**UNITEDSTATESSECURITIES 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, 2004.**                                            |
|       |
| **or**     |
|       |
| **o**      | **Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |

 

**CommissionFile Number 1-11853**

 

**ARGOSYGAMING COMPANY**

(Exact name of Registrant as Specified in itsCharter)

 
| State of Incorporation:**Delaware** |   | I.R.S. Employer Identification No.: **37-1304247** |
|-------------------------------------|--------|----------------------------------------------------|

 

**219Piasa Street**

**Alton,Illinois 62002**

**(618)474-7500**

(Address, including zip code, and telephonenumber, includingarea code, of Registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes ýNo o

 

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

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date: 29,474,783 shares ofCommon Stock, $.01 par value per share, as of August 2, 2004.

 

 

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(InThousands, Except Share and Per Share Data)

 
|                                                                                                                                                                             |   | **June 30,  2004** |      | **December 31,  2003** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                                                                                                                                                             |   | **(unaudited)**         |      |                        |   |
| **Current assets:**                                                                                                                                                              |   |                    |      |                        |   |
| Cash and cash equivalents                                                                                                                                                        |   | $                       | 69,754    |                        | $      | 67,205 |   |
| Accounts receivable, net                                                                                                                                                         |   | 4,136                   |      | 4,292                       |   |
| Income taxes receivable                                                                                                                                                          |   | —                  |      | 1,015                       |   |
| Deferred income taxes                                                                                                                                                            |   | 12,377                  |      | 13,295                      |   |
| Other current assets                                                                                                                                                             |   | 6,860                   |      | 7,196                       |   |
| Total current assets                                                                                                                                                             |   | 93,127                  |      | 93,003                      |   |
|                                                                                                                                                                             |   |                    |      |                        |   |
| **Net property and  equipment**                                                                                                                                                  |   | 551,611                 |      | 548,120                     |   |
| **Other assets:**                                                                                                                                                                |   |                    |      |                        |   |
| Deferred finance costs, net                                                                                                                                                      |   | 16,562                  |      | 16,748                      |   |
| Goodwill, net                                                                                                                                                                    |   | 727,470                 |      | 727,470                     |   |
| Intangible assets, net                                                                                                                                                           |   | 24,917                  |      | 26,092                      |   |
| Other                                                                                                                                                                            |   | 3,157                   |      | 439                         |   |
| Total other assets                                                                                                                                                               |   | 772,106                 |      | 770,749                     |   |
| **Total assets**                                                                                                                                                                 |   | $                       | 1,416,844 |                        | $      | 1,411,872 |   |
|                                                                                                                                                                             |   |                    |      |                        |   |
| **Current  liabilities:**                                                                                                                                                        |   |                    |      |                        |   |
| Accounts payable                                                                                                                                                                 |   | $                       | 11,861    |                        | $      | 26,955 |   |
| Accrued payroll and related expenses                                                                                                                                             |   | 25,540                  |      | 24,125                      |   |
| Accrued gaming and admission taxes                                                                                                                                               |   | 17,693                  |      | 14,486                      |   |
| Other accrued liabilities                                                                                                                                                        |   | 56,946                  |      | 70,070                      |   |
| Accrued interest                                                                                                                                                                 |   | 15,400                  |      | 9,296                       |   |
| Income taxes payable                                                                                                                                                             |   | 5,411                   |      | —                      |   |
| Current maturities of long-term debt                                                                                                                                             |   | 3,713                   |      | 4,648                       |   |
| Total current liabilities                                                                                                                                                        |   | 136,564                 |      | 149,580                     |   |
|                                                                                                                                                                             |   |                    |      |                        |   |
| **Long-term debt**                                                                                                                                                               |   | 843,396                 |      | 865,510                     |   |
| **Deferred income  taxes**                                                                                                                                                       |   | 105,803                 |      | 93,119                      |   |
| **Other long-term  obligations**                                                                                                                                                 |   | 711                     |      | 419                         |   |
|                                                                                                                                                                             |   |                    |      |                        |   |
| **Stockholders’  equity:**                                                                                                                                                  |   |                    |      |                        |   |
| Common stock, $.01 par; 120,000,000 shares  authorized;  29,474,783 and 29,314,542 shares issued and outstanding at June 30, 2004  and December 31, 2003, respectively |   | 295                     |      | 293                         |   |
| Capital in excess of par                                                                                                                                                         |   | 95,754                  |      | 92,551                      |   |
| Accumulated other comprehensive loss                                                                                                                                             |   | (563                    | )         | (1,941                      | )      |
| Retained earnings                                                                                                                                                                |   | 234,884                 |      | 212,341                     |   |
| Total stockholders’ equity                                                                                                                                                  |   | 330,370                 |      | 303,244                     |   |
| **Total liabilities  and stockholders’ equity**                                                                                                                             |   | $                       | 1,416,844 |                        | $      | 1,411,872 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

2

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

(InThousands, Except Share and Per Share Data)

 
|                                      |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|-------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                      |   | **2004**                              |    | **2003**                            |   | **2004** |   | **2003** |   |
|                                      |   | **(unaudited)**                       |    | **(unaudited)**                     |   | **(unaudited)** |   | **(unaudited)** |   |
| **Revenues:**                             |   |                                  |    |                                |   |   |   |   |   |
| Casino                                    |   | $                                     | 258,213 |                                | $      | 252,153 |   | $ | 524,220 |   | $ | 493,010 |   |
| Admissions                                |   | 5,351                                 |    | 3,162                               |   | 10,711 |   | 6,167 |   |
| Food, beverage and other                  |   | 25,958                                |    | 24,993                              |   | 52,418 |   | 49,753 |   |
|                                      |   | 289,522                               |    | 280,308                             |   | 587,349 |   | 548,930 |   |
| Less promotional allowances               |   | (34,958                               | )       | (31,963                             | )      | (68,696 | ) | (64,253 | ) |
| Net revenues                              |   | 254,564                               |    | 248,345                             |   | 518,653 |   | 484,677 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Costs and expenses:**                   |   |                                  |    |                                |   |   |   |   |   |
| Gaming and admission taxes                |   | 90,013                                |    | 95,466                              |   | 181,591 |   | 175,323 |   |
| Casino                                    |   | 31,179                                |    | 33,228                              |   | 63,753 |   | 67,374 |   |
| Selling, general and administrative       |   | 37,925                                |    | 39,481                              |   | 82,101 |   | 75,270 |   |
| Food, beverage and other                  |   | 18,721                                |    | 17,761                              |   | 37,322 |   | 35,559 |   |
| Other operating expenses                  |   | 9,735                                 |    | 10,379                              |   | 19,598 |   | 20,885 |   |
| Depreciation and amortization             |   | 14,848                                |    | 12,839                              |   | 29,073 |   | 25,522 |   |
| Write-down of assets                      |   | —                                |    | 6,500                               |   | — |   | 6,500 |   |
|                                      |   | 202,421                               |    | 215,654                             |   | 413,438 |   | 406,433 |   |
| Income from operations                    |   | 52,143                                |    | 32,691                              |   | 105,215 |   | 78,244 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Other income  (expense):**              |   |                                  |    |                                |   |   |   |   |   |
| Interest income                           |   | 18                                    |    | 35                                  |   | 39 |   | 86 |   |
| Interest expense                          |   | (16,594                               | )       | (18,989                             | )      | (34,645 | ) | (37,936 | ) |
| Expense on early retirement of debt       |   | (763                                  | )       | —                              |   | (26,040 | ) | — |   |
|                                      |   | (17,339                               | )       | (18,954                             | )      | (60,646 | ) | (37,850 | ) |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| Income before income taxes                |   | 34,804                                |    | 13,737                              |   | 44,569 |   | 40,394 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| Income tax expense                        |   | (16,221                               | )       | (6,788                              | )      | (22,026 | ) | (18,784 | ) |
| **Net income**                            |   | $                                     | 18,583  |                                | $      | 6,949 |   | $ | 22,543 |   | $ | 21,610 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Basic income per  share**               |   | $                                     | 0.63    |                                | $      | 0.24 |   | $ | 0.77 |   | $ | 0.75 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Diluted income per  share**             |   | $                                     | 0.63    |                                | $      | 0.24 |   | $ | 0.76 |   | $ | 0.74 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Weighted average  shares outstanding:** |   |                                  |    |                                |   |   |   |   |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Basic**                                 |   | 29,442,736                            |    | 29,106,597                          |   | 29,394,255 |   | 29,026,856 |   |
|                                      |   |                                  |    |                                |   |   |   |   |   |
| **Diluted**                               |   | 29,666,772                            |    | 29,320,197                          |   | 29,629,305 |   | 29,277,700 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

(InThousands, Except Share and Per Share Data)

 
|                                                                               |   | **Six Months  Ended June 30,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                               |   | **2004**                            |   | **2003** |   |
|                                                                               |   | **(unaudited)**                     |   | **(unaudited)** |   |
| **Cash flows from  operating activities:**                                         |   |                                |   |   |   |
| Net income                                                                         |   | $                                   | 22,543 |   | $ | 21,610 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                |   |   |   |
| Depreciation                                                                       |   | 27,899                              |   | 24,342 |   |
| Amortization                                                                       |   | 3,811                               |   | 3,213 |   |
| (Gain) loss on sale of fixed assets                                                |   | (286                                | )      | 244 |   |
| Compensation expense recognized on issuance  of stock                              |   | 101                                 |   | 74 |   |
| Loss on early retirement of debt                                                   |   | 26,040                              |   | — |   |
| Write-down of assets                                                               |   | —                              |   | 6,500 |   |
| Deferred income taxes                                                              |   | 14,098                              |   | 8,270 |   |
| Changes in operating assets and  liabilities, net of effect from acquisitions:     |   |                                |   |   |   |
| Accounts receivable and other current  assets                                      |   | (1,211                              | )      | 8,324 |   |
| Accounts payable and other current  liabilities                                    |   | 4,391                               |   | 12,048 |   |
| Net cash provided by operating activities                                          |   | 97,386                              |   | 84,625 |   |
|                                                                               |   |                                |   |   |   |
| **Cash flows from  investing activities:**                                         |   |                                |   |   |   |
| Purchases of property and equipment                                                |   | (45,971                             | )      | (67,693 | ) |
| Other                                                                              |   | 983                                 |   | 227 |   |
| Net cash used in investing activities                                              |   | (44,988                             | )      | (67,466 | ) |
|                                                                               |   |                                |   |   |   |
| **Cash flows from  financing activities:**                                         |   |                                |   |   |   |
| Proceeds from issuance of long-term debt                                           |   | 350,000                             |   | — |   |
| Payments on long-term debt                                                         |   | (351,826                            | )      | (1,809 | ) |
| Redemption premium on early retirement of  debt                                    |   | (27,961                             | )      | — |   |
| Increase in deferred finance costs                                                 |   | (7,115                              | )      | (1,310 | ) |
| Repayments of line of credit, net                                                  |   | (14,600                             | )      | (11,800 | ) |
| Proceeds from stock option exercises                                               |   | 1,690                               |   | 1,481 |   |
| Other                                                                              |   | (37                                 | )      | — |   |
| Net cash used in financing activities                                              |   | (49,849                             | )      | (13,438 | ) |
| Net change in cash and cash equivalents                                            |   | 2,549                               |   | 3,721 |   |
| Cash and cash equivalents, beginning of  period                                    |   | 67,205                              |   | 59,720 |   |
| Cash and cash equivalents, end of period                                           |   | $                                   | 69,754 |   | $ | 63,441 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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**ARGOSY GAMING COMPANY**

**CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

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

 
|                                                                         |   | **Shares** |   | **Common  Stock** |   | **Capital in  Excess of Par** |   | **Accumulated  Other  Comprehensive  (Loss) Income** |   | **Retained  Earnings** |   | **Total  Stockholders’  Equity** |   |
|------------------------------------------------------------------------------|--------|------------|--------|-------------------|--------|-------------------------------|--------|------------------------------------------------------|--------|------------------------|--------|---------------------------------------|--------|
|                                                                         |   |       |   |              |   |                          |   |                                                 |   |                   |   |                                  |   |
| Balance, December 31, 2003                                              |   | 29,314,542 |   | $                 | 293    |                          | $      | 92,551                                               |   | $                      | (1,941 | )                                     | $      | 212,341 |   | $ | 303,244 |   |
| Exercise of stock options and restricted  stock award, including tax benefit |   | 160,241    |   | 2                 |   | 3,102                         |   |                                                 |   |                   |   | 3,104                                 |   |
| Restricted stock compensation expense                                        |   |       |   |              |   | 101                           |   |                                                 |   |                   |   | 101                                   |   |
| Comprehensive income:                                                        |   |       |   |              |   |                          |   |                                                 |   |                   |   |                                  |   |
| Other comprehensive income - interest rate  swaps                            |   |       |   |              |   |                          |   | 1,378                                                |   |                   |   | 1,378                                 |   |
| Net income for the six months ended  June 30, 2004                      |   |       |   |              |   |                          |   |                                                 |   | 22,543                 |   | 22,543                                |   |
| Comprehensive income                                                         |   |       |   |              |   |                          |   |                                                 |   |                   |   | 23,921                                |   |
|                                                                         |   |       |   |              |   |                          |   |                                                 |   |                   |   |                                  |   |
| Balance, June 30, 2004                                                  |   | 29,474,783 |   | $                 | 295    |                          | $      | 95,754                                               |   | $                      | (563   | )                                     | $      | 234,884 |   | $ | 330,370 |   |

 

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

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  Interim results may notnecessarily be indicative of results that may be expected for any other interimperiod or for the year as a whole.  Forfurther information, refer to the financial statements and footnotes theretofor the year ended December 31, 2003, included in our Annual Report onForm 10-K (File No. 1-11853).  Theaccompanying unaudited condensed consolidated financial statements contain alladjustments, which are, in the opinion of management, necessary to presentfairly the financial position and the results of operations for the periodsindicated.

 

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

 

Long-termdebt consists of the following:

 
|                                                                                                                                        |   | **June 30,  2004** |    | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-----------------------------|--------|
|                                                                                                                                        |   | **(unaudited)**         |    |                        |   |
| Senior secured line of credit, expires  July 31, 2006, interest payable at least quarterly at either LIBOR  and/or prime plus a margin |   | $                       | 27,600  |                        | $      | 42,200 |   |
| Term loan, matures July 31, 2008,  principal and interest payments due quarterly at either LIBOR and/or prime  plus a margin           |   | 266,750                 |    | 268,125                     |   |
| Subordinated notes, due June 1, 2009,  interest payable semi-annually at 10.75%                                                        |   | —                  |    | 356,623                     |   |
| Subordinated notes, due  September 2011, interest payable semi-annually at 9.0%                                                        |   | 200,000                 |    | 200,000                     |   |
| Subordinated notes, due January 2014,  interest payable semi-annually at 7.0%                                                          |   | 350,000                 |    | —                      |   |
| Notes payable, principal and interest  payments due quarterly through September 2015, discounted at 10.5%                              |   | 2,759                   |    | 3,210                       |   |
|                                                                                                                                        |   | 847,109                 |    | 870,158                     |   |
| Less: current maturities                                                                                                                    |   | 3,713                   |    | 4,648                       |   |
| Long-term debt, less current maturities                                                                                                     |   | $                       | 843,396 |                        | $      | 865,510 |   |

 

At June 30, 2004, the line of credit allows for borrowings up to$330,000 and is subject to reductions on a quarterly basis.  Our line of credit and Term Loan (the“Credit Facility”) is secured by liens on substantially all of our assets andour subsidiaries are co-borrowers. Substantially all of our subsidiaries fully and unconditionallyguarantee our 9% Subordinated Notes on a joint and several basis.  Our subordinated notes rank junior to all ofour senior indebtedness, including borrowings under the Credit Facility.

 

In February and June 2004, we refinanced a portion of ourexisting indebtedness with net proceeds from the issuance of $350,000 in new 7%Subordinated Notes due 2014, together with funds from our Credit Facility.These funds were used to repurchase the $350,000 10.75% Subordinated Notes due2009. Related to this refinancing, we paid approximately $26,040 in netpremiums and fees.

 

The Subordinated Notes and the Credit Facility contain certainrestrictions on the payment of dividends on our common stock and the incurrenceof additional indebtedness, as well as other customary debt covenants. Inaddition, the Credit Facility requires us to maintain certain financial ratios,based on terms as defined in the Credit Facility, which, as of June 30,2004, are as follows: (1) Total Funded Debt to EBITDA Ratio of a maximum of4.25 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, 2004, we are in compliance with these ratios.  At June 30, 2004, based upon thesefinancial ratios, additional availability under the Credit Facility was$227,982.

 

6

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**3.****              Stock-basedCompensation**

 

In December 2002, the FinancialAccounting Standards Board issued FAS 148, “Accounting for Stock-Based Compensation– Transition and Disclosure”.  We have astock-based employee compensation plan and a stock-based director compensationplan.  As we continue to follow APB 25for 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.  Thefollowing table discloses our pro forma net income and diluted net income pershare had we applied the fair value recognition provisions of FAS 123.

 
|                                                         |   | **For the  three months  ended June 30,** |   | **For the  six months  ended June 30,** |   |
|--------------------------------------------------------------|--------|------------------------------------------------|--------|----------------------------------------------|--------|
| **(in thousands, except share data)**                        |   | **2004**                                       |   | **2003**                                     |   | **2004** |   | **2003** |   |
|                                                         |   |                                           |   |                                         |   |   |   |   |   |
| Net income                                                   |   |                                           |   |                                         |   |   |   |   |   |
| As reported                                                  |   | $                                              | 18,583 |                                         | $      | 6,949 |   | $ | 22,543 |   | $ | 21,610 |   |
| Pro forma stock-based compensation cost,  net of tax benefit |   | (243                                           | )      | (265                                         | )      | (490 | ) | (476 | ) |
| Pro forma                                                    |   | $                                              | 18,340 |                                         | $      | 6,684 |   | $ | 22,053 |   | $ | 21,134 |   |
|                                                         |   |                                           |   |                                         |   |   |   |   |   |
| Diluted net income per share                                 |   |                                           |   |                                         |   |   |   |   |   |
| As reported                                                  |   | $                                              | 0.63   |                                         | $      | 0.24 |   | $ | 0.76 |   | $ | 0.74 |   |
| Pro forma stock-based compensation cost,  net of tax benefit |   | (0.01                                          | )      | (0.01                                        | )      | (0.02 | ) | (0.02 | ) |
| Pro forma                                                    |   | $                                              | 0.62   |                                         | $      | 0.23 |   | $ | 0.74 |   | $ | 0.72 |   |

 

These pro forma amounts to reflect FAS 123option expense may not be representative of future disclosures because, underFAS 123, the estimated fair value of the options is amortized to expense overthe vesting period and additional options may be granted in the future.

 

In February 2003, we issued 25,000shares of restricted common stock to a new employee of which 50% vested inFebruary 2004 and the remaining 50% vest in February 2005.  Compensation expense of $409 is beingamortized over the vesting period. In April 2004, we issued 638,571 sharesof non-qualified stock options to certain key employees and 40,000 shares ofnon-qualified stock options to our non-employee directors under the ArgosyGaming Company Stock Option Plan and the Argosy Gaming Company Directors OptionPlan, respectively.

 

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

 

The following table sets forth the computation of basic and dilutedearnings per share:

 

7

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|                                                                                                   |   | **Three  months ended** |   | **Six months  ended**   |   |
|--------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                                                                                   |   | **June 30,  2004** |   | **June 30,  2003** |   | **June 30,  2004** |   | **June 30,  2003** |   |
|                                                                                                   |   | **(unaudited)**         |   | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **Numerator:**                                                                                         |   |                    |   |                    |   |   |   |   |   |
| Numerator for basic and diluted earnings  per share - Net income                                       |   | $                       | 18,583 |                    | $      | 6,949 |   | $ | 22,543 |   | $ | 21,610 |   |
|                                                                                                   |   |                    |   |                    |   |   |   |   |   |
| **Denominator:**                                                                                       |   |                    |   |                    |   |   |   |   |   |
| Denominator for basic earnings per share -  weighted average shares outstanding                        |   | 29,442,736              |   | 29,106,597              |   | 29,394,255 |   | 29,026,856 |   |
|                                                                                                   |   |                    |   |                    |   |   |   |   |   |
| Effect of dilutive securities (computed  using the treasury stock method):                             |   |                    |   |                    |   |   |   |   |   |
| Employee and directors stock options                                                                   |   | 215,195                 |   | 205,130                 |   | 226,518 |   | 245,557 |   |
| Restricted stock                                                                                       |   | 8,841                   |   | 8,470                   |   | 8,532 |   | 5,287 |   |
| Dilutive potential common shares                                                                       |   | 224,036                 |   | 213,600                 |   | 235,050 |   | 250,844 |   |
| Denominator for diluted earnings per share  - adjusted weighted-average shares and assumed conversions |   | 29,666,772              |   | 29,320,197              |   | 29,629,305 |   | 29,277,700 |   |
|                                                                                                   |   |                    |   |                    |   |   |   |   |   |
| Basic earnings per share                                                                               |   | $                       | 0.63   |                    | $      | 0.24 |   | $ | 0.77 |   | $ | 0.75 |   |
|                                                                                                   |   |                    |   |                    |   |   |   |   |   |
| Diluted earnings per share                                                                             |   | $                       | 0.63   |                    | $      | 0.24 |   | $ | 0.76 |   | $ | 0.74 |   |

 

For the three months ended June 30, 2004, employee options to purchase636,237 shares of common stock priced at $37.71 per share and director optionsto purchase 43,000 shares of common stock priced at a range from $37.71 -$39.99 per share, were not included in the computation of diluted earnings pershare because the option exercise price was greater than the average marketprice of the underlying common shares and, therefore, the effect would beanti-dilutive.

 

For the six months ended June 30, 2004, employee options topurchase 693,145 shares of common stock priced at a range of $35.18 - $37.71per share and director options to purchase 52,000 shares of common stock pricedat a range from $35.15 - $39.99 per share, were not included in the computationof diluted earnings per share because the option exercise price was greaterthan the average market price of the underlying common shares and, therefore,the effect would be anti-dilutive.

 

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

 

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

 

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

 

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

 

**ARGOSYGAMING COMPANY**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

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

 

8

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**Cautionary Statementsfor Purposes of the “Safe Harbor” Provisions of the Private SecuritiesLitigation Reform Act of 1995**

 

*This Report includes “forward-looking” statements within the meaning ofthe Private Securities Litigation Reform Act of 1995. Forward-lookingstatements include statements concerning our business outlook, plans,objectives, goals, strategies, future events, future revenues or performance,capital expenditures, financing needs, plans or intentions relating toacquisitions and other information that is not historical information. Whenused in this document, the words “estimates,” “expects,” “anticipates,”“projects,” “plans,” “intends,” “believes,” “will,” “would,” “could,” andvariations of such words or similar expressions are intended to identifyforward-looking statements. All forward-looking statements, including, withoutlimitation, our examination of historical operating trends, are based upon ourcurrent expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faithand we believe there is a reasonable basis for them, but there can be noassurance that our expectations, beliefs and projections will be realized.*

*There are a number of risks and uncertainties that could cause ouractual results to differ materially from the forward-looking statementscontained in this document.  Such risks,uncertainties and other important factors include, but are not limited to: (i)increased competition and general economic conditions in our markets, includingthe legalization of gaming in states adjacent to our operations; (ii) changesin, or failure to comply with, laws or regulations (including increases inexisting taxes or the imposition of new taxes on gaming revenues or gamingdevices), joint venture relations or decisions of courts, regulators,accounting standards and governmental bodies; (iii) construction factorsrelating to our expansion projects, including delays, zoning issues,environmental restrictions, weather or other hazards, site access matters andbuilding permit issues; (iv) the ability to effectively implement operationalchanges at our properties; (v) the effect of economic, credit, and capitalmarket conditions on the economy in general, and on gaming companies inparticular; (vi) the effect of future legislation or regulatory changes on ouroperations (including legalization of gaming in new jurisdictions); (vii) ourdependence on our Lawrenceburg, Indiana casino; (viii) our substantialleverage; and (ix) other risks and uncertainties detailed from time to time inour filings with the Securities and Exchange Commission.*

*All subsequent written and oral forward-looking statements attributableto us or persons acting on our behalf are expressly qualified in their entiretyby our cautionary statements. The forward-looking statements included in thisdocument are made only as of the date of this document. We do not intend, andundertake no obligation, to update these forward-looking statements.*

 

**Overview**

 

We own and operate the Alton Belle Casino in Alton, Illinois; theEmpress Casino Joliet in Joliet, Illinois; the Argosy Casino in Riverside,Missouri; the Argosy Casino in Baton Rouge, Louisiana; the Argosy Casino inSioux City, Iowa; and the Argosy Casino in Lawrenceburg, Indiana.

 

In 2003, we invested capital to enhance our product offering and expandour capacity in our products. We opened our approximately $105 million casinofacility in Riverside on December 11, 2003 and have seen a significantincrease in revenues. Net revenues for the six months ended June 30, 2004 forRiverside increased $27.7 million, or 60.3% compared to the six months endedJune 30, 2003. In May 2003, we opened an approximately $43 millionbarge-based facility in Joliet.  Inspite of this investment, Joliet net revenues decreased 9.1% for the six monthsended June 30, 2004 over the six months ended June 30, 2003 due tothe increase in gaming taxes in the state of Illinois and the subsequentoperating measures taken by the Company as described below. InFebruary 2003, we completed an approximately $6 million renovation inSioux City which helped lead to an increase in their net revenues of 8.8% forthe six months ended June 30, 2004 over the six months ended June 30,2003.

 

During June 2004, our Lawrenceburg casino amended its developmentagreement with the City of Lawrenceburg, Indiana effective January 1,2004.  This amendment allows for areduction of up to $5 million annually in fees paid to the City ofLawrenceburg.  For the year endedDecember 31, 2004, we estimate receiving the full $5 million reduction, andtherefore, we have recorded a $2.5 million reduction in selling, general andadministrative expense for the three months ended June 30, 2004.

 

Year over year results are impacted by the enactment of higher gamingand admission tax rates in Illinois effective July 1, 2003.  Included in gaming and admission tax expensefor the three months ended June 30, 2003 is a $5.9 

 

9

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million charge at Lawrenceburg due to new legislation in June 2003relating to the 2002 gaming tax increase and additional expense of $6.2 millioncombined at our Illinois casinos for this increase in gaming and admission taxrates in Illinois.  These items broughtthe effective gaming and admission tax rate for the six months ended June 30,2003 to 36.2%. Exclusive of these 2003 items, our consolidated effective gamingand admission tax rates (as a percent of net revenues) for the six months endedJune 30, 2004 and 2003 were 35.0% and 33.7%, respectively. For the sixmonths ended June 30, 2004, our income from operations increased 34.5%, or$27.0 million, and our operating margins improved from 21.4% to 25.9%, ascompared to the six months ended June 30, 2003.  These increases were the result of increased revenues at all ofour facilities except our Illinois locations. For example, Riverside net revenues increased 60.3% as we opened our newexpanded casino in December 2003 and our Lawrenceburg casino’s netrevenues increased 9.2%.  Our Illinoisfacilities’ net revenues were lower due to implementation of reduced hours ofoperation at both casinos and restaurants, changes in product mix, significantrevisions to marketing programs and Joliet implementing an admission fee tominimize the impact of increased gaming and admission tax rates in Illinois.  Our operating expenses increased dueprimarily to higher state gaming and admission taxes due to increased revenuesand rate increases in Illinois.

 

We also continue to invest in coinless or “TITO” slot machines, which,when implemented, are more convenient to our customers and result inoperational efficiencies. As of June 30, 2004, approximately 90% of ourtotal slot machines are TITO-operational and we expect to be essentially 100%TITO operational by year-end 2004.  Webelieve that going forward the convenience and efficiency of TITO machines willhave a positive impact on both our casino revenues and our operating expenses.

 

In February and June 2004, we refinanced a portion of ourexisting indebtedness with net proceeds from the issuance of $350 million innew 7% Senior Subordinated Notes (“7% Notes”) due 2014, together with fundsfrom our Credit Facility.  These fundswere used to repurchase the $350 million 103⁄4% Senior Subordinated Notes (“103⁄4%Notes”) due 2009.  Associated with thisrefinancing, we incurred a pretax charge for the six months ended June 30,2004 of $26.0 million for net premiums and fees associated with the earlyredemption of our 103⁄4% Notes.

 

Legislative uncertainties present challenges and risks to our ongoingoperations.  For example, casino gamingis currently prohibited or restricted in several states adjacent to Indiana,Iowa and Missouri, and residents of those states comprise a significant portionof the patrons at our Lawrenceburg, Sioux City and Riverside casinos.  Legislation has been proposed in variousstates that would permit certain types of casino-style gaming. If thislegislation were approved in states adjacent to our properties, it would resultin increased competition with respect to significant portions of our targetmarkets.  Furthermore, the large numberof state and local governments with significant current or projected budgetdeficits make it more likely that those governments that permit gaming willseek to fund such deficits with new or increased gaming taxes.  To address these legislative risks, we mustregularly adjust our business strategies and adapt our casino operations.

 

10

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**ARGOSY GAMING COMPANY AND SUBSIDIARIES**

**SELECTED FINANCIAL INFORMATION**

(inthousands)

 
|                               |   | **Three  months ended** |    | **Six months  ended**   |   |
|------------------------------------|--------|-------------------------|---------|-------------------------|--------|
|                               |   | **June 30,  2004** |    | **June 30,  2003** |   | **June 30,  2004** |   | **June 30,  2003** |   |
|                               |   | **(unaudited)**         |    | **(unaudited)**         |   | **(unaudited)** |   | **(unaudited)** |   |
| **CASINO REVENUES**                |   |                    |    |                    |   |   |   |   |   |
| Alton Belle Casino                 |   | $                       | 25,901  |                    | $      | 29,199 |   | $ | 53,087 |   | $ | 58,586 |   |
| Argosy Casino - Riverside          |   | 36,963                  |    | 23,658                  |   | 75,201 |   | 48,116 |   |
| Argosy Casino - Baton Rouge        |   | 20,939                  |    | 20,430                  |   | 42,634 |   | 40,489 |   |
| Argosy Casino - Sioux City         |   | 11,397                  |    | 10,780                  |   | 23,083 |   | 21,169 |   |
| Argosy Casino - Lawrenceburg       |   | 107,671                 |    | 103,136                 |   | 219,673 |   | 200,197 |   |
| Empress Casino Joliet              |   | 55,342                  |    | 64,950                  |   | 110,542 |   | 124,453 |   |
| Total                              |   | $                       | 258,213 |                    | $      | 252,153 |   | $ | 524,220 |   | $ | 493,010 |   |
|                               |   |                    |    |                    |   |   |   |   |   |
| **NET REVENUES**                   |   |                    |    |                    |   |   |   |   |   |
| Alton Belle Casino                 |   | $                       | 24,590  |                    | $      | 27,910 |   | $ | 50,634 |   | $ | 56,135 |   |
| Argosy Casino - Riverside          |   | 35,826                  |    | 22,650                  |   | 73,756 |   | 46,014 |   |
| Argosy Casino - Baton Rouge        |   | 21,505                  |    | 20,967                  |   | 43,856 |   | 41,802 |   |
| Argosy Casino - Sioux City         |   | 11,035                  |    | 10,475                  |   | 22,381 |   | 20,575 |   |
| Argosy Casino - Lawrenceburg       |   | 108,049                 |    | 104,085                 |   | 220,982 |   | 202,423 |   |
| Empress Casino Joliet              |   | 53,559                  |    | 62,258                  |   | 107,044 |   | 117,728 |   |
| Total                              |   | $                       | 254,564 |                    | $      | 248,345 |   | $ | 518,653 |   | $ | 484,677 |   |
|                               |   |                    |    |                    |   |   |   |   |   |
| **INCOME (LOSS) FROM  OPERATIONS** |   |                    |    |                    |   |   |   |   |   |
| Alton Belle Casino                 |   | $                       | 2,426   |                    | $      | 2,619 |   | $ | 5,584 |   | $ | 9,333 |   |
| Argosy Casino - Riverside          |   | 8,121                   |    | 3,408                   |   | 17,505 |   | 7,402 |   |
| Argosy Casino - Baton Rouge        |   | 2,805                   |    | 1,200                   |   | 5,430 |   | 2,989 |   |
| Argosy Casino - Sioux City         |   | 2,793                   |    | 1,831                   |   | 5,212 |   | 3,590 |   |
| Argosy Casino - Lawrenceburg       |   | 33,722                  |    | 24,365                  |   | 66,838 |   | 50,431 |   |
| Empress Casino Joliet              |   | 9,058                   |    | 5,510                   |   | 19,413 |   | 16,218 |   |
| Corporate                          |   | (6,782                  | )       | (6,242                  | )      | (14,767 | ) | (11,719 | ) |
| Total                              |   | $                       | 52,143  |                    | $      | 32,691 |   | $ | 105,215 |   | $ | 78,244 |   |

 

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**RECONCILIATION OF NET INCOME TO EBITDA (1) (2)**

(Inthousands, unaudited)

 
|                                   |   | **For the  three months ended June 30,** |   |
|----------------------------------------|--------|-----------------------------------------------|--------|
|                                   |   | **2004**                                      |   | **2003** |   |
| Net income (3)                         |   |                                          |   | $ | 18,583 |   |   |   | $ | 6,949 |   |
| Income tax expense                     |   |                                          |   | 16,221 |   |   |   | 6,788 |   |
| Interest expense, net                  |   |                                          |   | 16,576 |   |   |   | 18,954 |   |
|                                   |   |                                          |   |   |   |   |   |   |   |
| Depreciation and amortization expense: |   |                                          |   |   |   |   |   |   |   |
| Alton Belle Casino                     |   | $                                             | 1,608  |   |   |   | $ | 1,640 |   |   |   |
| Argosy Casino - Riverside              |   | 2,588                                         |   |   |   | 1,373 |   |   |   |
| Argosy Casino - Baton Rouge            |   | 2,239                                         |   |   |   | 2,170 |   |   |   |
| Argosy Casino - Sioux City             |   | 597                                           |   |   |   | 1,141 |   |   |   |
| Argosy Casino - Lawrenceburg           |   | 3,583                                         |   |   |   | 3,257 |   |   |   |
| Empress Casino Joliet                  |   | 3,587                                         |   |   |   | 2,723 |   |   |   |
| Corporate                              |   | 646                                           |   |   |   | 535 |   |   |   |
| Depreciation and amortization expense  |   | 14,848                                        |   | 14,848 |   | 12,839 |   | 12,839 |   |
|                                   |   |                                          |   |   |   |   |   |   |   |
| EBITDA (1) (2):                        |   |                                          |   |   |   |   |   |   |   |
| Alton Belle Casino                     |   | 4,034                                         |   |   |   | 4,259 |   |   |   |
| Argosy Casino - Riverside              |   | 10,709                                        |   |   |   | 4,781 |   |   |   |
| Argosy Casino - Baton Rouge            |   | 5,044                                         |   |   |   | 3,370 |   |   |   |
| Argosy Casino - Sioux City             |   | 3,390                                         |   |   |   | 2,972 |   |   |   |
| Argosy Casino - Lawrenceburg           |   | 37,305                                        |   |   |   | 27,622 |   |   |   |
| Empress Casino Joliet                  |   | 12,645                                        |   |   |   | 8,233 |   |   |   |
| Corporate                              |   | (6,899                                        | )      |   |   | (5,707 | ) |   |   |
| EBITDA (1) (2)                         |   | $                                             | 66,228 |   | $ | 66,228 |   | $ | 45,530 |   | $ | 45,530 |   |
|                                        |        |                                               |        |  |  |  |  |  |  |  |  |  |  |  |

 

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|                                   |   | **For the  six months ended June 30,** |    |
|----------------------------------------|--------|---------------------------------------------|---------|
|                                   |   | **2004**                                    |    | **2003** |   |
| Net income (3)                         |   |                                        |    | $ | 22,543 |   |   |   | $ | 21,610 |   |
| Income tax expense                     |   |                                        |    | 22,026 |   |   |   | 18,784 |   |
| Interest expense, net                  |   |                                        |    | 34,606 |   |   |   | 37,850 |   |
|                                   |   |                                        |    |   |   |   |   |   |   |
| Depreciation and amortization expense: |   |                                        |    |   |   |   |   |   |   |
| Alton Belle Casino                     |   | $                                           | 3,160   |   |   |   | $ | 3,411 |   |   |   |
| Argosy Casino - Riverside              |   | 5,049                                       |    |   |   | 2,818 |   |   |   |
| Argosy Casino - Baton Rouge            |   | 4,505                                       |    |   |   | 4,232 |   |   |   |
| Argosy Casino - Sioux City             |   | 1,720                                       |    |   |   | 2,187 |   |   |   |
| Argosy Casino - Lawrenceburg           |   | 6,995                                       |    |   |   | 6,494 |   |   |   |
| Empress Casino Joliet                  |   | 6,387                                       |    |   |   | 5,333 |   |   |   |
| Corporate                              |   | 1,257                                       |    |   |   | 1,047 |   |   |   |
| Depreciation and amortization expense  |   | 29,073                                      |    | 29,073 |   | 25,522 |   | 25,522 |   |
|                                   |   |                                        |    |   |   |   |   |   |   |
| EBITDA (1) (2):                        |   |                                        |    |   |   |   |   |   |   |
| Alton Belle Casino                     |   | 8,744                                       |    |   |   | 12,744 |   |   |   |
| Argosy Casino - Riverside              |   | 22,554                                      |    |   |   | 10,220 |   |   |   |
| Argosy Casino - Baton Rouge            |   | 9,935                                       |    |   |   | 7,221 |   |   |   |
| Argosy Casino - Sioux City             |   | 6,932                                       |    |   |   | 5,777 |   |   |   |
| Argosy Casino - Lawrenceburg           |   | 73,833                                      |    |   |   | 56,925 |   |   |   |
| Empress Casino Joliet                  |   | 25,800                                      |    |   |   | 21,551 |   |   |   |
| Corporate                              |   | (39,550                                     | )       |   |   | (10,672 | ) |   |   |
| EBITDA (1) (2)                         |   | $                                           | 108,248 |   | $ | 108,248 |   | $ | 103,766 |   | $ | 103,766 |   |

 

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(1)          “EBITDA” is defined as earnings beforeinterest, taxes, depreciation and amortization.  EBITDA is presented solely as a supplemental disclosure becausemanagement believes it is 1) a widely used measure of operating performance inthe gaming industry, 2) a principal basis for valuation of gaming companies and3) is used as a basis for determining compliance with our credit facility.  Management uses property-level EBITDA(EBITDA before corporate expense) and EBITDA margin (EBITDA as a percent of netrevenues) as the primary measures of our properties’ performance, including theevaluation of operating personnel. EBITDA should not be construed as an alternative to GAAP-based financialmeasures such as operating income, an indicator of our operating performance,or cash flows from operating activities, as a measure of liquidity. We havesignificant uses of cash flows, including capital expenditures, interestpayments, taxes and debt principal repayments, which are not reflected inEBITDA.  We believe the performance ofour operating units is more appropriately measured before these expenses, sincethe allocation of our capital is decided by corporate management and is subjectto the approval of the board of directors. In addition, we manage cash and finance our operations at the consolidatedlevel and we file a consolidated income tax return.  We do not consider EBITDA in isolation.  Our calculation of EBITDA may not be comparable to similarlytitled measures reported by other companies. For a further discussion of such limitations, see our additionaldisclosures in this report under the heading “Non-GAAP Financial Measures.”

 

(2)          Because we do not include corporate expensein our computation, property-level EBITDA does not reflect all the costs ofoperating the properties as if each were a stand-alone business unit.  Corporate expense includes significantexpenses necessary to manage a multiple casino operation, certain of which,such as corporate executive compensation, development, public companyreporting, treasury, legal and tax expenses, would also be required of atypical stand-alone casino property.

 

(3)          Net income includes $763 and $26,040 ofexpense on early retirement of debt for the three months and six months endedJune 30, 2004, respectively.

 

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**Six months endedJune 30, 2004, compared to six months ended June 30, 2003**

 

A discussion of each of our properties operating results:

 

*Lawrenceburg* – Net revenues increased $18.6million primarily due to an increase in casino revenues of $19.5 million, or9.7%, to $219.7 million.  This increaseresulted from increases in admissions and win per admission of 5% each, theimplementation of 24-hour gaming and revisions to our marketing programs. Additionally,promotional allowances increased $2.1 million across all lines of complimentaryprograms due to changes in marketing programs and overall increases in casinorevenues.  Operating expenses increased$2.1 million to $154.1 million from $152.0 million.  Included in the six months ended June 30, 2003 was a chargeof $5.9 million in gaming and admission taxes due to new legislation inJune 2003 relating to the 2002 gaming tax increase.  Excluding this charge, gaming and admissiontaxes increased $6.9 million due to our increased revenue.  Selling, general and administrative(“SG&A”) expense increased $0.8 million due primarily to a combined $1.0million increase in promotions and payroll offset by a net decrease in citydevelopment fees of $0.3 million.  Thisdecrease in city development fees is due to an amendment to the developmentagreement with the City of Lawrenceburg that reduces our annual fee paid to theCity of Lawrenceburg.  Our fee for thesix months ended June 30, 2004 was reduced by $2.5 million.  Excluding this fee reduction, our citydevelopment fees increased $2.2 million due to increased revenues.

 

*Riverside* – Net revenues increased $27.7million as casino revenues increased $27.1 million, or 56.3%, to $75.2 milliondue to the opening of our renovated casino property in December 2003,which included a 53% increase in gaming capacity, renovation of the pavilionand increased food and beverage facilities. Admissions increased 47% and win per admission increased 6%.  Food, beverage and other (“FB&O”)revenue increased $4.5 million to $9.0 million due to our new restaurants, theincrease in admissions with the opening of our new casino and limited foodservice during the first six months of 2003 due to renovations in ourbuffet.  With this increase in revenuesand patrons, our promotional allowances increased $3.8 million (ratably lessthan our revenue increase), primarily in our complimentary food program.

 

Operating expenses increased $17.6 million in the following areas:  gaming and admission taxes increased $7.1million corresponding with our increase in revenues and admissions with theopening of our new casino in December 2003, SG&A expense and casinoexpense increased $3.7 million and $1.6 million, respectively, with ourexpanded casino operations, FB&O expense increased $3.0 million due to ourexpanded restaurant operations and the increase in patrons with our expandedoverall facility and depreciation and amortization expense increased $2.2million due to the project capital placed in service with the opening of ournew casino in December 2003.

 

*Joliet* – Net revenues decreased $10.7 milliondue primarily to a decrease in casino revenues of $13.9 million, or 11.2%, to$110.5 million due to the implementation of reduced hours of operations, theimplementation of an admission fee and changes in marketing efforts commencingin August 2003 in response to Illinois tax legislation increasing gamingand admission tax rates effective July 2003.  Admission revenues were $4.1 million in 2004 compared with noadmission revenues in 2003 due to the commencement of an admission fee inAugust 2003.  Additionally,FB&O revenues decreased $2.6 million due to the reduced admissions andpromotional allowances decreased $1.7 million, consisting primarily ofdecreases in our marketing and food programs of $4.5 million and an increase incomplimentary admissions of $3.4 million.

 

Operating expenses decreased $13.9 million consisting primarily of: a$6.5 million write-down of assets for the six months ended June 30, 2003and casino expense and other operating expense decreasing $2.6 million and $1.3million, respectively, following the operational changes implemented inresponse to the Illinois tax legislation increasing gaming and admission taxrates.  Additionally, FB&O expensedecreased $1.7 million corresponding to our decrease in revenues and gaming andadmission taxes decreased $1.8 million, not ratably with the decrease in casinorevenues due to the increased tax rates in Illinois.

 

*Alton* – Net revenues decreased $5.5 million ascasino revenues decreased $5.5 million, or 9.4%, to $53.1 million due tocompetitive pressures in the St. Louis market and the implementation of reducedhours commencing in August 2003 in response to the Illinois taxlegislation.  Operating expensesdecreased $1.4 million due to gaming and admission taxes decreasing $1.1million, not ratably with the decrease in casino revenues due to the increasedtax rates in Illinois, and a reduction in casino expense of $1.1 million due tothe operational changes implemented in response to the Illinois tax legislationincreasing gaming and admission tax rates.

 

*Baton Rouge* – Net revenues increased $2.1million as casino revenues increased $2.1 million, or 5.3%, to $42.6 milliondue primarily to an increase in win per admission. Operating expenses increased$0.4 million primarily due to an increase in gaming and admission taxes of $0.4million corresponding with the increase in casino revenues.

 

14

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*Sioux City* – Net revenues increased $1.8 milliondue to an increase in casino revenues of $1.9 million, or 9.0%, to $23.1million due to the positive impact of property renovations completed in thefirst quarter 2003.   Operating expensesincreased $0.2 million as gaming and admissions taxes increased $0.7 millioncorresponding to the increase in casino revenues offset by a decrease indepreciation and amortization of $0.5 million as our current riverboat wasdepreciated to its’ salvage value for eventual replacement by our Riversideriverboat.  Depreciation expense infuture periods will increase as we anticipate placing this boat in serviceduring the third quarter 2004.

 

*Corporate* – Operating expenses increased $2.7million due in part to changes in incentive compensation plans and year overyear expansion of our corporate MIS and Development groups.

 

Other overall company costs were as follows:

 

*Other Income (Expense)*– Net interest expensedecreased $3.3 million to $34.6 million, which is primarily attributable to therefinancing, in February and June 2004, of our 103⁄4 % Notes with new7% Notes due 2014.  We also hadcapitalized interest of $1.6 million related to our casino constructionprojects for the six months ended June 30, 2003 compared to minimalcapitalized interest for the six months ended June 30, 2004, as theseassets were placed in service during 2003. Associated with this debtrefinancing, we incurred $26.0 million in net premiums and fees for the sixmonths ended June 30, 2004.

 

*Income Tax Expense –*Income tax expenseincreased $3.2 million to $22.0 million as pretax earnings increased primarilydue to increased earnings at our Riverside and Lawrenceburg properties offsetby expenses related to the early retirement of our 103⁄4% Notes. Our overalleffective tax rate is higher for the six months ended June 30, 2004compared to the six months ended June 30, 2003 due to recording a taxbenefit related to this debt refinancing at a rate lower than our overalleffective tax rate. Our effective tax rate would have been the same in bothyears had this debt refinancing not occurred.

 

**Three months endedJune 30, 2004, compared to three months ended June 30, 2003**

 

A discussion of each of our properties operating results:

 

*Lawrenceburg* – Net revenues increased $4.0million, primarily due to an increase in casino revenues of $4.5 million, or4.4%, to $107.7 million as win per admission increased 5% and admissionsdecreased 1%. Promotional allowances decreased $0.7 million across all lines ofcomplimentary programs due to changes in marketing programs. Operating expensesdecreased $5.4 million to $74.3 million from $79.7 million principally becausethe three months ended June 30, 2003 included a $5.9 million charge due tonew legislation in June 2003 amending the calculation of the 2002 gaming taxincrease in Indiana. Excluding this charge, gaming and admissions taxesincreased $2.0 million due to our increase in casino revenues offset by adecrease in SG&A expense of $2.0 million as the three months endedJune 30, 2004 reflects a net decrease in city development fees of $1.9million. This decrease in city development fees includes a $2.5 millionreduction in fees due to an amendment to the development agreement with theCity of Lawrenceburg that reduces our annual fee paid to the City ofLawrenceburg.

 

*Riverside* – Net revenues increased $13.2million as casino revenues increased $13.3 million, or 56.2%, to $37.0 milliondue to the opening of our renovated casino property in December 2003 whichincluded a 53% increase in gaming capacity, renovation of the pavilion andincreased food and beverage facilities. Admissions increased 46% and win per admission increased 7%.  FB&O revenue increased $2.2 million to$4.4 million due to our new restaurants, the increase in admissions with theopening of our new casino and limited food service during the second quarter2003 due to renovations in our buffet. With this increase in revenues andpatrons, our promotional allowances increased $2.3 million, primarily in ourcomplimentary food program.

 

Operating expenses increased $8.5 million in the following areas: anincrease in gaming and admission taxes of $3.5 million corresponding with ourincrease in revenues and admissions with the opening of our new casino inDecember 2003, SG&A expense and casino expense increased $1.6 millionand $0.6 million, respectively, with our expanded casino operations, FB&Oexpense increased $1.5 million due to our expanded restaurant operations andthe increase in patrons with our expanded overall facility and depreciation andamortization expense increased $1.2 million due to the project capital placedin service with the opening of our new casino in December 2003.

 

*Joliet* – Net revenues decreased $8.7 millionas casino revenues decreased $9.6 million, or 14.8%, to $55.3 million.  With the opening of our new barge-basedcasino in May 2003, we experienced increased revenues prior to theimplementation of reduced hours of operations, the implementation of anadmission fee and changes in marketing efforts commencing in 

 

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August 2003 in response to Illinois tax legislation increasinggaming and admission tax rates effective July 2003.  Admission revenues were $2.1 million in 2004compared with no admission revenues in 2003 due to the commencement of anadmission fee in August 2003. FB&O revenues decreased $1.2 million due to the reduced admissionsand promotional allowances remained constant due primarily to decreases in ourmarketing and food programs of $1.5 million and an increase in complimentaryadmissions of $1.8 million.

 

Operating expenses decreased $12.2 million due primarily to the threemonths ended June 30, 2003 including a $6.5 million write-down of bargeplatforms under construction for our expansion project initially planned thatwe have since decided not to further develop as a result of the increasedgaming and admission taxes enacted by the state of Illinois.  Additionally, gaming and admission taxesdecreased $3.1 million due to our reduced casino revenues and that the threemonths ended June 30, 2003 included a charge to increase our expense dueto increased gaming and admission tax rates effective July 1, 2003.  Casino expense and other operating expensedecreased $1.0 million and $0.6 million, respectively, due to the operationalchanges implemented in response to the Illinois tax legislation increasinggaming and admission tax rates and FB&O expense decreased $0.8 millioncorresponding to our decrease in revenues.

 

*Alton* – Net revenues and casino revenues eachdecreased $3.3 million due to increased competitive pressures in the St. Louismarket and the implementation of reduced hours commencing in August 2003in response to the Illinois tax legislation. Operating expenses decreased $3.2 million due to decreased gaming andadmission taxes of $2.4 million due to our reduced casino revenues and that thethree months ended June 30, 2003 included a charge to increase our expensedue to increased gaming and admission tax rates effective July 1, 2003.  In addition, casino expense decreased $0.7million due to the operational changes implemented in response to the Illinoistax legislation increasing gaming and admission tax rates.

 

*Baton Rouge* – Net revenues increased $0.5million as casino revenues increased $0.5 million, or 2.5%, to $20.9 milliondue primarily to an increase in win per admission.  Operating expenses decreased $1.1 million primarily due toreductions in payroll costs.

 

*Sioux City* – Net revenues increased $0.6million consisting of an increase in casino revenues of $0.6 million, or 5.7%,to $11.4 million due primarily to the continued positive impact of propertyrenovations completed in the first quarter 2003.   Operating expenses decreased $0.4 million as depreciation andamortization expense decreased $0.5 million as the current boat is fullydepreciated to its’ estimated salvage value (to be sold and replaced with theRiverside riverboat) offset by an increase in gaming and admissions taxes of$0.3 million corresponding to the increase in casino revenues.  Depreciation expense in future periods willincrease as we anticipate placing this boat in service during the third quarter2004.

 

*Corporate* – Operating expenses increased $0.6million primarily in increases in SG&A expense of $0.4 million spreadthroughout various corporate departments.

 

Other overall company costs were as follows:

 

*Other Income (Expense)*– Net interest expensedecreased $2.4 million to $16.6 million, which is primarily attributable to therefinancing, in February and June 2004, of our 103⁄4 % Notes with new7% Notes due 2014.  We also hadcapitalized interest of $0.8 million related to our casino constructionprojects for the three months ended June 30, 2003 compared to minimalcapitalized interest for the three months ended June 30, 2004 as theseassets were placed in service during 2003. Associated with this debt refinancing, we incurred $0.7 million in netpremiums and fees for the three months ended June 30, 2004.

 

*Income Tax Expense –*Income tax expenseincreased $9.4 million to $16.2 million as pretax earnings increased due toincreased operating income (increased earnings at all of our locations exceptour Illinois properties for the three months ended June 30, 2004, thethree months ended June 30, 2003 includes the $6.5 million Joliet write-down,the $5.9 million Lawrenceburg charge for gaming and admission taxes andincreased gaming and admission taxes in Joliet and Alton discussed previously)and reduced interest expense.

 

**Competition**

 

Our Alton Casino faces competition from four other riverboat casinooperators in the St. Louis area.  Onecompetitor plans to open a $75 million hotel expansion and facility renovationmid-to-late 2004.  In addition, twocompanies have applied to put new casinos in the St. Louis market. OurRiverside Casino faces competition from three barge-based casinos in the KansasCity area.  Our Baton Rouge Casino facescompetition from one casino located in downtown Baton Rouge, a nearby NativeAmerican casino and multiple casinos throughout Louisiana. We face competitionin Sioux City, Iowa from 

 

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video gaming devices in nearby South Dakota, from two land-based NativeAmerican casinos and, to a lesser extent, from slot machines at a pari-mutuelracetrack in Council Bluffs, Iowa and from two riverboat casinos in the CouncilBluffs, Iowa/Omaha, Nebraska market. The Lawrenceburg casino faces competition from two riverboat casinos inthe Cincinnati market.  Our Jolietcasino faces competition from seven other riverboat casino operators in theChicago metropolitan area, including four casinos in Indiana, which alloweddockside gaming beginning in 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.

 

**Liquidity and CapitalResources**

 

In the six months ended June 30, 2004, we generated cash flowsfrom operating activities of $97.4 million compared to $84.6 million for thesix months ended June 30, 2003. This increase is due to an overallincrease in our operating performance.

 

In the six months ended June 30, 2004, we used cash flows forinvesting activities of $45.0 million compared to $67.5 million for the sixmonths ended June 30, 2003.  Duringthe six months ended June 30, 2004, our investing activities includedpurchases of property and equipment of $46.0 million ($24.4 million forresidual payments on the Riverside construction project (including $13.6million on our payable at December 31, 2003), $0.9 million on renovatingour Riverside riverboat to be placed in Sioux City with the remaining formaintenance capital), compared to $67.7 million in property and equipmentpurchases for the six months ended June 30, 2003 ($51.7 million forconstruction projects at our Riverside, Joliet and Sioux City facilities withthe remaining for maintenance capital).

 

During the six months ended June 30, 2004, we used cash flows of$49.9 million for financing activities compared to using $13.4 million for thesix months ended June 30, 2003. For the six months ended June 30, 2004, we used $378.0 millionrelated to the repurchase of our 103⁄4% Notes offset by cash provided through theissuance of $350 million of our new 7% Notes. Additionally, for the six months ended June 30, 2004, we used $7.1million for deferred finance fees related to the 7% Notes. For the six monthsended June 30, 2004 and 2003, we used $14.6 million and $11.8 million,respectively, for repayments on our line of credit.

 

In February and June 2004, we refinanced a portion of ourexisting indebtedness with net proceeds from the issuance of $350 million innew 7% Notes due 2014, together with funds from our Credit Facility.  These funds were used to repurchase the $350million 103⁄4% Notes due 2009. Related to this refinancing, we paid approximately$28.0 million in premiums.  Funding ofthis debt purchase, call premium and accrued interest was from funds availableunder our Credit Facility.

 

During October 2001, we effectively fixed the interest rate onapproximately $200.0 million of our term loan through three interest rate swapagreements expiring on September 30, 2004.  For each swap agreement, we agreed to receive a floating rate ofinterest on the notional principal amount based upon a three month LIBOR rate(plus a 2.75% spread) in exchange for fixed rates ranging from 6.19% to6.27%.  As of June 30, 2004, thenotional principal amounts were $197.5 million.  These notional amounts do not represent amounts exchanged by theparties and, thus, are not a measure of our exposure to credit loss.  In accordance with SFAS 133, “Accounting forDerivative Instruments and Hedging Activities,” we recorded, as ofJune 30, 2004, the fair value of these interest rate swap agreements inthe consolidated balance sheet in other current obligations ($0.9 million pretax)and the related fair value of these agreements is deferred in stockholders’equity as a component of accumulated other comprehensive income ($0.5 million,net of a current deferred tax asset of $0.4 million).

 

Our Subordinated Notes due in 2011 and 2014 and the Credit Facilitycontain certain restrictions on the payment of dividends on our common stockand the occurrence of additional indebtedness, as well as other customary debtcovenants.  In addition, the CreditFacility requires us to maintain certain financial ratios, based on terms asdefined in the Credit Facility, which, as of June 30, 2004 are asfollows:  (1) Total Funded Debt toEBITDA Ratio of a maximum of 4.25 to 1.0; (2) Senior Leverage Ratio of amaximum of 2.50 to 1.0; and (3) Fixed Charge Ratio of a minimum of 1.50 to1.0.  As of June 30, 2004, we arein compliance with these ratios.  We arerenegotiating a new Senior Credit Facility and anticipate finalizing thistransaction during the third quarter 2004.

 

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During May 2003, we announced Board of Directors approval of a stockrepurchase program authorizing us to repurchase up to $30.0 million of ourcommon stock.  The repurchases can bemade at management’s discretion without prior notice from time to time in theopen market or through privately negotiated third party transactions incompliance with applicable laws and depending on market conditions.  As of the filing date of this report, wehave made no stock repurchases under this program.

 

Under our subordinated notes indentures, ourability to make dividends and other distributions on our common stock and makeinvestments outside of the Company and its restricted subsidiaries is generallylimited to 50% of our consolidated net income since July 1, 1999.  In addition, we are restricted fromincurring additional indebtedness, which, after giving effect of the additionalindebtedness, would cause our Interest Coverage Ratio (Consolidated EBITDA toConsolidated Interest Expense for the most recent four fiscal quarters on a proforma basis) to be less than 2.0 to 1. None of these covenants currently places any material limitations on ouranticipated future operating plans.

 

We continue to make capital investments at our existing properties forexpansion and product enhancement.  InDecember 2003, we opened our new approximately $105 million Riversidecasino.  For the remainder of 2004, weexpect to spend approximately $50-$60 million, including commencement on anexpansion project at Riverside for a new 1,400-space parking garage (estimatedto be completed in the third quarter 2005), maintenance capital expenditures(including the continuing implementation of our coinless TITO slot product) andthe renovation and transfer of the Riverside boat to Sioux City. The new garageat our Riverside property is part of a $75 million expansion project that alsoincludes a new 250-room hotel. We expect to fund these expenditures frominternally generated cash and availability under our Credit Facility.

 

Given our significant cash generation capabilities, we seek investmentopportunities at our existing properties, including but not limited toadditional capital investments at our Riverside and Lawrenceburg properties, orinto new assets. Should we decide to make additional investments at ourexisting properties or acquire new assets, we may amend our existing CreditFacility or issue additional debt or equity securities.  At June 30, 2004, we had approximately$69.8 million of cash and cash equivalents; $294.4 million was outstanding onour Senior Secured Credit Facility ($27.6 million on our revolving CreditFacility and $266.8 million on our term loan) and $550.0 million ofSubordinated Notes (due in September 2011 and January 2014).  As of June 30, 2004, we had outstandingletters of credit of $8.8 million and additional availability under the CreditFacility was approximately $228.0 million. We have no off-balance sheet debt.

 

Consistent with gaming industry practice, we conduct our operationswith a net working capital deficit. Unlike traditional industrial companies, agaming company’s balance sheet has limited accounts receivable and inventories.In addition, casinos generate significant cash on a daily basis. We generallyapply our daily cash flows to fund capital expenditures or pay down debt underour revolving Credit Facility and pay our current liabilities pursuant to theirnormal cycles.  Given the significantdaily cash flows generated by our operations and the financial flexibilityprovided by our Credit Facility, the existence of a working capital deficit hasno impact on our ability to operate our business or meet our obligations asthey become due.  We believe that cashon hand, operating cash flows, and funds available under our Credit Facility willbe sufficient to fund our current operating, capital expenditure and debtservice obligations for the next 12 months.

 

Because we have no direct operations and nosignificant assets other than ownership of stock in our subsidiaries, we aredependent on our subsidiaries for payments of dividends and other distributionsto generate the funds necessary to meet our cash needs.  Although there are currently no restrictionson the flow of funds between us and our subsidiaries, should our subsidiariesbe unable to remit dividends or other payments, our ability to meet ourfinancial obligations may be impaired.

 

Our long-term debt, as of June 30, 2004 matures as follows (inthousands):

 
| One year and less |   | $       | 3,713   |   |
|-------------------|--------|---------|---------|--------|
| 1 - 3 years       |   | 33,489  |    |
| 4 - 5 years       |   | 258,979 |    |
| After 5 years     |   | 550,928 |    |
| Total             |   | $       | 847,109 |   |

 

# **OffBalance Sheet Arrangements**

# ** **

# **Wehave not entered into any transactions with unconsolidated entities whereby wehave financial guarantees, subordinated retained interest, derivativeinstruments or other contingent arrangements that expose us to materialcontinuing risks, contingent liabilities or any other obligation under avariable interest in an unconsolidated entity that provides financing,liquidity, market risk or credit risk support to us.**

# ** **

# **CriticalAccounting Estimates**

# ** **

Our consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States, which requiresour management to make estimates and assumptions about the effects of mattersthat are inherently uncertain.  Of ouraccounting estimates, we believe the following may involve a higher degree ofjudgment and complexity.

 

*Goodwill –*We have approximately $727 millionof goodwill recorded on our balance sheet at June 30, 2004, 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 ofimpairment indicators are based on, among 

 

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other things, the regulatory and competitive status and operationalperformance of each of our acquired businesses.  Future events could significantly impact our judgments and anyresulting impairment loss could have a material adverse impact on our financialcondition and results of operations.

 

*Property and Equipment –*Our operations arecapital intensive and we have made significant capital investments in each ofour properties.  At June 30, 2004,we have approximately $552 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 policiesfor employee health, workers’ compensation and general patron liability havesignificant deductible levels on an individual claim basis.  We accrue a liability for known workers’compensation and general patron liability based upon claims reservesestablished by the third party administrator processing our claims.  Additionally, we accrue an amount forincurred but not reported claims based on our historical experience and otherfactors.  Our employee health insuranceaccrual is based on our historical claims experience rate including anestimated lag factor.  These accrualsinvolve complex estimates and could be significantly affected should current orfuture claims vary from historical levels. Management reviews our insurance accruals for adequacy at the end ofeach 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 taxing authorities. Weregularly assess the potential outcomes of these examinations in determiningthe adequacy of our provision for income taxes and our income taxliabilities.  Inherent on ourdetermination of any necessary reserves are assumptions based on pastexperiences and judgments about potential actions by taxing authorities.  Our estimate of the potential outcome forany uncertain tax issue is highly judgmental. We believe we have adequately provided for any reasonable and foreseeableoutcome related to uncertain tax matters. When actual results of tax examinations differ from our estimates, weadjust the income tax provision in the period in which the examination issuesare settled.

 

We have received proposed assessments from the Indiana Department ofRevenue (“IDR”) in connection with our Indiana income tax returns for the years1997 through 2002.  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. Additionally, another company and the IDR have litigated this matter inIndiana Tax Court during 2001.  DuringApril 2004, the court issued an opinion in this case finding for the IDR.Plaintiffs are in process of appealing this decision.  At June 30, 2004, we have accrued approximately $19.1million, net of federal tax benefit, for the proposed IDR assessments includingamounts for additional pending assessments for the period January 1, 2003through June 30, 2004.  For the sixmonths ended June 30, 2004, we expensed $3.5 million related to thisissue.  We continue to review the factsand circumstances leading to our determination of the probability the IDR willprevail in their proposed assessments. Should our evaluation of the IDR prevailing in their proposed andpending assessments change, we could be required to record additional expensefor penalties that could be assessed by the IDR.

 

# **Non-GAAPFinancial Measures**

# ** **

EBITDA is a supplemental measure of our performance that is not requiredby, or presented in accordance with Generally Accepted Accounting Principles(“GAAP”). EBITDA is not a measurement of our financial performance under GAAPand should not be considered as an alternative to net income, operating incomeor any other performance measures derived in accordance with GAAP or as analternative to cash flow from operating activities as measures of ourliquidity.

 

EBITDA is defined as earnings before interest, taxes, depreciation andamortization. Our compensation plans base incentive compensation payments inpart on EBITDA performance measured against targets, and we use it to establishour budgets and analyze our operations as compared to our budgets. In addition,our Credit Facility and our indentures use 

 

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measures similar to EBITDA (with additional adjustments) to measure ourcompliance with covenants such as interest coverage and debt incurrence. Webelieve EBITDA facilitates operating performance comparisons from period toperiod and company to company by backing out potential differences caused byvariations in capital structures (affecting interest expense), tax positions(such as the impact on periods or companies of changes in effective tax ratesor net operating losses) and the age and book depreciation of facilities andequipment (affecting relative depreciation expense). We also present EBITDAbecause we believe it is frequently used by securities analysts, investors andother interested parties in the evaluation of the operating performance ofcompanies in the gaming industry, the vast majority of which present EBITDAwhen reporting their results.

 

In addition, in evaluating EBITDA, you should be aware that in thefuture we will incur expenses such as those used in calculating EBITDA. Ourpresentation of EBITDA should not be construed as an inference that our futureresults will be unaffected by unusual or nonrecurring items.

 

EBITDA has limitations as an analytical tool, and you should notconsider it in isolation, or as a substitute for analysis of our results asreported under GAAP. Some of these limitations are:

 

•                                          itdoes not reflect our cash expenditures, or future requirements for capitalexpenditures or contractual commitments;

•                                          itdoes not reflect changes in, or cash requirements for, our working capitalneeds;

•                                          itdoes not reflect the significant interest expense, or the cash requirementsnecessary to service interest or principal payments, on our debt;

•                                          althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andEBITDA does not reflect any cash requirements for such replacements;

•                                          itis not adjusted for all non-cash income or expense items that are reflected inour statements of cash flows;

•                                          itdoes not reflect the impact of earnings or charges resulting from matters weconsider not to be indicative of our ongoing operations, as discussed in ourpresentation of EBITDA and Management’s Discussion and Analysis of FinancialCondition and Results of Operation; and

•                                          othercompanies in our industry may calculate EBITDA differently than we do, limitingits usefulness as a comparative measure.

 

Because of these limitations, EBITDA should not be considered as ameasure of discretionary cash available to us to invest in the growth of ourbusiness. We compensate for these limitations by relying primarily on our GAAPresults and using EBITDA only supplementally.

 

Property-level EBITDA represents EBITDA attributable to a particularcasino property before corporate expense. We present property-level EBITDA as afurther supplemental measure of the performance of our casino properties.Management uses property-level EBITDA as the primary measure of our properties’performance, including the evaluation of operating personnel at our properties.We also use property-level EBITDA to make decisions regarding the allocation ofcapital among our properties. These decisions are made primarily by corporatemanagement and our board of directors. We believe that property-levelperformance is appropriately measured before expenses such as interest andincome taxes and other non-cash items such as depreciation and amortization,because we finance our operations at the consolidated level and file aconsolidated tax return.

 

As an analytical tool, property-level EBITDA is subject to similarlimitations as EBITDA. In addition, because we do not include corporate expensein our computation, property-level EBITDA does not reflect all the costs ofoperating the properties as if each were a stand-alone business unit. Corporateexpense includes significant expenses necessary to manage a multiple casinooperation, certain of which, such as corporate executive compensation,development, public company reporting, treasury, legal and tax expenses, wouldalso be required of a typical stand alone casino property.

 

**Controls andProcedures**

 

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

 

We maintain disclosure controls and procedures that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the

 

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Commission’s rules and forms, and that such information is accumulatedand communicated to our management including our President and Chief ExecutiveOfficer and Senior Vice President and Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this Report, June 30, 2004,(the “Evaluation Date”), we carried out an evaluation, under the supervisionand with the participation of the Company’s management, including Richard J.Glasier, our President and Chief Executive Officer and Dale R. Black, ourSenior Vice President and Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures.  Based upon that evaluation, the Presidentand Chief Executive Officer and the Senior Vice President and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective asof the Evaluation Date.

 

(b)**                                ***Changes ininternal controls:*

 

There was no change in the Company’s internal controls during theperiod covered by this Report that could materially affect, or could reasonablybe expected to materially affect, the Company’s internal control over financialreporting.

 

**ARGOSYGAMING COMPANY**

**OTHERINFORMATION**

 

**PART II.****                                                OtherInformation**

 

Item 1.             *LegalProceedings –*

 

The Company is from time to time a party to legal proceedings arisingin the ordinary course of business.  Nomaterial changes have occurred since our last filing.

 

Item 2.             *Changes inSecurities and Use of Proceeds*–**

 

(a)                                  None.

 

(b)                                 None.

 

(c)                                  OnApril 29, 2004, in reliance on the exemption provided by Section 4(2)of the Securities Act and Rule 701 promulgated thereunder, we issued (i) toemployees 638,571 options to purchase shares of our common stock priced at$37.71 per share and (ii) to non-employee directors 40,000 options to purchaseshares of our common stock priced at $37.71 per share. Employees and directorsthat received options to purchase our common stock may exercise such options inaccordance with the terms of our stock-based employee compensation plan and ourstock-based director compensation plan, respectively.  The underlying shares of common stock issuable upon the exerciseof such options have been registered under Form S-8 filed with the Securitiesand Exchange Commission on March 11, 1994.

 

(d)                                 None.

 

(e)                                  OnMay 6, 2003, we announced Board of Directors approval of a stock repurchaseprogram authorizing us to repurchase up to $30.0 million of our commonstock.  The repurchases may be made atmanagement’s discretion without prior notice from time to time in the openmarket or through privately negotiated third party transactions in compliancewith applicable laws and depending on market conditions.  During the quarter ended June 30, 2004,we did not make any stock repurchases under the program.  The stock repurchase program has noexpiration date.

 

Item 3.             *DefaultsUpon Senior Securities –* None

 

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

 

The Company’s annual meeting of stockholders was held on April 29,2004.  At the meeting, the stockholdersvoted on matters as follows:

 

Election of Board of Directors –

 
|               |   | **Votes For** |   | **Votes  Against** |   | **Withheld** |   |
|--------------------|--------|---------------|--------|--------------------|--------|--------------|--------|
| F. Lance Callis    |   | 27,134,900    |   | 0                  |   | 651,184      |   |
| John B. Pratt, Sr. |   | 24,983,973    |   | 0                  |   | 2,802,111    |   |
| Edward F. Brennan  |   | 24,811,261    |   | 0                  |   | 2,974,823    |   |

 

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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)*                                 Reportson Form 8-K*

 

Report on Form 8-K dated April 27, 2004, filed with the Securitiesand Exchange Commission, furnishing the press release dated April 27, 2004,announcing the Company’s first quarter 2004 operating results for the threemonths ended March 31, 2004.

 

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**ARGOSYGAMING COMPANY**

**SIGNATURES**

 

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 theundersigned thereunto duly authorized.

 

 
|                                             | Argosy Gaming Company                           |   |
|--------------------------------------------------|-------------------------------------------------|--------|
|                                             | Registrant                                      |   |
|                                             |                                            |
|                                             |                                            |
| Date:    August 5, 2004 | /s/ Dale R. Black                               |   |
|                                             | Dale R. Black                                   |
|                                             | Senior Vice President - Chief Financial Officer |
|                                                  |                                                 |        |  |

 

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