**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

 

**FORM 10-Q**

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

 

**Commission File Number 1-11853**

 

**ARGOSY GAMING COMPANY**

(Exact name ofRegistrant as Specified in its Charter)

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  ý  No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes  ý  No  o

 

**APPLICABLE ONLY TOCORPORATE ISSUERS:**

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock asof the latest practicable date: 29,202,022 shares of Common Stock, $.01 par value per share, as ofAugust 8, 2003.

 

 

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**ARGOSYGAMING COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS**(In Thousands, ExceptShare and Per Share Data)

 
|                                                                                                                                                                            |   | **June 30,  2003** |      | **December 31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------------|------------|
|                                                                                                                                                                            |   | **(unaudited)**         |      |                        | ** ** |
| **Current assets:**                                                                                                                                                             |   |                    |      |                        |       |
| Cash and cash equivalents                                                                                                                                                       |   | $                       | 63,441    |                        | $          | 59,720 |   |
| Accounts receivable, net                                                                                                                                                        |   | 3,318                   |      | 3,833                       |       |
| Income taxes receivable                                                                                                                                                         |   | 331                     |      | 7,944                       |       |
| Deferred income taxes                                                                                                                                                           |   | 7,324                   |      | 7,324                       |       |
| Other current assets                                                                                                                                                            |   | 6,049                   |      | 5,433                       |       |
| Total current assets                                                                                                                                                            |   | 80,463                  |      | 84,254                      |       |
|                                                                                                                                                                            |   |                    |      |                        |       |
| **Net property and equipment**                                                                                                                                                  |   | 497,023                 |      | 455,894                     |       |
|                                                                                                                                                                            |   |                    |      |                        |       |
| **Other assets:**                                                                                                                                                               |   |                    |      |                        |       |
| Deferred finance costs, net                                                                                                                                                     |   | 18,988                  |      | 20,143                      |       |
| Goodwill, net                                                                                                                                                                   |   | 727,470                 |      | 727,470                     |       |
| Intangible assets, net                                                                                                                                                          |   | 27,270                  |      | 28,451                      |       |
| Other, net                                                                                                                                                                      |   | 2,386                   |      | 2,353                       |       |
| Total other assets                                                                                                                                                              |   | 776,114                 |      | 778,417                     |       |
| **Total assets**                                                                                                                                                                |   | $                       | 1,353,600 |                        | $          | 1,318,565 |   |
|                                                                                                                                                                            |   |                    |      |                        |       |
| **Current liabilities:**                                                                                                                                                        |   |                    |      |                        |       |
| Accounts payable                                                                                                                                                                |   | $                       | 22,861    |                        | $          | 17,459 |   |
| Accrued payroll and related expenses                                                                                                                                            |   | 22,734                  |      | 24,279                      |       |
| Accrued gaming and admission taxes                                                                                                                                              |   | 46,740                  |      | 36,996                      |       |
| Other accrued liabilities                                                                                                                                                       |   | 36,385                  |      | 32,299                      |       |
| Accrued interest                                                                                                                                                                |   | 9,234                   |      | 9,427                       |       |
| Current maturities of long-term debt                                                                                                                                            |   | 4,557                   |      | 4,469                       |       |
| Total current liabilities                                                                                                                                                       |   | 142,511                 |      | 124,929                     |       |
|                                                                                                                                                                            |   |                    |      |                        |       |
| **Long-term debt**                                                                                                                                                              |   | 872,185                 |      | 886,315                     |       |
| **Deferred income taxes**                                                                                                                                                       |   | 62,659                  |      | 55,073                      |       |
| **Other long-term obligations**                                                                                                                                                 |   | 6,046                   |      | 6,248                       |       |
|                                                                                                                                                                            |   |                    |      |                        |       |
| **Stockholders’ equity:**                                                                                                                                                  |   |                    |      |                        |       |
| Common stock, $.01 par; 120,000,000 shares authorized;  29,202,022 and 28,946,229 shares issued and outstanding at June 30, 2003  and December 31, 2002, respectively |   | 292                     |      | 289                         |       |
| Capital in excess of par                                                                                                                                                        |   | 91,062                  |      | 88,686                      |       |
| Accumulated other comprehensive (loss)                                                                                                                                          |   | (3,373                  | )         | (3,583                      | )          |
| Retained earnings                                                                                                                                                               |   | 182,218                 |      | 160,608                     |       |
| Total stockholders’ equity                                                                                                                                                 |   | 270,199                 |      | 246,000                     |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                            |   | $                       | 1,353,600 |                        | $          | 1,318,565 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANYCONDENSED CONSOLIDATED STATEMENTS OF INCOME**(In Thousands, ExceptShare and Per Share Data)

 
|                                |   | **Six Months  Ended**   |    | **Three  Months Ended** |       |
|-------------------------------------|--------|-------------------------|---------|-------------------------|------------|
|                                |   | **June 30,  2003** |    | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                                |   | **(unaudited)**         |    | **(unaudited)**         |       | **(unaudited)** |   | **(unaudited)** |   |
| **Revenues:**                       |   |                    |    |                    |       |   |   |   |   |
| Casino                              |   | $                       | 493,010 |                    | $          | 477,288 |   | $ | 252,153 |   | $ | 235,198 |   |
| Admissions                          |   | 6,167                   |    | 5,414                   |       | 3,162 |   | 2,622 |   |
| Food, beverage and other            |   | 49,753                  |    | 48,893                  |       | 24,993 |   | 24,161 |   |
|                                |   | 548,930                 |    | 531,595                 |       | 280,308 |   | 261,981 |   |
| Less promotional allowances         |   | (64,253                 | )       | (56,519                 | )          | (31,963 | ) | (28,616 | ) |
| Net  revenues                       |   | 484,677                 |    | 475,076                 |       | 248,345 |   | 233,365 |   |
|                                |   |                    |    |                    |       |   |   |   |   |
| **Costs and expenses:**             |   |                    |    |                    |       |   |   |   |   |
| Gaming and admission taxes          |   | 175,323                 |    | 150,024                 |       | 95,466 |   | 82,135 |   |
| Casino                              |   | 67,374                  |    | 72,064                  |       | 33,228 |   | 35,425 |   |
| Selling, general and administrative |   | 75,270                  |    | 66,023                  |       | 39,481 |   | 32,704 |   |
| Food, beverage and other            |   | 35,559                  |    | 37,056                  |       | 17,761 |   | 18,319 |   |
| Other operating expenses            |   | 20,885                  |    | 20,956                  |       | 10,379 |   | 10,462 |   |
| Depreciation and amortization       |   | 25,522                  |    | 22,904                  |       | 12,839 |   | 11,290 |   |
| Write-down of assets                |   | 6,500                   |    | —                  |       | 6,500 |   | — |   |
|                                |   | 406,433                 |    | 369,027                 |       | 215,654 |   | 190,335 |   |
| Income  from operations             |   | 78,244                  |    | 106,049                 |       | 32,691 |   | 43,030 |   |
|                                |   |                    |    |                    |       |   |   |   |   |
| **Other income (expense):**         |   |                    |    |                    |       |   |   |   |   |
| Interest income                     |   | 86                      |    | 102                     |       | 35 |   | 52 |   |
| Interest expense                    |   | (37,936                 | )       | (41,347                 | )          | (18,989 | ) | (20,501 | ) |
|                                |   | (37,850                 | )       | (41,245                 | )          | (18,954 | ) | (20,449 | ) |
|                                |   |                    |    |                    |       |   |   |   |   |
| Income  before income taxes         |   | 40,394                  |    | 64,804                  |       | 13,737 |   | 22,581 |   |
|                                |   |                    |    |                    |       |   |   |   |   |
| Income  tax expense                 |   | (18,784                 | )       | (28,838                 | )          | (6,788 | ) | (11,315 | ) |
|                                |   |                    |    |                    |       |   |   |   |   |
| **Net income**                      |   | $                       | 21,610  |                    | $          | 35,966 |   | $ | 6,949 |   | $ | 11,266 |   |
|                                |   |                    |    |                    |       |   |   |   |   |
| **Basic income per share**          |   | $                       | 0.75    |                    | $          | 1.25 |   | $ | 0.24 |   | $ | 0.39 |   |
|                                |   |                    |    |                    |       |   |   |   |   |
| **Diluted income per share**        |   | $                       | 0.74    |                    | $          | 1.22 |   | $ | 0.24 |   | $ | 0.38 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**(In Thousands, ExceptShare and Per Share Data)

 
|                                                                               |   | **Six Months  Ended**   |   |
|------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                               |   | **June 30,  2003** |   | **June 30,  2002** | ** ** |
|                                                                               |   | **(unaudited)**         |   | **(unaudited)** | ** ** |
| **Cash flows from operating  activities:**                                         |   |                    |   |   |   |
| Net income                                                                         |   | $                       | 21,610 |   | $ | 35,966 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                    |   |   |   |
| Depreciation                                                                       |   | 24,342                  |   | 21,731 |   |
| Amortization                                                                       |   | 3,213                   |   | 3,180 |   |
| Loss on sale of fixed assets                                                       |   | 244                     |   | 341 |   |
| Compensation expense recognized on issuance of  stock                              |   | 74                      |   | — |   |
| Write-down of assets                                                               |   | 6,500                   |   | — |   |
| Deferred income taxes                                                              |   | 8,270                   |   | 5,777 |   |
| Changes in operating assets and liabilities, net  of effect from acquisitions:     |   |                    |   |   |   |
| Accounts receivable and other current assets                                       |   | 8,324                   |   | (1,452 | ) |
| Accounts payable and other current liabilities                                     |   | 12,048                  |   | 13,054 |   |
| Net cash provided by operating activities                                          |   | 84,625                  |   | 78,597 |   |
|                                                                               |   |                    |   |   |   |
| **Cash flows from investing  activities:**                                         |   |                    |   |   |   |
| Purchases of property and equipment                                                |   | (67,693                 | )      | (18,341 | ) |
| Other                                                                              |   | 227                     |   | 663 |   |
| Net cash used in investing activities                                              |   | (67,466                 | )      | (17,678 | ) |
|                                                                               |   |                    |   |   |   |
| **Cash flows from financing  activities:**                                         |   |                    |   |   |   |
| Repayment of line of credit, net                                                   |   | (11,800                 | )      | (59,000 | ) |
| Payments on long-term debt                                                         |   | (1,809                  | )      | (1,781 | ) |
| Proceeds from stock option exercises                                               |   | 1,481                   |   | 221 |   |
| Increase in deferred finance costs                                                 |   | (1,310                  | )      | — |   |
| Other                                                                              |   | —                  |   | (29 | ) |
| Net cash used in financing activities                                              |   | (13,438                 | )      | (60,589 | ) |
| Net increase in cash and cash equivalents                                          |   | 3,721                   |   | 330 |   |
| Cash and cash equivalents, beginning of period                                     |   | 59,720                  |   | 57,221 |   |
| Cash and cash equivalents, end of period                                           |   | $                       | 63,441 |   | $ | 57,551 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANYCONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**(Unaudited - InThousands, Except Share and Per Share Data)

 
|                                                    |   | **Shares** |       | **Common  Stock** | ** ** | **Capital in  Excess of Par** | ** ** | **Accumulated  Other  Comprehensive  (Loss) Income** |       | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------|--------|------------|------------|-------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
|                                                    |   |       | ** ** |              | ** ** |                          | ** ** |                                                 | ** ** |                   | ** ** |                                  | ** ** |
| Balance, December 31, 2002                         |   | 28,946,229 |       | $                 | 289        |                          | $          | 88,686                                               |       | $                      | (3,583     | )                                     | $          | 160,608 |   | $ | 246,000 |   |
| Exercise of stock options, including tax benefit        |   | 164,353    |       | 2                 |       | 1,948                         |       |                                                 |       |                   |       | 1,950                                 |       |
| Exercise of warrants                                    |   | 91,440     |       | 1                 |       | 354                           |       |                                                 |       |                   |       | 355                                   |       |
| Restricted stock compensation expense                   |   |       |       |              |       | 74                            |       |                                                 |       |                   |       | 74                                    |       |
| Comprehensive income:                                   |   |       |       |              |       |                          |       |                                                 |       |                   |       |                                  |       |
| Other comprehensive income - interest rate swaps        |   |       |       |              |       |                          |       | 210                                                  |       |                   |       | 210                                   |       |
| Net income for the six months ended June 30,  2003 |   |       |       |              |       |                          |       |                                                 |       | 21,610                 |       | 21,610                                |       |
| Comprehensive income                                    |   |       |       |              |       |                          |       |                                                 |       |                   |       | 21,820                                |       |
|                                                    |   |       |       |              |       |                          |       |                                                 |       |                   |       |                                  |       |
| Balance, June 30, 2003                             |   | 29,202,022 |       | $                 | 292        |                          | $          | 91,062                                               |       | $                      | (3,373     | )                                     | $          | 182,218 |   | $ | 270,199 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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**ARGOSYGAMING COMPANY**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

(In Thousands, Except Share and Per ShareData)

 

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

 

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

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. Interim results may not necessarily be indicative of results which maybe expected for any other interim period or for the year as a whole.  For further information, refer to thefinancial statements and footnotes thereto for the year ended December 31,2002, included in our Annual Report on Form 10-K (File No. 1-11853).  The accompanying unaudited condensedconsolidated financial statements contain all adjustments, which are, in theopinion of management, necessary to present fairly the financial position andthe results of operations for the periods indicated.  Such adjustments include normal recurring accruals as well as awrite-down of assets and adjustments to record our gaming taxes at the effectiveannual rate.  Certain 2002 amounts havebeen reclassified to conform to the 2003 financial statement presentation.

 

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

 

Long-term debt consists of the following:

 
|                                                                                                                                                 |   | **June 30,  2003** |    | **December 31,  2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|------------|
|                                                                                                                                                 |   | **(unaudited)**         |    |                        | ** ** |
| Senior secured line of credit, expires  July 31, 2006, interest payable at least quarterly at either LIBOR or  prime plus a margin              |   | $                       | 46,500  |                        | $          | 58,300 |   |
| Term loan, matures July 31, 2008, principal  and interest payments due quarterly at either LIBOR and/or prime plus a margin                     |   | 269,500                 |    | 270,875                     |       |
| Subordinated notes, including unamortized premium  of $7,084 at June 30, 2003, due June 1, 2009, interest payable  semi-annually at 10.75% |   | 357,084                 |    | 357,517                     |       |
| Subordinated notes, due September 2011,  interest payable semi-annually at 9.0%                                                                 |   | 200,000                 |    | 200,000                     |       |
| Notes payable, principal and interest payments due  quarterly through September 2015, discounted at 10.5%                                       |   | 3,658                   |    | 4,092                       |       |
|                                                                                                                                                 |   | 876,742                 |    | 890,784                     |       |
| Less: current maturities                                                                                                                             |   | 4,557                   |    | 4,469                       |       |
| Long-term debt, less current maturities                                                                                                              |   | $                       | 872,185 |                        | $          | 886,315 |   |

 

On July 26, 2001, we issued$200,000 of 9.0% subordinated notes due 2011. On February 1, 2001, we issued $150,000 of additional 103⁄4%subordinated notes due 2009. Prior to this issuance, we had $200,000 ofoutstanding 103⁄4% subordinated notes (all “subordinated notes”). OnJuly 31, 2001, we entered into an amended and restated senior secured lineof credit, maintaining our available line of credit at $400,000 and adding aterm loan of $275,000 (“credit facility”). On April 18, 2003, we entered into the First Amendment to thecredit facility, which updated and extended certain capital expenditurelimitations, financial ratios and other items of the credit facility whilemaintaining our current available line of credit and term loan.  The credit facility is secured by liens onsubstantially all of our assets and our subsidiaries are co-borrowers.Substantially all of our subsidiaries fully and unconditionally guarantee thesubordinated notes on a joint and several basis. The subordinated notes rankjunior to all of our senior indebtedness, including borrowings under the creditfacility.

 

The subordinated notes and thecredit facility contain certain restrictions on the payment of dividends on ourcommon stock and the incurrence of additional indebtedness, as well as othercustomary debt covenants.   In addition,the credit facility requires us to maintain certain financial ratios as ofJune 30, 2003, as follows: (1) Total Funded Debt to EBITDA Ratio of amaximum of 4.25 to 1.0; (2) Senior Leverage Ratio of a maximum of 2.50 to 1.0;and (3) Fixed Charge Ratio of a minimum of 1.50 to 1.0.  As of June 30, 2003, we are incompliance with these ratios.

 

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

 

In December 2002, the FinancialAccounting Standards Board issued FAS 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”. We have a stock-based employee compensation plan and a stock-based directorcompensation plan.  As we continue to followAPB 25 for stock options granted to employees and directors, no stock-basedcompensation cost is reflected in net income, as all options granted underthose plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant.  Theeffect on net income and earnings per share if we had applied the fair valuerecognition provisions of FAS 123 to stock-based employee compensationwould be a decrease in net income of $188 and $387 and a decrease in dilutedearnings per share of $0.01 and $0.01 for the three months and six months endedJune 30, 2003, respectively.  Forthe three months and six months ended June 30, 2002, net income would havedecreased by $121 and $221 and diluted earnings per share would have decreasedby $0.00 and $0.01, respectively.

 

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

 

The following table sets forththe computation of basic and diluted earnings per share:

 
|                                                                                                   |   | **Six Months  Ended**   |   | **Three  Months Ended** |       |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|------------|
|                                                                                                   |   | **June 30,  2003** |   | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                                                                                                   |   | **(unaudited)**         |   | **(unaudited)**         |       | **(unaudited)** |   | **(unaudited)** |   |
| **Numerator:**                                                                                         |   |                    |   |                    |       |   |   |   |   |
| Numerator for basic and diluted earnings per share  - Net income                                       |   | $                       | 21,610 |                    | $          | 35,966 |   | $ | 6,949 |   | $ | 11,266 |   |
|                                                                                                   |   |                    |   |                    |       |   |   |   |   |
| **Denominator:**                                                                                       |   |                    |   |                    |       |   |   |   |   |
| Denominator for basic earnings per share -  weighted average shares outstanding                        |   | 29,026,856              |   | 28,840,352              |       | 29,106,597 |   | 28,846,081 |   |
|                                                                                                   |   |                    |   |                    |       |   |   |   |   |
| Effect of dilutive securities (computed using the  treasury stock method):                             |   |                    |   |                    |       |   |   |   |   |
| Employee and directors stock options and warrants                                                      |   | 245,557                 |   | 554,611                 |       | 205,130 |   | 547,001 |   |
| Restricted stock                                                                                       |   | 5,287                   |   | —                  |       | 8,470 |   | — |   |
| Dilutive potential common shares                                                                       |   | 250,844                 |   | 554,611                 |       | 213,600 |   | 547,001 |   |
| Denominator for diluted earnings per share -  adjusted weighted-average shares and assumed conversions |   | 29,277,700              |   | 29,394,963              |       | 29,320,197 |   | 29,393,082 |   |
|                                                                                                   |   |                    |   |                    |       |   |   |   |   |
| Basic earnings per share                                                                               |   | $                       | 0.75   |                    | $          | 1.25 |   | $ | 0.24 |   | $ | 0.39 |   |
|                                                                                                   |   |                    |   |                    |       |   |   |   |   |
| Diluted earnings per share                                                                             |   | $                       | 0.74   |                    | $          | 1.22 |   | $ | 0.24 |   | $ | 0.38 |   |

 

For the six months endedJune 30, 2003, employee options to purchase 575,565 shares of common stockpriced at a range from $18.93 - $35.18 per share and director options topurchase 20,500 shares of common stock priced at a range from $22.30 - $39.99per share, were not included in the computation of diluted earnings per sharebecause the option exercise price was greater than the average market price ofthe underlying common shares and, therefore, the effect would be anti-dilutive.

 

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

 

In February 2003, weissued 25,000 shares of restricted common stock to a new employee.  These shares will vest 50% inFebruary 2004 and 50% in February 2005.  Compensation expense of $409 is being amortized over the vestingperiod.  In April 2003, under theArgosy Gaming Company Stock Option Plan, we issued 259,821 shares of non-qualifiedstock options to certain key employees.

 

7

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**5.****              Goodwilland Other Intangible Assets**

 

Under the provisions ofSFAS Statement 142, “Goodwill and Other Intangible Assets”, impairment testingis required at least annually. Additionally, as a result of the gaming and admission tax increases inIllinois effective July 1, 2003, we performed an interim impairment teston the goodwill and other intangibles for our Empress Casino Joliet(“Empress”).  This interim impairmenttesting indicated no impairment for Empress as of June 30, 2003.

 

**6.****              Commitmentsand Contingent Liabilities**

 

We are subject to, fromtime to time, various legal and regulatory proceedings in the ordinary courseof our business.  We believe thatcurrent proceedings will not have a material effect on our financial conditionor the results of our operations.

 

**ARGOSY GAMING COMPANYMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

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

 

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

 

*This*Report*contains forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of1995.  When used in this document, thewords “anticipate”, “believe”, “estimate” and “expect” and similar expressionsare generally intended to identify forward-looking statements.  Investors are cautioned that anyforward-looking statements, including those regarding the intent, belief orcurrent expectations of the Company or its management, are not guarantees offuture performance and involve risks and uncertainties, and that actual resultsmay differ materially from those in the forward-looking statements as a resultof various factors including, but not limited to, (i) construction delaysrelated to the Company’s expansion projects, (ii) competitive and generaleconomic conditions in the markets in which the Company operates, (iii) theeffect of future legislation or regulatory changes on the Company’s operations,including but not limited to gaming tax increases, issuances of additionalgaming licenses and the approval of cashless slots and (iv) other risksdetailed from time to time in the Company’s Securities and Exchange Commissionfilings.  The Company does not intend toupdate these forward-looking statements.*

 

**Overview**

 

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

 

Effective July 1, 2003, Illinois enactednew legislation increasing gaming and admission tax rates.  As a result, we have decided to write-down$6.5 million in barge assets previously held for future development at ourJoliet facility.  Since opening our newbarge facility in Joliet in May 2003, Joliet’s casino revenues haveincreased.  In June 2003, Indianaenacted legislation resulting in a $5.9 million charge at our Indiana facilityregarding the calculation of the 2002 Indiana gaming tax rate increase.  Dockside gaming has continued to positivelyimpact our Lawrenceburg casino revenues. In Illinois, the increased taxes and dockside gaming in Indiana havecontinued to negatively impact our Illinois casinos.

 

In 2002, many factors affected our casinos’operations.  Effective August 1,2002, our Lawrenceburg casino commenced dockside gaming.  This had a positive impact on casino revenuesin the last half of 2002.  During thesecond quarter 2002, Illinois and Indiana enacted legislation increasing gamingtax rates.  Also, in late 2001 and 2002,three competitors made significant renovations, which, coupled with theincreased gaming tax rates, have negatively impacted our Alton and Joliet,Illinois casino operations.  Inaddition, dockside gaming in Indiana, effective August 2002, has negativelyimpacted our Joliet, Illinois casino operations.

 

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**ARGOSYGAMING COMPANY AND SUBSIDIARIESSELECTED FINANCIAL INFORMATIONCASINO AND NET REVENUES(In Thousands)**

 
|                         |   | **Six Months  Ended**   |    | **Three  Months Ended** |       |
|------------------------------|--------|-------------------------|---------|-------------------------|------------|
|                         |   | **June 30,  2003** |    | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                         |   | **(unaudited)**         |    | **(unaudited)**         |       | **(unaudited)** |   | **(unaudited)** |   |
| **Casino Revenues**          |   |                    |    |                    |       |   |   |   |   |
| Alton Belle Casino           |   | $                       | 58,586  |                    | $          | 61,307 |   | $ | 29,199 |   | $ | 30,237 |   |
| Argosy Casino - Riverside    |   | 48,116                  |    | 50,631                  |       | 23,658 |   | 24,833 |   |
| Argosy Casino - Baton Rouge  |   | 40,489                  |    | 39,636                  |       | 20,430 |   | 19,472 |   |
| Argosy Casino - Sioux City   |   | 21,169                  |    | 19,276                  |       | 10,780 |   | 9,498 |   |
| Argosy Casino - Lawrenceburg |   | 200,197                 |    | 181,982                 |       | 103,136 |   | 88,940 |   |
| Empress Casino Joliet        |   | 124,453                 |    | 124,456                 |       | 64,950 |   | 62,218 |   |
| Total                        |   | $                       | 493,010 |                    | $          | 477,288 |   | $ | 252,153 |   | $ | 235,198 |   |
|                         |   |                    |    |                    |       |   |   |   |   |
| **Net Revenues**             |   |                    |    |                    |       |   |   |   |   |
| Alton Belle Casino           |   | $                       | 56,135  |                    | $          | 59,134 |   | $ | 27,910 |   | $ | 29,128 |   |
| Argosy Casino - Riverside    |   | 46,014                  |    | 48,639                  |       | 22,650 |   | 23,853 |   |
| Argosy Casino - Baton Rouge  |   | 41,802                  |    | 40,677                  |       | 20,967 |   | 20,065 |   |
| Argosy Casino - Sioux City   |   | 20,575                  |    | 18,788                  |       | 10,475 |   | 9,152 |   |
| Argosy Casino - Lawrenceburg |   | 202,423                 |    | 185,593                 |       | 104,085 |   | 90,498 |   |
| Empress Casino Joliet        |   | 117,728                 |    | 122,245                 |       | 62,258 |   | 60,669 |   |
| Total                        |   | $                       | 484,677 |                    | $          | 475,076 |   | $ | 248,345 |   | $ | 233,365 |   |

 

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**ARGOSYGAMING COMPANY AND SUBSIDIARIESSELECTED FINANCIAL INFORMATIONRECONCILIATION OF INCOME FROM OPERATIONS TO EBITDA(In Thousands)**

 
|                                       |   | **Six Months  Ended**   |    | **Three  Months Ended** |       |
|--------------------------------------------|--------|-------------------------|---------|-------------------------|------------|
|                                       |   | **June 30,  2003** |    | **June 30,  2002** | ** ** | **June 30,  2003** | ** ** | **June 30,  2002** | ** ** |
|                                       |   | **(unaudited)**         |    | **(unaudited)**         |       | **(unaudited)** |   | **(unaudited)** |   |
| **Income (loss) from Operations**          |   |                    |    |                    |       |   |   |   |   |
| Alton Belle Casino                         |   | $                       | 9,333   |                    | $          | 15,720 |   | $ | 2,619 |   | $ | 7,231 |   |
| Argosy Casino - Riverside                  |   | 7,402                   |    | 10,907                  |       | 3,408 |   | 4,958 |   |
| Argosy Casino - Baton Rouge (1)            |   | 2,989                   |    | 4,512                   |       | 1,200 |   | 1,896 |   |
| Argosy Casino - Sioux City                 |   | 3,590                   |    | 3,565                   |       | 1,831 |   | 1,645 |   |
| Argosy Casino - Lawrenceburg               |   | 50,431                  |    | 52,855                  |       | 24,365 |   | 20,246 |   |
| Empress Casino Joliet (2)                  |   | 16,218                  |    | 28,569                  |       | 5,510 |   | 11,492 |   |
| Corporate                                  |   | (11,719                 | )       | (10,079                 | )          | (6,242 | ) | (4,438 | ) |
| Total                                      |   | $                       | 78,244  |                    | $          | 106,049 |   | $ | 32,691 |   | $ | 43,030 |   |
|                                       |   |                    |    |                    |       |   |   |   |   |
| **Depreciation and Amortization  Expense** |   |                    |    |                    |       |   |   |   |   |
| Alton Belle Casino                         |   | $                       | 3,411   |                    | $          | 3,247 |   | $ | 1,640 |   | $ | 1,641 |   |
| Argosy Casino - Riverside                  |   | 2,818                   |    | 2,129                   |       | 1,373 |   | 1,046 |   |
| Argosy Casino - Baton Rouge (1)            |   | 4,232                   |    | 3,947                   |       | 2,170 |   | 1,973 |   |
| Argosy Casino - Sioux City                 |   | 2,187                   |    | 1,565                   |       | 1,141 |   | 776 |   |
| Argosy Casino - Lawrenceburg               |   | 6,494                   |    | 6,744                   |       | 3,257 |   | 3,206 |   |
| Empress Casino Joliet                      |   | 5,333                   |    | 4,822                   |       | 2,723 |   | 2,421 |   |
| Corporate                                  |   | 1,047                   |    | 450                     |       | 535 |   | 227 |   |
| Total                                      |   | $                       | 25,522  |                    | $          | 22,904 |   | $ | 12,839 |   | $ | 11,290 |   |
|                                       |   |                    |    |                    |       |   |   |   |   |
| **EBITDA(3)**                              |   |                    |    |                    |       |   |   |   |   |
| Alton Belle Casino                         |   | $                       | 12,744  |                    | $          | 18,967 |   | $ | 4,259 |   | $ | 8,872 |   |
| Argosy Casino - Riverside                  |   | 10,220                  |    | 13,036                  |       | 4,781 |   | 6,004 |   |
| Argosy Casino - Baton Rouge (1)            |   | 7,221                   |    | 8,459                   |       | 3,370 |   | 3,869 |   |
| Argosy Casino - Sioux City                 |   | 5,777                   |    | 5,130                   |       | 2,972 |   | 2,421 |   |
| Argosy Casino - Lawrenceburg               |   | 56,925                  |    | 59,599                  |       | 27,622 |   | 23,452 |   |
| Empress Casino Joliet (2)                  |   | 21,551                  |    | 33,391                  |       | 8,233 |   | 13,913 |   |
| Corporate                                  |   | (10,672                 | )       | (9,629                  | )          | (5,707 | ) | (4,211 | ) |
| Total                                      |   | $                       | 103,766 |                    | $          | 128,953 |   | $ | 45,530 |   | $ | 54,320 |   |

 

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(1)                      BatonRouge includes our Centroplex Centre Hotel and Jazz Enterprises, Inc., a whollyowned subsidiary that owns and operates the Catfish Town real estatedevelopment adjacent to our Baton Rouge casino.

 

(2)                      Jolietincludes a write-down of $6.5 million for assets related to the originalplanned expansion.

 

(3)                      “EBITDA”is defined as earnings before interest, taxes, depreciation andamortization.  EBITDA should not beconstrued as an alternative to financial measures determined in accordance withgenerally accepted accounting principles, such as income from operations, netincome or cash flows generated by operating, investing and financingactivities. 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.

 

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**Six months ended June 30, 2003 comparedto six months ended June 30, 2002**

 

*Casino Revenues -*Casinorevenues for the six months ended June 30, 2003, increased $15.7 million,or 3.3% to $493.0 million from $477.3 million for the six months endedJune 30, 2002.  Lawrenceburg casinorevenues increased $18.2 million, or 10.0%, to $200.2 million for the sixmonths ended June 30, 2003, from $182.0 million for the six months endedJune 30, 2002, reflecting the commencement of dockside gaming effectiveAugust 1, 2002 and revisions to our marketing programs.  Our Joliet casino recorded $124.5 million incasino revenues for both the six months ended June 30, 2003 and the sixmonths ended June 30, 2002. Joliet’s casino revenues have increased with our new barge-basedfacility opening in May 2003, but had been decreasing previously due tofacility renovations by two competitors and the commencement of dockside gamingin Indiana.  Alton, Riverside, SiouxCity and Baton Rouge reported aggregate casino revenues of $168.4 million forthe six months ended June 30, 2003, a decrease of $2.5 million or 1.5%,from $170.9 million for the six months ended June 30, 2002.  This decrease is primarily at our Alton andRiverside casinos.  Alton has beennegatively impacted by increased capacity in the market from substantialcapital investments by a competitor in August 2002 and Riverside’s casinorevenues have been lower due to construction disruption related to our ongoingrenovation.

 

*Admissions*- Admissions revenues (net of complimentary admissions) increased to $1.0million for the six months ended June 30, 2003, from $0.9 million for thesix months ended June 30, 2002, due primarily to an increase in the numberof admissions at Lawrenceburg following the commencement of dockside gamingeffective August 1, 2002.

 

*Food, Beverage andOther* - Food, beverage and other revenues increased by$0.9 million to $49.8 million for the six months ended June 30, 2003compared to $48.9 million for the six months ended June 30, 2002.  Food, beverage and other net profit increased$2.4 million to $14.2 million for the six months ended June 30, 2003, from$11.8 million for the six months ended June 30, 2002.  Joliet’s food, beverage and other net profitincreased $1.7 million and Lawrenceburg had an increase of $0.5 million.

 

*PromotionalAllowances* – Promotional allowances for the six monthsended June 30, 2003, were $64.3 million compared to $56.5 million for thesix months ended June 30, 2002, an increase of $7.8 million or 13.8%.  The majority of this increase, $5.0 million,is at our Joliet facility.  We increasedour promotional spending at our Joliet facility in anticipation of the openingof our new barge-based casino in May 2003 as well as in reaction toincreased competitive pressures in the first part of the year.  Lawrenceburg’s promotional allowancesincreased $2.8 million as a result of overall increases in casino revenues.

 

*Gaming and AdmissionTaxes*– Gaming and admission taxes increased $25.3million to $175.3 million for the six months ended June 30, 2003 from$150.0 million for the six months ended June 30, 2002.  An increase in the Illinois tax rateseffective July 1, 2003 increased our annual effective tax rates at bothour Illinois casinos and we recorded additional expense of $6.2 million in thesix months ended June 30, 2003. The remaining portion of this increase is due primarily to increasedgaming and admission taxes of $16.9 million at our Lawrenceburg casino.  This includes a $5.9 million charge due tonew legislation in June 2003 amending the calculation of the 2002 increasein Indiana gaming taxes.  The remainingincrease in gaming taxes at Lawrenceburg is due to increased casino revenues.

 

*Casino Expenses -*Casinoexpenses decreased $4.7 million to $67.4 million for the six months endedJune 30, 2003, from $72.1 million for the six months ended June 30, 2002.  This decrease is due primarily to Jolietwhere we have reduced payroll and other casino operating expenses.

 

*Selling, Generaland Administrative*—Selling,general and administrative expenses increased $9.3 million to $75.3 million forthe six months ended June 30, 2003, from $66.0 million for the six monthsended June 30, 2002.  The factorscontributing to this increase are primarily a $2.3 million increase in citydevelopment fees at Lawrenceburg corresponding to the increase in revenuesrelated to the commencement of dockside gaming effective August 1, 2002, a$1.8 million increase in advertising and promotions expense at Joliet topromote the opening in May 2003 of our new barge-based facility as well asin reaction to increased competitive pressures in the first half of the yearand an additional $0.6 million of expenses related to our Developmentdepartment at our corporate office.  Theremaining increase is spread throughout our other properties.

 

*Other OperatingExpenses*—Other operating expenses remained relativelyconstant at $20.9 million for the six months ended June 30, 2003 and $21.0million for the six months ended June 30, 2002.

 

*Depreciation andAmortization*—Depreciation and amortization increased$2.6 million from $22.9 million for the six months ended June 30, 2002, to$25.5 million for the six months ended June 30, 2003.  This increase is primarily due toaccelerated depreciation on planned asset retirements, depreciation for our newdata warehouse placed in service during the third quarter 2002 and depreciationon project capital placed in service during 2003 at our Sioux City and Jolietfacilities.

 

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*Write-down of Assets*– As a result of the increased gaming and admissiontax rates enacted by the State of Illinois, which were effective July 1,2003, we have decided not to further develop additional barge platforms underconstruction for our expansion project initially planned at our Jolietfacility.  Therefore, during the sixmonths ended June 30, 2003, we recorded a $6.5 million write-down of thesebarge platforms to their estimated net realizable value.

 

*Interest Expense*—Netinterest expense decreased $3.3 million to $37.9 million for the six monthsended June 30, 2003, from $41.2 million for the six months endedJune 30, 2002.  This decrease isprimarily attributable to reduced borrowings on our revolving line of creditdue to debt repayments with free cash flow and lower interest rates on ourvariable debt.  We capitalized $1.6million of interest related to our casino construction projects for the sixmonths ended June 30, 2003 compared to $0.2 million for the six monthsended June 30, 2002.

 

*Income Tax Expense –*Income tax expensedecreased by $10.0 million to $18.8 million for the six months endedJune 30, 2003, from $28.8 million for the six months ended June 30,2002, due to reduced pre-tax earnings offset by an increase in our effectivetax rate from 44.5% for the six months ended June 30, 2002 to 46.5% forthe six months ended June 30, 2003. This increase in our overall effective income tax rate is primarily dueto the impact on our estimated annual income tax expense of gaming taxlegislation enacted by Illinois and Indiana during June 2003.  Our net income decreased approximately $0.03per diluted share due to the change in the effective income tax rate.

 

*Net Income –*Netincome was $21.6 million for the six months ended June 30, 2003, comparedto $36.0 million for the six months ended June 30, 2002, due primarily tothe factors discussed above.

 

**Three months ended June 30, 2003compared to three months ended June 30, 2002**

 

*Casino Revenues -*Casinorevenues for the three months ended June 30, 2003, increased $17.0million, or 7.2% to $252.2 million from $235.2 million for the three monthsended June 30, 2002.  Lawrenceburgcasino revenues increased $14.2 million, or 16.0%, to $103.1 million for thethree months ended June 30, 2003, from $88.9 million for the three monthsended June 30, 2002, reflecting the commencement of dockside gamingeffective August 1, 2002 and revisions to our marketing programs. OurJoliet casino recorded $65.0 million in casino revenues for the three monthsended June 30, 2003, an increase of $2.8 million from the three monthsended June 30, 2002 casino revenues of $62.2 million.  The opening of Joliet’s new barge-basedcasino has positively impacted our second quarter casino revenues.  Alton, Riverside, Sioux City and Baton Rougeaggregate casino revenues have remained constant at $84.1 million for the threemonths ended June 30, 2003 and June 30, 2002.  Alton has been negatively impacted byincreased capacity in the market from substantial capital investments by acompetitor in August 2002 and Riverside’s casino revenues have been lowerdue to construction disruption related to our ongoing renovation.  The opening of our facility renovation inMarch 2003 has positively impacted our Sioux City property.

 

*Admissions*- Admissions revenues (net of complimentary admissions) remained constant at$0.5 million for the three months ended June 30, 2003 and June 30,2002.

 

*Food, Beverage andOther* - Food, beverage and other revenues increased to$25.0 million for the three months ended June 30, 2003 from $24.2 millionfor the three months ended June 30, 2002. Food, beverage and other net profit increased $1.4 million to $7.2million for the three months ended June 30, 2003, from $5.8 million forthe three months ended June 30, 2002. Food, beverage and other net profit increased $0.6 million at both ourJoliet and Lawrenceburg properties.

 

*PromotionalAllowances* – Promotional allowances for the threemonths ended June 30, 2003, were $32.0 million compared to $28.6 millionfor the three months ended June 30, 2002, an increase of $3.4 million or11.9%.  The majority of this increase isat our Lawrenceburg and Joliet facilities ($1.9 million and $1.2 million,respectively).  The increase inpromotional allowances at Lawrenceburg is a result of our overall increase incasino revenues. At Joliet, we increased our promotional spending in connectionwith the opening of our new barge-based casino in May 2003.

 

*Gaming and AdmissionTaxes –* Gaming and admission taxes increased $13.4million to $95.5 million for the three months ended June 30, 2003 from$82.1 million for the three months ended June 30, 2002.  An increase in the Illinois tax rateseffective July 1, 2003 increased our annual effective tax rates in bothour Illinois casinos and we recorded additional expense of $6.2 million in thethree months ended June 30, 2003. For the three months ended June 30, 2003 our Lawrenceburg casinorecorded a $5.9 million charge due to new legislation in June 2003,amending the calculation of the 2002 increase in Indiana gaming taxes.  The remaining increase is due to increasedcasino revenues resulting in increased gaming taxes.

 

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*Casino Expenses -*Casinoexpenses decreased $2.2 million to $33.2 million for the three months endedJune 30, 2003, from $35.4 million for the three months ended June 30,2002.  This decrease is primarily atJoliet where we have reduced payroll and other casino operating expenses.

 

*Selling, Generaland Administrative*—Selling,general and administrative expenses increased $6.8 million to $39.5 million forthe three months ended June 30, 2003, from $32.7 million for the threemonths ended June 30, 2002, due primarily to a $1.3 million increase incity development fees at Lawrenceburg due to the increase in revenues relatedto the commencement of dockside gaming effective August 1, 2002, increasedadvertising and promotions expense of $1.2 million at Joliet related to theopening of our barge-based facility and additional expenses of $0.6 million inour Development department at our corporate office.  The remaining increase is spread throughout our other properties.

 

*Other OperatingExpenses*—Other operating expenses remained relativelyconstant at $10.4 million for the three months ended June 30, 2003 and$10.5 million for the six months ended June 30, 2002.

 

*Depreciation andAmortization*—Depreciation and amortization increased$1.5 million from $11.3 million for the three months ended June 30, 2002,to $12.8 million for the three months ended June 30, 2003.  This increase is due primarily toaccelerated depreciation on planned asset retirements, depreciation for our newdata warehouse placed in service during the third quarter 2002 and depreciationon project capital placed in service during 2003 at our Sioux City and Jolietfacilities.

 

*Write-down of Assets*– As a result of the increased gaming and admissiontax rates enacted by the State of Illinois, which were effective July 1,2003, we have decided not to further develop additional barge platforms underconstruction for our expansion project initially planned at our Jolietfacility.  Therefore, during the threemonths ended June 30, 2003, we recorded a $6.5 million write-down of thesebarge platforms to their estimated net realizable value.

 

*Interest Expense*—Netinterest expense decreased $1.4 million to $19.0 million for the three monthsended June 30, 2003, from $20.4 million for the three months endedJune 30, 2002.  This decrease isprimarily attributable to reduced borrowings on our revolving line of creditdue to debt repayments with free cash flow and lower interest rates on ourvariable debt.  We capitalized $0.8million of interest related to our casino construction projects for the threemonths ended June 30, 2003 compared to $0.1 million for the three monthsended June 30, 2002.

 

*Income Tax Expense –*Income tax expensedecreased by $4.5 million to $6.8 million for the three months endedJune 30, 2003, from $11.3 million for the three months ended June 30,2002, due to reduced pre-tax earnings and to the impact on our estimated annualincome tax expense of gaming tax legislation enacted by Illinois and Indianaduring June 2003.

 

*Net Income –*Netincome was $6.9 million for the three months ended June 30, 2003, comparedto $11.3 million for the three months ended June 30, 2002, due primarilyto the factors discussed above.

 

**Competition**

 

Our Alton Casino faces competition from four other riverboat casinooperators in the St. Louis area.  One ofthese competitors completed a major casino and facility renovation in earlyAugust 2002.  Another competitorplans to open a $75 million hotel expansion mid-to-late 2004.  Our Riverside Casino faces competition fromthree barge-based casinos in the Kansas City area.  Our Baton Rouge Casino faces competition from one casino locatedin downtown Baton Rouge, a nearby Native American casino and multiple casinosthroughout Louisiana. We face competition in Sioux City, Iowa from video gamingdevices in nearby South Dakota, from two land-based Native American casinosand, to a lesser extent, from slot machines at a pari-mutuel racetrack inCouncil Bluffs, Iowa and from two riverboat casinos in the Council Bluffs,Iowa/Omaha, Nebraska market.  TheLawrenceburg casino faces competition from two riverboat casinos in theCincinnati market.  Our Joliet casinofaces competition from eight other riverboat casino operators in the Chicagoarea.  One of these competitors hasopened a major expansion project within the last twelve months.  Additionally, four competitors in Indianawere allowed to begin dockside gaming in August 2002.

 

There could be further unanticipated competition in any market in whichwe operate as a result of legislative changes or other events.  For instance, several states have discussedadopting or expanding gaming in various forms, which could cause increasedcompetition in our markets.  We expecteach market, in which we participate, both current and prospective, to behighly competitive.

 

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**Liquidity and Capital Resources**

 

In the six months ended June 30, 2003,we generated cash flows from operating activities of $84.6 million compared to$78.6 million for the six months ended June 30, 2002.  This increase is due primarily to the use ofan approximately $7 million net tax receivable at December 31, 2002 whichreduced our current year tax payments.

 

In the six months endedJune 30, 2003, we used cash flows for investing activities of $67.5million compared to $17.7 million for the six months ended June 30,2002.  During the six months ended June 30,2003, our investing activities included purchases of property and equipment of$67.7 million, a $48.9 million increase over property and equipment purchasesfor the six months ended June 30, 2002. This increase is due primarily to construction and expansion projects atour Joliet, Riverside and Sioux City facilities.

 

During the six months endedJune 30, 2003, we used cash flows of $13.4 million for financingactivities compared to using $60.6 million for the six months endedJune 30, 2002.  For the six monthsended June 30, 2003 and June 30, 2002, we used $11.8 million and$59.0 million, respectively, for repayments on our line of credit.  Additionally, for the six months endedJune 30, 2003, we used $1.3 million for deferred financing fees related tothe amendment to our credit agreement.

 

At June 30, 2003, we hadapproximately $63.4 million of cash and cash equivalents.  At June 30, 2003, we had outstanding$316.0 million on our senior secured credit facility ($46.5 million on ourrevolving credit facility and $269.5 million on our term loan) and $557.1million of subordinated notes (due in June 2009 and September 2011),including $7.1 million of unamortized premium. As of June 30, 2003, we had outstanding letters of credit of $7.5million and availability under the credit facility was approximately $103.1million.  We have no off-balance sheetdebt.

 

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 ofJune 30, 2003, the notional principal amounts were $198.5 million.  These notional amounts do not representamounts exchanged by the parties and, thus, are not a measure of our exposureto credit loss.  In accordance withSFAS 133, “Accounting for Derivative Instruments and Hedging Activities,”we recorded, as of June 30, 2003, the fair value of these interest rateswap agreements in the consolidated balance sheet in other long-termobligations ($5.6 million pretax) and the related change in fair value of theseagreements is deferred in stockholders’ equity as a component of accumulatedother comprehensive income ($3.4 million net of deferred taxes of $2.2million).

 

On April 18, 2003, we enteredinto the first amendment to our second amended and restated credit agreementdated July 31, 2001.  Thisamendment extends certain capital expenditure limitations and financial ratioswhile maintaining our current available line of credit of $400 million and ourterm loan.  The subordinated notes andthe credit facility contain certain restrictions on the payment of dividends onour common stock and the occurrence of additional indebtedness, as well asother typical debt covenants.  Inaddition, the credit facility requires us to maintain certain financial ratiosas of June 30, 2003, as follows: (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.25 to 1.0; (2)Senior Leverage Ratio of a maximum of 2.50 to 1.0; and (3) Fixed Charge Ratioof a minimum of 1.50 to 1.0.  As ofJune 30, 2003, we are in compliance with these ratios.

 

During May 2003, we announcedBoard of Directors approval of a stock repurchase program authorizing us torepurchase up to $30 million of our common stock.  The repurchases will be made at management’s discretion withoutprior notice from time to time in the open market or through privatelynegotiated third party transactions in compliance with applicable laws anddepending on market conditions.  As ofAugust 8, 2003, we have made no stock repurchases under this program.

 

We have made a significantinvestment in property and equipment and plan to make additional investments atour existing properties.  As ofJune 30, 2003, construction continues on the major expansion project atour Riverside property.  Our Sioux Cityrenovation was completed in February 2003 and our new barge-based casinoin Joliet was completed and opened in May 2003.  During the remainder of 2003, we expect to spend approximately$80 million to $90 million in capital expenditures, the majority of which willbe to complete our Riverside project and also continuing implementation of ourcashless ("TITO") slot product. We plan on opening our Riverside barge facility near the end of2003.  We expect to fund these expendituresfrom internally generated cash and availability under our credit facility.

 

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Consistent with gaming industrypractice, we conduct our operations with a net working capital deficit.  Unlike traditional industrial companies, agaming company’s balance sheet has limited accounts receivable andinventories.  In addition, casinosgenerate significant cash on a daily basis. We generally apply our daily cash flows to fund capital expenditures orpay down debt under our revolving credit facility and pay our currentliabilities pursuant to their normal cycles. Given the significant daily cash flows generated by our operations andthe financial flexibility provided by our credit facility, the existence of aworking capital deficit has no impact on our ability to operate our business ormeet our obligations as they become due. We believe that cash on hand, operating cash flows, and funds availableunder our credit facility will be sufficient to fund our current operating,capital expenditure and debt service obligations for the next 12 months.

 

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

 
| One year and less |   | $       | 4,556   |   |
|-------------------|--------|---------|---------|--------|
| 1 - 3 years       |   | 8,808   |    |
| 4 - 5 years       |   | 310,797 |    |
| After 5 years     |   | 552,581 |    |
| Total             |   | $       | 876,742 |   |

 

# **Critical Accounting Estimates**

 

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

 

*Goodwill –*We have approximately $727 millionof goodwill recorded on our balance sheet at June 30, 2003, related toacquisitions.  We regularly evaluate ouracquired businesses for potential impairment indicators.  Additionally, we adopted the provisions ofSFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002,that requires us to perform impairment testing at least annually.  Our judgments regarding the existence of impairmentindicators are based on, among other things, the regulatory and competitivestatus and operational performance of each of our acquired businesses.  Future events could significantly impact ourjudgments and any resulting impairment loss could have a material adverseimpact on our financial condition and results of operations.

 

*Property and Equipment –*Our operations arecapital intensive and we have made significant capital investments in each ofour properties.  At June 30, 2003,we have approximately $497 million of net property and equipment recorded onour balance sheet.  We depreciate ourassets on a straight-line basis over their estimated useful lives.  The estimates of the useful lives are basedon the nature of the assets as well as our current operating strategy.  Future events, such as property expansions,new competition and new regulations, could result in a change in the manner inwhich we are using certain assets requiring a change in the estimated usefullives of such assets.  In assessing therecoverability of the carrying value of property and equipment, we must makeassumptions regarding estimated future cash flows and other factors.  If these estimates or the relatedassumptions change in the future, we may be required to record impairmentcharges for these assets.

 

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

 

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

 

*Income Taxes*– We are subject to income taxesin the United States and in several states. We account for income taxes in accordance with SFAS Statement 109,“Accounting for Income Taxes.”  Ourincome tax returns are subject to examination by various taxingauthorities.  We regularly assess thepotential outcomes of these examinations in

 

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determining the adequacy of ourprovision for income taxes and our income tax liabilities.  Inherent on our determination of anynecessary reserves are assumptions based on past experiences and judgmentsabout potential actions by taxing authorities. Our estimate of the potential outcome for any uncertain tax issue ishighly judgmental.  We believe we haveadequately provided for any reasonable and foreseeable outcome related touncertain tax matters.  When actualresults of tax examinations differ from our estimates, we adjust the income taxprovision in the period in which the examination issues are settled.

 

We have received proposed assessments from the Indiana Department ofRevenue (“IDR”) in connection with our Indiana income tax returns for the years1997 through 1999.  Those assessmentsare based on the IDR’s position that state gaming taxes are based on gamingrevenues and are not deductible for Indiana income tax purposes.  We have filed a formal protest of theproposed assessment with the IDR.  AtJune 30, 2003, we have accrued approximately $13 million, net of federaltax benefit, for the proposed IDR assessments including amounts for additionalpending assessments for the years 2000 through 2003.  We continue to assess facts and circumstances leading to theassessments and the probability of the IDR prevailing in their proposedassessments.

 

**Controlsand Procedures**

 

(a)**         ***Evaluationof disclosure controls and procedures:*

 

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

 

As of the end of the period coveredby this Report, June 30, 2003, (the “Evaluation Date”), we carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including Richard J. Glasier, our President and Chief ExecutiveOfficer and Dale R. Black, our Senior Vice President and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures.  Based uponthat evaluation, the President and Chief Executive Officer and the Senior VicePresident and Chief Financial Officer concluded that our disclosure controlsand procedures were effective as of the Evaluation Date.

 

(b)**        ***Changes in internal controls:*

 

There was no change in the Company’s internal controlsduring the period covered by this Report that could materially affect, or couldreasonably be expected to materially affect, the Company’s internal controlover financial reporting.

 

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**ARGOSYGAMING COMPANYOTHER INFORMATION**

 

**PARTII.****                                                OtherInformation**

 

Item 1.             *LegalProceedings –*

 

The Company isfrom time to time a party to legal proceedings arising in the ordinary courseof business.  Changes in reported legalproceedings since our last filing are as follows:

 

***CapitolHouse Preservation Company, L.L.C. v. Jazz Enterprises, Inc. et. al.***

*** ***

***               ***DuringJune 2003, the Louisiana trial court dismissed this lawsuit. This decision issubject to appeal to the Louisiana First Circuit Court of Appeals.

 

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

 

Item 3.             *DefaultsUpon Senior Securities –* None

 

Item 4.             *Submissionof Matters to a Vote of Security Holders –*

 

The Company’s Annual Meeting of Stockholderswas held on April 29, 2003.  At themeeting, the stockholders voted on the matters as follows:

 

Election of Directors –

 
|                |   | **Votes For** |   | **Against** |   |
|---------------------|--------|---------------|--------|-------------|--------|
| George L.  Bristol  |   | 21,140,062    |   | 5,442,235   |   |
| James B.  Perry     |   | 26,443,016    |   | 139,281     |   |
| Jimmy F.  Gallagher |   | 25,999,049    |   | 583,248     |   |

 

Item 5.             *OtherInformation –*None

 

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

 

(a)                                  *Exhibits*

 
| Exhibit 31.1 |   | Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.2 |   | Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002                                                |
| Exhibit 32.1 |   | Certification pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| Exhibit 32.2 |   | Certification pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

(b)                                 *Reports onForm 8-K*

 

Report on Form 8-K dated April 22, 2003,filed with the Securities and Exchange Commission, furnishing the press releasedated April 22, 2003, announcing the Company’s first quarter operatingresults for the three months ended March 31, 2003.

 

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**SIGNATURES**

 

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

 

 
|                                     | Argosy Gaming Company                                          |   |
|------------------------------------------|----------------------------------------------------------------|--------|
|                                     | Registrant                                                     |   |
|                                     |                                                           |
| Date:     August 13, 2003 | /s/ Dale R.  Black                                             |   |
|                                     | Dale R. Black  Senior Vice President - Chief Financial Officer |
|                                          |                                                                |        |  |

 

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