10-Q 1 a74872e10-q.txt FORM 10-Q FOR THE PERIOD JUNE 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q [X] QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission file number 333-0214 -------- HORSESHOE GAMING HOLDING CORP. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 88-0425131 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18454 South West Creek Drive, Tinley Park, IL 60477 -------------------------------------------------------------------------------- (Address of principal executive office) (ZIP CODE) (815) 429-8300 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] 2 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

2 3 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)

The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Horseshoe Gaming Holding Corp., a Delaware corporation, and its subsidiaries (the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 2000. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of all periods presented have been made. The results of operations for the six months ended June 30, 2001, are not necessarily indicative of the operating results for the full year. Certain reclassifications have been made to the financial statements as previously presented to conform to current classifications. NOTE 2 - ACCOUNTING PRONOUNCEMENTS In January 2001, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue 3 of Issue 00-22 ("EITF 00-22"), "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". EITF 00-22 requires that incentives to induce casino play ("Points") be recorded as a reduction of revenue. The Company had historically classified Points as operating expenses. In accordance with the transition rules, the Company adopted EITF 00-22 in the first quarter of 2001. Points of $6.3 million and $8.5 million were recorded for the three months ended June 30, 2001 and 2000, respectively, and points of $14.1 million and $16.5 million were recorded for the six months ended June 30, 2001 and 2000, respectively, and are included as promotional allowances and other in the accompanying Consolidated Condensed Statements of Operations. The adoption of EITF 00-22 had no effect on the Company's operating income. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). These pronouncements change the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142 states that goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and the impact that adoption will have on the Company's financial position and results of operations. The Company amortized $2.9 million and $4.2 million of goodwill in three months ended June 30, 2001 and 2000, respectively, and $6.5 million and $9.7 million in the six months ended June 30, 2001 and 2000, respectively. NOTE 3 - ASSETS HELD FOR SALE The gaming license for one of the Company's wholly owned subsidiaries, Empress Casino Joliet Corporation ("Joliet"), was due to be renewed by the Illinois Gaming Board ("IGB") in June 2000. On June 30, 2000, the IGB preliminarily denied Joliet's application to renew its riverboat owner's license and preliminarily found Jack Binion ("Binion"), the Company's Chairman of the Board and CEO, unsuitable to be licensed as a key person. On July 19, 2000, Joliet received the Notice of Denial of License Renewal from the IGB. In response to the denial, Joliet timely filed a Verified Request for Hearing of the IGB's decision. 6 7 Effective January 31, 2001, the IGB approved a settlement agreement ("Settlement Agreement") between the IGB, the Company, Joliet and Binion. Pursuant to the pertinent parts of the Settlement Agreement: (a) the Company agreed to sell Joliet to a suitable purchaser within the time frames established in the Settlement Agreement; (b) Binion will withdraw his key person application; and (c) upon the closing of the sale of Joliet, Joliet will withdraw its Verified Request for Hearing and, upon acceptance by the IGB of the withdrawal, the previous denial of Joliet's renewal application will be moot. As a result of the Settlement Agreement, the Company has classified the long-lived assets of Joliet as Assets Held for Sale in the accompanying Consolidated Condensed Balance Sheets and effective February 1, 2001, the Company ceased depreciation and amortization on those assets. The effect on net working capital is not expected to be material. Included in the accompanying Consolidated Condensed Statements of Operations, are net revenues from Joliet of $69.9 million and $60.3 million for the three months ended June 30, 2001 and 2000, respectively, and $137.6 million and $121.3 million for the six months ended June 30, 2001 and 2000, respectively. Joliet also contributed $19.2 million and $16.5 million of operating income before corporate allocations and other non-recurring items for the three months ended June 30, 2001 and 2000, respectively, and $38.2 million and $33.5 million for the six months ended June 30, 2001 and 2000, respectively. On April 12, 2001, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Argosy Gaming Company ("Argosy"). Under the terms of the Merger Agreement, the Company agreed to sell the stock of Joliet to Argosy for cash consideration of $465.0 million. The Company and Argosy closed the transaction on July 31, 2001. Net proceeds from the sale were used to retire senior debt of approximately $222.8 million with the remainder to be utilized in accordance with the Company's debt agreements, which include payment of expenditures and indemnities related to the sale, an offer to retire existing subordinated debt or to make additional investments in assets and property. NOTE 4 - LONG-TERM DEBT In July 2001, the Company amended its Credit Facility to allow, among other things, (i) for the sale of Joliet and (ii) the reduction of its loan commitment to $150 million. Current maturities of long-term debt in the accompanying Consolidated Condensed Balance Sheets, include the outstanding balance of $197.8 million on the Credit Facility as of June 30, 2001. NOTE 5 - PREOPENING EXPENSE During 2001, the Company incurred preopening expense related to the rebranding of the Company's property in Hammond, Indiana. Included in preopening expense is advertising and production costs related to the name change of approximately $1.9 million and $2.0 million for the three and six months ended June 30, 2001, respectively. NOTE 6 - CONTINGENCIES On July 5, 2001, James Wellborn and Charles J. Nickel filed a lawsuit against the Municipality of Bossier City, Louisiana asking the Court to: (i) order the City to collect a $3.00 per person boarding fee from Horseshoe Entertainment; (ii) invalidate a contract fixing the amount paid by Horseshoe Entertainment to Bossier City as opposed to a per person boarding fee; and (iii) certify the suit as a class action on behalf of all citizens and tax payers of Bossier Parish. The Company is not named in the suit but will seek to intervene to protect its interest. The Company believes the suit is without merit and will vigorously defend the validity of the contract. The Company and its subsidiaries, during the normal course of operating their business, become engaged in various litigation and other legal disputes. In the opinion of the Company's management, the ultimate disposition of such disputes will not have a material impact on the Company's operations. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the consolidated financial condition and results of operations of Horseshoe Gaming Holding Corp. (the "Company") and its subsidiaries. The discussion should be read in conjunction with the Company's consolidated condensed financial statements and notes thereto. This Quarterly Report on Form 10-Q contains certain "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which generally can be identified by the use of terms such as "may," "expect," "anticipate," "believe," "continue," or similar variations or the negative thereof. These forward looking statements are subject to certain risks and uncertainties, such as risks associated with substantial indebtedness, debt service and liquidity; risks of competition in the Company's existing and future markets; failure to obtain or retain licenses or regulatory approvals; changes in gaming laws and regulations; and other factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, which could cause actual results to differ materially. INTRODUCTION The Company is a leading multi-jurisdictional gaming company which owns and operates, through its wholly-owned subsidiaries, riverboat casinos under the "Horseshoe" and "Empress" brands. These include the Horseshoe Bossier City Casino ("Bossier City") in Bossier City, Louisiana, which commenced operations on July 9, 1994, the Horseshoe Tunica Casino ("Tunica") in Robinsonville, Mississippi, which commenced operations on February 13, 1995, the Horseshoe Hammond Casino ("Hammond") in Hammond, Indiana and the Empress Casino Joliet ("Joliet") in Joliet, Illinois. Hammond and Joliet were acquired (the "Empress Merger") from Empress Entertainment, Inc. ("Empress") on December 1, 1999. Joliet commenced operations on June 17, 1992 and Hammond commenced operations on June 28, 1996. In the second quarter of 2001, Hammond converted from the Empress brand to the Horseshoe brand. As more fully described below, the Company sold the Joliet casino on July 31, 2001. The Joliet casino gaming license was due to be renewed by the Illinois Gaming Board ("IGB") in June 2000. On June 30, 2000, the IGB preliminarily denied Joliet's application to renew its riverboat owner's license and preliminarily found Jack Binion ("Binion"), Chairman of the Board and CEO of the Company, unsuitable to be licensed as a key person. On July 19, 2000, Joliet received the Notice of Denial of License Renewal from the IGB. In response to the denial, Joliet timely filed a Verified Request for Hearing of the IGB's decision. Effective January 31, 2001, the IGB approved a settlement agreement ("Settlement Agreement") between the IGB, the Company, Joliet and Binion. Pursuant to the pertinent parts of the Settlement Agreement: (a) the Company agreed to sell Joliet to a suitable purchaser within the time frames established in the Settlement Agreement; (b) Binion will withdraw his key person application; and (c) upon the closing of the sale of Joliet, Joliet will withdraw its Verified Request for Hearing and, upon acceptance by the IGB of the withdrawal, the previous denial of Joliet's renewal application will be moot. On April 12, 2001, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Argosy Gaming Company ("Argosy"). Under the terms of the Merger Agreement, the Company agreed to sell the stock of Joliet to Argosy for cash consideration of $465.0 million. The Company and Argosy closed the transaction on July 31, 2001. 8 9 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 AND 2000

------------- (a) Before corporate allocations and other non-recurring items. (b) Not meaningful. (c) The "% Increase/(Decrease)" for operating margin represents the absolute difference in percentage points (pts.) between the two periods. (d) Includes advertising and production costs of $1.9 million. 9 10 The Company experienced a 6.7% increase in casino revenues and a 7.2% increase in net revenues in the quarter ended June 30, 2001 as compared to the prior year quarter. Strong revenue increases in Hammond and Joliet and modest increases in Tunica were partially offset by a decrease in revenues in Bossier City. In spite of the consolidated revenue increase, Bossier City, Tunica and Hammond each reported a decrease in operating income and operating margins. Joliet's operating income increased 16% in the three months ended June 30, 2001 over the prior year period but its operating margin remained flat quarter-to-quarter. Decreases in revenues, operating income and operating margins in Bossier City are largely attributable to increased competition in the Bossier City/Shreveport market. Additional competition caused decreases in slot and table game volume in Bossier City. Additionally, the property experienced lower hold percentages in both slots and table games during the quarter ended June 30, 2001. While the Company continues to be the predominant operator in the Bossier City/Shreveport market, the additional competition will likely cause operating margins to remain soft for the remainder of the year. In addition to the increased competition, casinos in the Bossier City/Shreveport market were negatively impacted by a 1% increase in gaming taxes which became effective April 1, 2001. Gaming taxes will increase an additional 1% on April 1, 2002 and 1% on April 1, 2003. Tunica experienced a 2% increase in casino revenues during the second quarter of 2001, primarily due to increases in slot volume and hold. Net revenues in the second quarter of 2001 in Tunica include the positive impact of approximately $2.0 million related to a reduction in the amount of promotional costs incurred for player database marketing. Operating income in the second quarter of 2001 includes an additional $1.6 million in depreciation expense related to the expanded facility which opened in December, 2000. Decreased operating margins in Tunica are the result of increased costs in the 2001 period related to the recently opened expansion, including staffing, utilities and higher cost of sales for food and beverage items related to the enlarged buffet and the new specialty restaurant which have not been offset by anticipated revenue increases. The Hammond property converted to the Horseshoe brand during the second quarter of 2001. Significant increases in slot and table game volume can partially be attributed to the additional promotional activity surrounding this conversion. While revenues increased substantially, operating income and operating margins decreased in the second quarter of 2001. Operating income for the three months ended June 30, 2001 as compared to the prior year period, include an additional $300,000 of depreciation expense and an approximate $600,000 charge for assets written off due to the conversion. The Company continued to invest significant resources during the three months ended June 30, 2001 in order to increase the service standard at the Hammond property as it geared up for the conversion to the Horseshoe brand. Hammond was also affected by continued construction disruption in the pavilion area during the second quarter of 2001 prior to the conversion to the Horseshoe brand. Preopening expense of $3.2 million in the three months ended June 30, 2001 relate to the rebranding of the Hammond property. Casino revenue increases in Joliet in the second quarter of 2001 can largely be attributed to an increase in the slot hold percentage along with an increase in slot volumes. The increase in slot volume and hold was slightly offset by a decrease in the table games hold percentage. Operating income in Joliet increased in the second quarter of 2001 primarily as a result of the increase in net revenues while operating margins in Joliet remained flat quarter-to-quarter. During the second quarter of 2001, Joliet incurred significant direct mail expense related to the cash offers included in several of its promotions. Corporate expenses decreased 21.3% in the three months ended June 30, 2001 as compared to the same period in the prior year due to significant legal and professional fees and charges related to the relocation of the corporate headquarters in 2000 that did not recur in 2001. Depreciation and amortization expense decreased 17.4% in the second quarter of 2001 as compared to the prior year period. This is primarily the result of ceasing to depreciate and amortize the Joliet assets once Joliet became an asset held for sale on February 1, 2001, offset by increased depreciation due to the expansions in Hammond and Tunica. 10 11 SIX MONTHS ENDED JUNE 30, 2001 AND 2000

----------- (a) Before corporate allocations and other non-recurring items. (b) Not meaningful. (c) The "% Increase/(Decrease)" for operating margin represents the absolute difference in percentage points (pts.) between the two periods. (d) Includes advertising and production costs of $2.0 million. 11 12 The Company experienced a 6.4% increase in casino revenues and a 6.3% increase in net revenues in the six months ended June 30, 2001 as compared to the prior year period. Strong revenue increases in Hammond and Joliet and a modest increase in Tunica were partially offset by a decrease in revenues in Bossier City. In spite of the consolidated revenue increase, Bossier City, Tunica and Hammond each reported a decrease in operating income and operating margins. Joliet's operating income increased 14% but its operating margin remained basically flat in the first half of 2001 as compared to the prior year period. Decreases in revenues, operating income and operating margins in Bossier City are largely attributable to increased competition in the Bossier City/Shreveport market. Additional competition caused decreases in slot and table game volume in Bossier City. Additionally, the property experienced lower table game hold during the six months ended June 30, 2001. While the Company continues to be the predominant operator in the Bossier City/Shreveport market, the additional competition will likely cause operating margins to remain soft for the remainder of the year. In addition to the increased competition, casinos in the Bossier City/Shreveport market were negatively impacted by a 1% increase in gaming taxes which became effective April 1, 2001. Gaming taxes will increase an additional 1% on April 1, 2002 and 1% on April 1, 2003. Increases in year-to-date casino revenues in Tunica of 4.1% during the first six months of 2001 were primarily the result of volume increases in both slots and table games which can be attributed to the additional gaming space which opened in December 2000. Increases in table game hold were partially offset by a decrease in the slot hold percentage in the six months ended June 30, 2001 as compared to the same period in the prior year. Net revenues in the 2001 period in Tunica include the positive impact related to a reduction in the amount of promotional costs incurred for player database marketing. Operating income for the six months ended June 30, 2001 include an additional $2.6 million in depreciation expense related to the expanded facility which opened in December 2000. Decreased operating margins in Tunica are the result of increased costs in the 2001 period related to the recently opened expansion, including staffing, utilities and higher cost of sales for food and beverage items related to the enlarged buffet and the new specialty restaurant which have not been offset by anticipated revenue increases. Casino revenues in Hammond increased 10.5% during the first half of 2001 as compared to the prior year period. Volume increases in slots and table games were partially offset by a reduction in the hold percentages in both slots and table games. The Hammond property converted to the Horseshoe brand during the second quarter of 2001. Increases in slot and table game volume can partially be attributed to the additional promotional activity surrounding this conversion. While revenues increased, operating income and operating margins decreased in the first six months of 2001. Operating income for the six months ended June 30, 2001 as compared to the prior year period, include an additional $700,000 of depreciation expense and an approximate $600,000 charge for assets written off due to the conversion. The Company continued to invest significant resources during the first half of 2001 in order to increase the service standard at the Hammond property as it geared up for the conversion to the Horseshoe brand. Hammond was also affected by continued construction disruption in the pavilion area during the first half of 2001 prior to the conversion to the Horseshoe brand. Preopening expense of $4.1 million in the six months ended June 30, 2001 relate to the rebranding of the Hammond property. Casino revenue increases in Joliet in the first six months of 2001 can be attributed to increases in both slot hold and slot volume. Operating income in Joliet increased in the first half of 2001 primarily as a result of the increase in net revenues while operating margins in Joliet remained basically flat between the two periods. During the first half of 2001, Joliet incurred significant direct mail expense related to the cash offers included in several of its promotions. Corporate expenses decreased 17.2% in the six months ended June 30, 2001 as compared to the same period in the prior year due to significant legal and professional fees and charges related to the relocation of the corporate headquarters in 2000 that did not recur in 2001. Depreciation and amortization expense decreased 12.4% in the first six months of 2001 as compared to the prior year period. This is primarily the result of ceasing to depreciate and amortize the Joliet assets once Joliet became an asset held for sale on February 1, 2001, offset by increased depreciation due to the expansions in Hammond and Tunica. 12 13 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2001, the Company had cash and cash equivalents of $80.0 million. During the six months ended June 30, 2001, cash provided by operating activities was $81.9 million and net cash used in investing activities was $27.4 million. During the first half of 2001, the Company had a net repayment of long-term debt of $29.7 million and paid capital dividends of $22.9 million for a net total of approximately $52.6 million used in financing activities. On July 31, 2001, the Company completed the sale of its Empress Joliet Casino for $465.0 million in cash. Net proceeds from the sale were used to retire senior debt of approximately $222.8 million with the remainder to be utilized in accordance with the Company's debt agreements, which include payment of expenditures and indemnities related to the sale, an offer to retire existing subordinated debt or to make additional investments in assets and property. In July 2001, the Company borrowed an additional $25.0 million under its Credit Facility in order to bring the total of its senior debt to approximately $222.8 million. Effective July 31, 2001, the Company reduced its commitment on its Credit Facility to $150 million. As of August 10, 2001, there was no outstanding balance on the Credit Facility. The outstanding balance of $197.8 million on the Credit Facility as of June 30, 2001 is classified as current maturities of long-term debt on the accompanying Consolidated Condensed Balance Sheets. The Company believes that the Company's cash and cash equivalents on hand, cash from operations and available borrowing capacity will be adequate to meet the Company's debt service obligations and capital expenditures commitments for the next twelve months. Recently Adopted Accounting Pronouncements In January 2001, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue 3 of Issue 00-22 ("EITF 00-22"), "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". EITF 00-22 requires that incentives to induce casino play ("Points") be recorded as a reduction of revenue. The Company had historically classified Points as operating expenses. In accordance with the transition rules, the Company adopted EITF 00-22 in the first quarter of 2001. Points of $6.3 million and $8.5 million were recorded for the three months ended June 30, 2001 and 2000, respectively, and points of $14.1 million and $16.5 million were recorded for the six months ended June 30, 2001 and 2000, respectively, and are included as promotional allowances and other in the accompanying Consolidated Condensed Statements of Operations. The adoption of EITF 00-22 had no effect on the Company's operating income. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). These pronouncements change the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142 states that goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed for impairment annually (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and the impact that adoption will have on the Company's financial position and results of operations. The Company amortized $2.9 million and $4.2 million of goodwill in three months ended June 30, 2001 and 2000, respectively, and $6.5 million and $9.7 million in the six months ended June 30, 2001 and 2000, respectively. 13 14 CONTINGENCIES On July 5, 2001, James Wellborn and Charles J. Nickel filed a lawsuit against the Municipality of Bossier City, Louisiana asking the Court to: (i) order the City to collect a $3.00 per person boarding fee from Horseshoe Entertainment; (ii) invalidate a contract fixing the amount paid by Horseshoe Entertainment to Bossier City as opposed to a per person boarding fee; and (iii) certify the suit as a class action on behalf of all citizens and tax payers of Bossier Parish. The Company is not named in the suit but will seek to intervene to protect its interest. The Company believes the suit is without merit and will vigorously defend the validity of the contract. The Company and its subsidiaries, during the normal course of operating their business, become engaged in various litigation and other legal disputes. In the opinion of the Company's management, the ultimate disposition of such disputes will not have a material impact on the Company's operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK As of June 30, 2001 there were no material changes to the information incorporated by reference in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On November 30, 1999, the Illinois Gaming Board ("IGB") approved the acquisition of Empress Joliet by the Company, placing certain conditions on its decision. One of the conditions was the completion of the investigation and approval of all key persons of the Company. On March 13, 2000, Empress Joliet filed its renewal application with the IGB and on June 30, 2000, the IGB issued its initial decision and directed the Administrator to issue a Notice of Denial to Empress Joliet, denying its application for renewal of its Owner's License. On July 19, 2000, Empress Joliet received the Notice of Denial of License Renewal from the IGB. In response to the denial, the Company filed an appeal and submitted a request for an administrative hearing. Effective January 31, 2001, the IGB approved a settlement agreement between the IGB, the Company, Empress Joliet and Jack Binion, Chairman of the Board and CEO of the Company. Pursuant to the settlement, on August 2, 2001, Joliet withdrew its Verified Request for Hearing, rendering the previous denial of Joliet's renewal application moot. On July 5, 2001, James Wellborn and Charles J. Nickel filed a lawsuit against the Municipality of Bossier City, Louisiana asking the Court to: (i) order the City to collect a $3.00 per person boarding fee from Horseshoe Entertainment; (ii) invalidate a contract fixing the amount paid by Horseshoe Entertainment to Bossier City as opposed to a per person boarding fee; and (iii) certify the suit as a class action on behalf of all citizens and tax payers of Bossier Parish. The Company is not named in the suit but will seek to intervene to protect its interest. The Company believes the suit is without merit and will vigorously defend the validity of the contract. 14 15 ITEM 5. OTHER INFORMATION DISPOSITION OF ASSETS On July 31, 2001, Horseshoe Gaming Holding Corp. (the "Company") sold the stock of Empress Casino Joliet Corporation ("Empress Joliet"), a wholly owned subsidiary of the Company, to Argosy Gaming Company ("Argosy") for cash consideration of $465 million. The sale was consummated pursuant to an Agreement and Plan of Merger dated as of April 12, 2001, by and among Argosy, Joliet Acquisition Corporation, Empress Joliet and the Company. The purchase price was paid in cash and the amount was determined through arms-length negotiations between the Company and Argosy. The required pro forma financial information relating to the Company's disposition of Empress Joliet as of and for the six months ended June 30, 2001 and for the twelve months ended December 31, 2000 are attached hereto. HORSESHOE GAMING HOLDING CORP. UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed financial statements give effect to the sale of Empress Joliet, as if such transaction had occurred, for balance sheet purposes on June 30, 2001 and, for statement of operations purposes, on January 1, 2001 and January 1, 2000, respectively. These unaudited pro forma condensed financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto. The pro forma information is not necessarily indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of the Company's future results. 15 16 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED BALANCE SHEET AS OF JUNE 30, 2001 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

See notes to unaudited pro forma condensed balance sheet. 16 17 NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET (a) Reflects additional borrowing on the Credit Facility prior to the sale of Empress Joliet. (b) Reflects the estimated net proceeds from the sale of Empress Joliet. (c) Reflects the estimated net assets sold to Argosy. (d) Reflects the partial use of proceeds on the sale of Empress Joliet to pay down existing balances on the Credit Facility. The Company plans to further reduce debt by approximately $160 million in June 2002, the first call date on the 9-3/8% Senior Subordinated Notes. (e) Reflects the estimated tax distribution from the gain on the sale of Empress Joliet. (f) Reflects the estimated gain on the sale of Empress Joliet. The following is a preliminary calculation of the estimated impact to the statement of operations for this transaction: Purchase price cash proceeds $465,000 Less: Net working capital (6,117) Estimated transaction and other related costs (22,151) --------- Estimated net proceeds 436,732 Less: Estimated net book value of assets and liabilities disposed (284,831) --------- Estimated gain $151,901 =========

17 18 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (IN THOUSANDS)

------------ ** Includes push-down adjustments See notes to unaudited pro forma condensed statement of operations. 18 19 HORSESHOE GAMING HOLDING CORP. AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)

------------ ** Includes push-down adjustments See notes to unaudited pro forma condensed statement of operations. 19 20 NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (a) Reflects the elimination of intercompany charges included in retail and other, corporate expense and deferred compensation. (b) Reflects the elimination of intercompany interest expense. (c) Reflects the reduction in interest expense based on the pay down of the Credit Facility as calculated below:

(d) Reflects estimated earnings on unused proceeds from sale of Empress Joliet as calculated below: Estimated net proceeds $ 436,732 Estimated tax distributions (40,099) Repayment on Credit Facility (222,750) --------- Available proceeds to invest 173,883 Estimated interest rate 3.50% --------- Estimated annual interest income $ 6,086 ========= Estimated interest income for six months $ 3,043 =========

20 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

---------- (a) Filed as an exhibit to Horseshoe Gaming Holding Corp.'s Form 8-K filed on April 19, 2001. (b) Filed as an exhibit to Horseshoe Gaming Holding Corp.'s Form S-4 Registration Statement filed on June 15, 1999. (c) Filed herewith. Reports on Form 8-K filed during the quarter: None 21 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HORSESHOE GAMING HOLDING CORP. a Delaware corporation Date: August 14, 2001 By: /s/ Kirk C. Saylor --------------------------------- Kirk C. Saylor Chief Financial Officer and Treasurer (Principal Financial Officer) 22 23 EXHIBIT INDEX

HORSESHOE GAMING HOLDING CORP 10-Q