased competitive pressures in the marketsin which the Company operates, (iii) 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 (iv) otherrisks detailed from time to time in the Company’s Securities and ExchangeCommission filings.  The Company doesnot intend to update these forward-looking statements.*

 

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**ARGOSY GAMING COMPANY**

**OTHER INFORMATION**

 

**PART II.                OtherInformation**

 

Item 1.                     *Legal Proceedings -*

 

TheCompany is from time to time a party to legal proceedings arising in theordinary course of business. Other than as disclosed below no material changeshave occurred since our last filing.

 

##### ***Gaming IndustryClass Actions***

 

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

 

Item2.    *Changes in Securities*-**None

 

Item3.    *Defaults Upon Senior Securities -* None

 

Item4.    *Submission of Matters to a Vote of Security Holders —*

 

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

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

 

Item5.    *Other Information -*None

 

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

 

(a)*           Exhibits*

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

 

(b)       *        Reportson Form 8-K*– None

 

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**ARGOSY GAMING COMPANY**

**SIGNATURES**

 

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

 

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

 

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