**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

### ** **

**FORM 10-Q**

 

**ý****Quarterly Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

**For thequarterly period ended March 31, 2005.**

 

**or**

 

**o****Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**CommissionFile Number 1-11853**

 

**ARGOSY GAMING COMPANY**

(Exact name ofRegistrant as Specified in its Charter)

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

 

**219 PiasaStreet**

**Alton,Illinois 62002**

**(618) 474-7500**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.      Yes ýNo o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes ýNo o

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock as of thelatest practicable date: 29,590,702 shares of Common Stock, $.01 par value pershare, as of May 3, 2005.

 

 

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**Item1.  Financial Statements**

 

**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(In Thousands, ExceptShare and Per Share Data)

 
| ** **                                                                                                                                                                        | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                        | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Current assets:**                                                                                                                                                               |       |                     |       |                        |       |
| Cash  and cash equivalents                                                                                                                                                        |       | $                        | 77,434     |                        | $          | 80,069 |   |
| Accounts  receivable, net                                                                                                                                                         |       | 4,333                    |       | 3,534                       |       |
| Income  taxes receivable                                                                                                                                                          |       | —                   |       | 8,705                       |       |
| Deferred  income taxes                                                                                                                                                            |       | 14,560                   |       | 14,224                      |       |
| Other  current assets                                                                                                                                                             |       | 10,077                   |       | 10,064                      |       |
| Total  current assets                                                                                                                                                             |       | 106,404                  |       | 116,596                     |       |
|                                                                                                                                                                              |       |                     |       |                        |       |
| **Net property and equipment**                                                                                                                                                    |       | 547,864                  |       | 544,929                     |       |
| **Other assets:**                                                                                                                                                                 |       |                     |       |                        |       |
| Deferred  finance costs, net                                                                                                                                                      |       | 18,782                   |       | 19,576                      |       |
| Goodwill,  net                                                                                                                                                                    |       | 727,470                  |       | 727,470                     |       |
| Intangible  assets, net                                                                                                                                                           |       | 23,696                   |       | 24,263                      |       |
| Other                                                                                                                                                                             |       | 6,880                    |       | 5,622                       |       |
| Total  other assets                                                                                                                                                               |       | 776,828                  |       | 776,931                     |       |
| **Total assets**                                                                                                                                                                  |       | $                        | 1,431,096  |                        | $          | 1,438,456 |   |
| **Current liabilities:**                                                                                                                                                          |       |                     |       |                        |       |
| Accounts  payable                                                                                                                                                                 |       | $                        | 12,131     |                        | $          | 10,032 |   |
| Accrued  payroll and related expenses                                                                                                                                             |       | 24,365                   |       | 25,447                      |       |
| Accrued  gaming and admission taxes                                                                                                                                               |       | 21,672                   |       | 12,424                      |       |
| Other  accrued liabilities                                                                                                                                                        |       | 49,173                   |       | 76,317                      |       |
| Accrued  interest                                                                                                                                                                 |       | 7,194                    |       | 17,627                      |       |
| Income  taxes payable                                                                                                                                                             |       | 2,722                    |       | —                      |       |
| Current  maturities of long-term debt                                                                                                                                             |       | 2,559                    |       | 2,512                       |       |
| Total  current liabilities                                                                                                                                                        |       | 119,816                  |       | 144,359                     |       |
|                                                                                                                                                                              |       |                     |       |                        |       |
| **Long-term debt**                                                                                                                                                                |       | 800,622                  |       | 811,615                     |       |
| **Deferred income taxes**                                                                                                                                                         |       | 113,673                  |       | 107,794                     |       |
| **Other long-term obligations**                                                                                                                                                   |       | 2,459                    |       | 1,926                       |       |
|                                                                                                                                                                              |       |                     |       |                        |       |
| **Stockholders’ equity:**                                                                                                                                                    |       |                     |       |                        |       |
| Common  stock, $.01 par; 120,000,000 shares authorized; 29,566,639 and 29,553,772  shares issued and outstanding at March 31, 2005 and December 31,  2004, respectively |       | 296                      |       | 296                         |       |
| Capital  in excess of par                                                                                                                                                         |       | 99,020                   |       | 98,580                      |       |
| Retained  earnings                                                                                                                                                                |       | 295,210                  |       | 273,886                     |       |
| Total  stockholders’ equity                                                                                                                                                  |       | 394,526                  |       | 372,762                     |       |
| **Total liabilities and stockholders’ equity**                                                                                                                               |       | $                        | 1,431,096  |                        | $          | 1,438,456 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

(In Thousands,Except Share and Per Share Data)

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(unaudited)**                       | ** ** | **(unaudited)** | ** ** |
| **Revenues:**                            |       |                                  |       |   |   |
| Casino                                   |       | $                                     | 274,983    |   | $ | 266,007 |   |
| Admissions                               |       | 5,529                                 |       | 5,360 |   |
| Food,  beverage and other                |       | 28,298                                |       | 26,460 |   |
|                                     |       | 308,810                               |       | 297,827 |   |
| Less  promotional allowances             |       | (37,793                               | )          | (33,738 | ) |
| Net  revenues                            |       | 271,017                               |       | 264,089 |   |
| **Costs and expenses:**                  |       |                                  |       |   |   |
| Gaming  and admission taxes              |       | 95,826                                |       | 91,578 |   |
| Casino                                   |       | 31,531                                |       | 32,574 |   |
| Selling,  general and administrative     |       | 44,166                                |       | 44,176 |   |
| Food,  beverage and other                |       | 20,133                                |       | 18,601 |   |
| Other  operating expenses                |       | 10,738                                |       | 9,863 |   |
| Depreciation  and amortization           |       | 15,626                                |       | 14,225 |   |
|                                     |       | 218,020                               |       | 211,017 |   |
| Income  from operations                  |       | 52,997                                |       | 53,072 |   |
|                                     |       |                                  |       |   |   |
| **Other income (expense):**              |       |                                  |       |   |   |
| Interest  income                         |       | 78                                    |       | 21 |   |
| Interest  expense                        |       | (14,653                               | )          | (18,051 | ) |
| Expense  on early retirement of debt     |       | —                                |       | (25,277 | ) |
|                                     |       | (14,575                               | )          | (43,307 | ) |
|                                     |       |                                  |       |   |   |
| Income  before income taxes              |       | 38,422                                |       | 9,765 |   |
| Income  tax expense                      |       | (17,098                               | )          | (5,805 | ) |
| **Net income**                           |       | $                                     | 21,324     |   | $ | 3,960 |   |
|                                     |       |                                  |       |   |   |
| **Basic income per share**               |       | $                                     | 0.72       |   | $ | 0.13 |   |
|                                     |       |                                  |       |   |   |
| **Diluted income per share**             |       | $                                     | 0.71       |   | $ | 0.13 |   |
|                                     |       |                                  |       |   |   |
| **Weighted average shares outstanding:** |       |                                  |       |   |   |
|                                     |       |                                  |       |   |   |
| **Basic**                                |       | 29,556,028                            |       | 29,345,773 |   |
|                                     |       |                                  |       |   |   |
| **Diluted**                              |       | 29,853,912                            |       | 29,561,807 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(In Thousands, ExceptShare and Per Share Data)

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                       | ** ** | **(unaudited)** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                  |       |   |   |
| Net  income                                                                        |       | $                                     | 21,324     |   | $ | 3,960 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                  |       |   |   |
| Depreciation                                                                       |       | 15,059                                |       | 13,635 |   |
| Amortization                                                                       |       | 1,333                                 |       | 1,871 |   |
| Gain  on the disposal of equipment                                                 |       | (16                                   | )          | (87 | ) |
| Compensation  expense recognized on issuance of stock                              |       | —                                |       | 50 |   |
| Loss  on early retirement of debt                                                  |       | —                                |       | 25,277 |   |
| Deferred  income taxes                                                             |       | 5,669                                 |       | 6,963 |   |
| Changes  in operating assets and liabilities:                                      |       |                                  |       |   |   |
| Accounts  receivable and other assets                                              |       | (840                                  | )          | 217 |   |
| Accounts  payable, income taxes and other liabilities                              |       | (7,383                                | )          | (11,521 | ) |
| Accrued  interest                                                                  |       | (10,433                               | )          | (3,536 | ) |
| Net  cash provided by operating activities                                         |       | 24,713                                |       | 36,829 |   |
|                                                                               |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                  |       |   |   |
| Purchases  of property and equipment                                               |       | (16,770                               | )          | (30,740 | ) |
| Other                                                                              |       | 26                                    |       | 465 |   |
| Net  cash used in investing activities                                             |       | (16,744                               | )          | (30,275 | ) |
|                                                                               |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                  |       |   |   |
| (Repayments)  borrowings on credit facility, net                                   |       | (10,937                               | )          | 10,900 |   |
| Proceeds  from issuance of senior subordinated notes                               |       | —                                |       | 350,000 |   |
| Payments  on senior subordinated notes, including early redemption premium         |       | —                                |       | (357,086 | ) |
| Increase  in deferred finance costs                                                |       | —                                |       | (6,700 | ) |
| Proceeds  from stock option exercises                                              |       | 314                                   |       | 925 |   |
| Other                                                                              |       | 19                                    |       | (19 | ) |
| Net  cash used in financing activities                                             |       | (10,604                               | )          | (1,980 | ) |
| Net  change in cash and cash equivalents                                           |       | (2,635                                | )          | 4,574 |   |
| Cash  and cash equivalents, beginning of period                                    |       | 80,069                                |       | 67,205 |   |
| Cash  and cash equivalents, end of period                                          |       | $                                     | 77,434     |   | $ | 71,779 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**ARGOSYGAMING COMPANY**

**CONDENSEDCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

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

 
| ** **                                                 | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Capital in  Excess of Par** | ** ** | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | ** **        | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **                            | ** ** |
| Balance,  December 31, 2004                           |       | 29,553,772 |       | $                 | 296        |                          | $          | 98,580                 |       | $                                     | 273,886    |   | $ | 372,762 |   |
| Exercise  of stock options, including tax benefit          |       | 12,867     |       | —            |       | 440                           |       | —                 |       | 440                                   |       |
| Net  income for the three months ended March 31, 2005 |       |       |       | —            |       | —                        |       | 21,324                 |       | 21,324                                |       |
|                                                       |       |       |       |              |       |                          |       |                   |       |                                  |       |
| Balance,  March 31, 2005                              |       | 29,566,639 |       | $                 | 296        |                          | $          | 99,020                 |       | $                                     | 295,210    |   | $ | 394,526 |   |

** **

See accompanyingnotes to condensed consolidated financial statements.

 

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# **ARGOSYGAMING COMPANY**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited, inThousands, Except Share and Per Share Data)

 

**1.****              Basis ofPresentation and Pending Merger**

 

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

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  Interim results may not necessarily beindicative of results that may be expected for any other interim period or forthe year as a whole.  For furtherinformation, refer to the financial statements and footnotes thereto for theyear ended December 31, 2004, included in our Annual Report on Form 10-K(File No. 1-11853).  Theaccompanying unaudited condensed consolidated financial statements contain alladjustments, which are, in the opinion of management, necessary to fairly presentthe financial position and the results of operations for the periods indicated.

 

Thestates of Illinois, Indiana and Iowa assess gaming taxes on a graduated scalebased on casino revenues and throughout the year we accrue gaming tax expenseutilizing an effective annual tax rate.  Forthe three months ended March 31, 2005, we have recorded gaming taxes atour Illinois properties at the current tax rates without giving benefit to astatutory rollback in gaming tax rates scheduled to go into effect July 1,2005.  Should the reduction in Illinoisgaming taxes occur on July 1, 2005, we expect to record a cumulativebenefit for the impact of the reduction in our effective gaming taxes at ourIllinois properties during the three months ended September 30, 2005.  If we recorded the benefit of the enactedrollback in our calculation of our effective gaming tax rates for the threemonths ended March 31, 2005, we estimate our gaming tax expense at ourIllinois properties would have been approximately $3,000 lower beforeconsideration of federal and state income taxes.

 

*Pendingmerger –* The Company entered into a definitive MergerAgreement (“Merger Agreement”) with Penn National Gaming, Inc. (“Penn”) onNovember 3, 2004.  Under the termsof the Merger Agreement, we have agreed to sell all of the outstanding stock ofthe Company to Penn for $47 per share and Penn will assume all of ourindebtedness for aggregate consideration of approximately $2.2 billion. Ourshareholders approved the Merger Agreement on January 20, 2005.  The transaction is subject to approval byeach company’s respective state regulatory bodies, and to certain othernecessary regulatory approvals and other customary closing conditions containedin the Merger Agreement. The transaction is not conditioned on financing and,pending regulatory approvals, is expected to close in the third quarter of2005.

 

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

 

Long-term debt consistsof the following:

 
| ** **                                                                                                                                                                                   | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| Senior  Secured Credit Facility:                                                                                                                                                             | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Senior  secured line of credit, expires September 30, 2009, interest payable at  least quarterly at either LIBOR and/or prime plus a margin (from 4.1% to 6.0%  at March 31, 2005) |       | $                        | 76,600     |                        | $          | 87,100 |   |
| Term  loan, matures June 30, 2011, principal and interest payments due  quarterly at either LIBOR and/or prime plus a margin (4.31% at March 31,  2005)                            |       | 174,125                  |       | 174,562                     |       |
|                                                                                                                                                                                         |       | 250,725                  |       | 261,662                     |       |
| Subordinated  Notes:                                                                                                                                                                         |       |                     |       |                        |       |
| Due September 2011,  interest payable semi-annually at 9.0%                                                                                                                             |       | 200,000                  |       | 200,000                     |       |
| Due January 2014,  interest payable semi-annually at 7.0%                                                                                                                               |       | 350,000                  |       | 350,000                     |       |
|                                                                                                                                                                                         |       | 550,000                  |       | 550,000                     |       |
| Notes  payable, principal and interest payments due quarterly through September 2015,  discounted at 10.5%                                                                              |       | 2,456                    |       | 2,465                       |       |
| Total  long-term debt                                                                                                                                                                        |       | 803,181                  |       | 814,127                     |       |
| Less:  current maturities                                                                                                                                                                    |       | 2,559                    |       | 2,512                       |       |
| Long-term  debt, less current maturities                                                                                                                                                     |       | $                        | 800,622    |                        | $          | 811,615 |   |

 

We have borrowingsoutstanding under two separate Subordinated Notes issues totaling $550,000 (“SubordinatedNotes”). On September 30, 2004, we entered into the Third Amended andRestated Credit Agreement (the “Credit Facility”) with a revolving line ofcredit for up to $500,000 and a Term Loan of $175,000 maintaining a totalfacility of $675,000. The Credit Facility is secured by liens on substantiallyall of our assets and our subsidiaries are co-borrowers.  Substantially all of our subsidiaries fullyand unconditionally guarantee our 9% Subordinated Notes on a joint and severalbasis.  All of our subordinated notesrank junior to all of our senior indebtedness, including borrowings under theCredit Facility.

 

In2004, we refinanced a portion of our existing indebtedness ($350,000 of 10.75%Subordinated Notes due 2009) with net proceeds from the issuance of $350,000 innew 7% Subordinated Notes due 2014, together with borrowings under our CreditFacility.  Related to this refinancing,we incurred a pre-tax charge $26,040 in net premiums and fees.

 

Theclosing of our pending merger with Penn constitutes a change of control asdefined under our Subordinated Note indentures and obligates us to make anoffer to repurchase our Subordinated Notes at a cash price equal to 101% of theprincipal amount of our outstanding Subordinated Notes plus accrued interest.This change of control offer is required to be made within 30 business daysfollowing the change of control.  Alternatively,Penn could choose to retire the Subordinated Notes or seek to obtain a waiverof this requirement.  In addition, upon achange of control, all committments under the Credit Facility terminate.  Prior to the closing of the merger, we will retirethe Credit Facility or seek to obtain a waiver under the Credit Facility.

 

OurSubordinated Notes due in 2011 and 2014 contain certain restrictions on thepayment of dividends on our common stock and the incurrence of additionalindebtedness, as well as other typical debt covenants. In addition, the CreditFacility requires us to maintain certain financial ratios, based on terms asdefined in the Credit Facility, which, as of March 31, 2005, are asfollows: (1) Total Funded Debt to EBITDA Ratio of a maximum of 4.75 to1.0; (2) Senior Funded Debt to EBITDA Ratio of a maximum of 3.50 to 1.0;and (3) Fixed Charge Coverage Ratio of a minimum of 1.50 to 1.0.  As of March 31, 2005, we are incompliance with these ratios.  At April 29,2005, based upon these financial ratios, additional availability under theCredit Facility was approximately $435,000. We have no off balance sheet debt.

 

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

 

In December 2002,the Financial Accounting Standards Board issued FAS 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure”.  We have a stock-based employee compensationplan and a stock-based director compensation plan.  As we continue to follow APB 25 for stockoptions granted to employees and directors, no stock-based compensation cost isreflected in net income, as all options granted under those plans had anexercise price

 

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equal to the market valueof the underlying common stock on the date of grant.  The following table discloses our pro formanet income and diluted net income per share had we applied the fair valuerecognition provisions of FAS 123.

 
| ** **                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| **(unaudited,  in thousands, except share data)**       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net  income                                             | ** ** | ** **                            | ** ** | ** ** | ** ** |
| As  reported                                            |       | $                                     | 21,324     |   | $ | 3,960 |   |
| Pro  forma stock-based compensation, net of tax benefit |       | (772                                  | )          | (247 | ) |
| Pro  forma                                              |       | $                                     | 20,552     |   | $ | 3,713 |   |
|                                                    |       |                                  |       |   |   |
| Diluted  income per share                               |       |                                  |       |   |   |
| As  reported                                            |       | $                                     | 0.71       |   | $ | 0.13 |   |
| Pro  forma stock-based compensation, net of tax benefit |       | (0.02                                 | )          | (0.01 | ) |
| Pro  forma                                              |       | $                                     | 0.69       |   | $ | 0.12 |   |

 

These pro formaamounts to reflect FAS 123 option expense may not be representative of futuredisclosures because, under FAS 123, the estimated fair value of the options isamortized to expense over the vesting period and additional options may begranted in the future.

 

In April and July 2004,we granted 638,571 and 20,000 shares of non-qualified stock options,respectively, to certain key employees and 40,000 shares of non-qualified stockoptions to our non-employee directors under the Argosy Gaming Company StockOption Plan and the Argosy Gaming Company Directors Option Plan,respectively.  Under the terms of ourMerger Agreement with Penn, we are restricted from issuing additional stockoptions under both the Stock Option Plan and the Directors Option Plan for theperiod from the date of the agreement to the effective time of the merger.

 

In December 2004,the FASB revised SFAS No. 123 (“SFAS 123R”), “Accounting for Stock BasedCompensation.”  The revision establishesstandards for the accounting of transactions in which an entity exchanges itsequity instruments for goods or services, particularly transactions in which anentity obtains employee services in share-based payment transactions.  The revised statement requires a publicentity to measure the cost of employee services received in exchange for anaward of equity instruments based on the grant-date fair value of theaward.  That cost is to be recognizedover the period during which the employee is required to provide service inexchange for the award.  Changes in fairvalue during the requisite service period are to be recognized as compensationcost over that period.  In addition, therevised statement amends SFAS No. 95, “Statement of Cash Flows,” torequire that excess tax benefits be reported as a financing cash flow ratherthan as a reduction of taxes paid.  Theprovisions of the revised statement are effective for financial statementsissued for the first interim or annual reporting period beginning after December 15,2005, with early adoption encouraged.  Weare currently evaluating the impact that this statement will have on ourfinancial condition or results of operations.

 

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**4.****             ****Earnings Per Share**

 

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

 
| ** **                                                                                              | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(unaudited,  in thousands, except share data)**                                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **Numerator:**                                                                                          | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Numerator  for basic and diluted earnings per share - net income                                        |       | $                                     | 21,324     |   | $ | 3,960 |   |
|                                                                                                    |       |                                  |       |   |   |
| **Denominator:**                                                                                        |       |                                  |       |   |   |
| Denominator  for basic earnings per share - weighted average shares outstanding                         |       | 29,556,028                            |       | 29,345,773 |   |
|                                                                                                    |       |                                  |       |   |   |
| Effect  of dilutive securities (computed using the treasury stock method):                              |       |                                  |       |   |   |
| Employee  and directors stock options                                                                   |       | 297,884                               |       | 202,832 |   |
| Restricted  stock                                                                                       |       | —                                |       | 13,202 |   |
| Dilutive  potential common shares                                                                       |       | 297,884                               |       | 216,034 |   |
| Denominator  for diluted earnings per share - adjusted weighted-average shares and assumed  conversions |       | 29,853,912                            |       | 29,561,807 |   |
|                                                                                                    |       |                                  |       |   |   |
| Basic  earnings per share                                                                               |       | $                                     | 0.72       |   | $ | 0.13 |   |
|                                                                                                    |       |                                  |       |   |   |
| Diluted  earnings per share                                                                             |       | $                                     | 0.71       |   | $ | 0.13 |   |

 

For the three monthsended March 31, 2005, all employee and director options were included inthe computation of diluted earnings per share.

 

For the three monthsended March 31, 2004, employee options to purchase 58,755 shares of commonstock priced at $35.18 per share and director options to purchase 12,000 sharesof common stock priced at a range from $35.18-$39.99 per share, were notincluded in the computation of diluted earnings per share because the optionexercise price was greater than the average market price of the underlyingcommon shares and, therefore, the effect would be anti-dilutive.

 

**5.****              Commitments and ContingentLiabilities**

 

We are subject to, fromtime to time, various legal and regulatory proceedings in the ordinary courseof our business.  We believe that currentproceedings will not have a material effect on our financial condition or theresults of our operations.

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Exceptwhere otherwise noted, the words, “we,” “us,” “our” and similar terms, as wellas references to “Argosy” or the “Company” refer to Argosy Gaming Company andall of its subsidiaries.*

 

**Cautionary Statements forPurposes of the “Safe Harbor” Provisions of the Private Securities LitigationReform Act of 1995**

 

*This Report includes “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements include statements concerning our businessoutlook, plans, objectives, goals, strategies, future events, future revenuesor performance, capital expenditures, financing needs, plans or intentionsrelating to acquisitions and other information that is not historicalinformation. When used 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 risksand uncertainties that could cause our actual results to differ materially fromthe forward-looking statements contained in this document.  Such risks, uncertainties and other importantfactors include, but*

 

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*are notlimited to: (i) competitive and general economic conditions in ourmarkets, including location of our competitors and the legalization of gamingin states adjacent to our operations; (ii) changes in, or failure tocomply with, laws or regulations, (including increases in existing taxes or theimposition of new taxes on gaming revenues or gaming devices), or joint venturerelations or decisions of courts, regulators, accounting standards andgovernmental bodies (including obtaining the requisite approval of regulatoryauthorities for the proposed merger between Argosy and Penn National Gaming, Inc.);(iii) construction factors relating to our expansion projects, includingdelays, zoning issues, environmental restrictions, weather or other hazards, siteaccess matters and building permit issues; (iv) the ability to effectivelyimplement operational changes at our properties; (v) the effect ofeconomic, credit, and capital market conditions on the economy in general, andon gaming companies in particular; (vi) our dependence on ourLawrenceburg, Indiana casino; (vii) our substantial leverage; and (viii) otherrisks and uncertainties detailed from time to time in our filings with theSecurities and Exchange Commission.*

*All subsequent written andoral forward-looking statements attributable to us or persons acting on ourbehalf are expressly qualified in their entirety by our cautionary statements.The forward-looking statements included in this document are made only as ofthe date of this document. We do not intend, and undertake no obligation, toupdate these forward-looking statements.*

 

**Overview**

 

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

 

For the three months ended March 31, 2005 ascompared to March 31, 2004, our net revenues increased $6.9 million, or2.6%, and our income from operations remained constant as our operating marginsdropped to 19.6% from 20.1%.  Resultswere impacted primarily by higher gaming and admission tax expense ($4.2million) as our overall effective gaming and admission tax rate increased from34.7% to 35.4% with the overall higher revenue levels at our properties.

 

Construction continues on our new parking garage atRiverside with completion planned for the third quarter 2005.  This is part of our $75 million expansionproject that also will include a new luxury hotel planned for completion in2006.  After we opened our newbarge-based casino in Riverside in December 2003, we transferred theriverboat to our Sioux City location during 2004 to replace the existingsmaller riverboat.  We spent approximately$6 million in 2004 to refurbish this riverboat and it was placed in service inSioux City in September 2004. We currently hold the former Sioux Cityriverboat for sale. We have initiated the approval process to complete a majorcapital expansion project at our Lawrenceburg property. The project wouldinclude the replacement of the existing three-level boat with a largersingle-level boat that would add 1,200 gaming positions to the existing 2,875.The expansion plan would also provide a substantial increase in parking byadding a new, 1,500-space garage as well as surface parking for an additional350 cars. The plan nearly doubles the available on-site parking. The total costof the project is estimated to be approximately $250 million and would bepartially offset by a 10-year, $50 million incentive tax credit from the Cityof Lawrenceburg. Pending regulatory and other approvals, we expect to beginconstruction later this year, with completion of the garage near the end of2006 and of the casino in late 2007.

 

On September 30, 2004, we entered into the ThirdAmended and Restated Credit Agreement (“Credit Facility”) with a revolving lineof credit of $500 million and a Term Loan of $175 million maintaining our totalCredit Facility of $675 million. In February and June 2004, werefinanced a portion of our existing indebtedness with net proceeds from theissuance of $350 million in new 7% Senior Subordinated Notes (“7% Notes”) due2014, together with funds from our Credit Facility.  These funds were used to repurchase the $350million 10.75% Senior Subordinated Notes (“10.75% Notes”) due 2009.  Associated with this refinancing, we incurreda pretax charge of $26.0 million for net premiums and fees associated with theearly redemption of our 10.75% Notes.

 

During June 2004, our Lawrenceburg casino amendedits development agreement with the City of Lawrenceburg, Indiana effective January 1,2004. This amendment allows for a reduction of up to $5 million annually infees paid to the City of Lawrenceburg over a ten-year period. For the yearended December 31, 2005, we estimate earning the full $5 millionreduction, and therefore, we have recorded a $1.2 million reduction in selling,general and administrative expense for the three months ended March 31,2005.  No reduction was recorded for thethree months ended March 31, 2004, as the agreement was amended in June 2004and the entire six-month reduction was taken in the three months ended June 30,2004.  A receivable for this reduction of$6.2 million is included in other assets at March 31, 2005.

 

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We completed our investment to convert to coinless or “TITO”slot machines during the first quarter 2005. We believe the convenience andefficiency of TITO machines have had a positive impact on both our casinorevenues and our operating expenses.

 

Legislative uncertainties present challenges and risksto our ongoing operations.  For example,casino gaming is currently prohibited or restricted in several states adjacentto Indiana, Iowa and Missouri, and residents of those states comprise asignificant portion of the patrons at our Lawrenceburg, Sioux City andRiverside casinos.  Legislation has beenproposed in various states that would permit certain types of casino-stylegaming. If this legislation were approved in states adjacent to our properties,it would result in increased competition with respect to significant portionsof our target markets.  Furthermore, thelarge number of state and local governments with significant current orprojected budget deficits make it more likely that those governments thatpermit gaming will seek to fund such deficits with new or increased gamingtaxes.  To address these legislativerisks, we must regularly adjust our business strategies and adapt our casinooperations.

 

**ARGOSYGAMING COMPANY AND SUBSIDIARIES**

**SELECTEDFINANCIAL INFORMATION**

**(inthousands, unaudited)**

 
| ** **                        | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| **CASINO REVENUES**               |       |                                  |       |   |   |
| Argosy  Casino - Alton            |       | $                                     | 28,306     |   | $ | 27,186 |   |
| Argosy  Casino - Riverside        |       | 39,787                                |       | 38,238 |   |
| Argosy  Casino - Baton Rouge      |       | 24,521                                |       | 21,695 |   |
| Argosy  Casino - Sioux City       |       | 13,746                                |       | 11,686 |   |
| Argosy  Casino - Lawrenceburg     |       | 112,371                               |       | 112,002 |   |
| Empress  Casino Joliet            |       | 56,252                                |       | 55,200 |   |
| Total                             |       | $                                     | 274,983    |   | $ | 266,007 |   |
|                              |       |                                  |       |   |   |
| **NET REVENUES**                  |       |                                  |       |   |   |
| Argosy  Casino - Alton            |       | $                                     | 27,209     |   | $ | 26,044 |   |
| Argosy  Casino - Riverside        |       | 37,091                                |       | 37,930 |   |
| Argosy  Casino - Baton Rouge      |       | 26,364                                |       | 22,351 |   |
| Argosy  Casino - Sioux City       |       | 13,238                                |       | 11,346 |   |
| Argosy  Casino - Lawrenceburg     |       | 112,695                               |       | 112,933 |   |
| Empress  Casino Joliet            |       | 54,420                                |       | 53,485 |   |
| Total                             |       | $                                     | 271,017    |   | $ | 264,089 |   |
|                              |       |                                  |       |   |   |
| **INCOME (LOSS) FROM OPERATIONS** |       |                                  |       |   |   |
| Argosy  Casino - Alton            |       | $                                     | 4,574      |   | $ | 3,158 |   |
| Argosy  Casino - Riverside        |       | 7,925                                 |       | 9,384 |   |
| Argosy  Casino - Baton Rouge      |       | 4,603                                 |       | 2,625 |   |
| Argosy  Casino - Sioux City       |       | 3,264                                 |       | 2,419 |   |
| Argosy  Casino - Lawrenceburg     |       | 33,212                                |       | 33,116 |   |
| Empress  Casino Joliet            |       | 10,537                                |       | 10,355 |   |
| Corporate                         |       | (11,118                               | )          | (7,985 | ) |
| Total                             |       | $                                     | 52,997     |   | $ | 53,072 |   |

 

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**RECONCILIATIONOF NET INCOME TO EBITDA (1) (2)**

(In thousands, unaudited)

 
| ** **                              | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net  income (3)                         |       |                                  |       | $ | 21,324 |   |   |   | $ | 3,960 |   |
| Income  tax expense                     |       |                                  |       | 17,098 |   |   |   | 5,805 |   |
| Interest  expense, net                  |       |                                  |       | 14,575 |   |   |   | 18,030 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| Depreciation  and amortization expense: |       |                                  |       |   |   |   |   |   |   |
| Argosy  Casino - Alton                  |       | $                                     | 1,634      |   |   |   | $ | 1,552 |   |   |   |
| Argosy  Casino - Riverside              |       | 3,915                                 |       |   |   | 2,461 |   |   |   |
| Argosy  Casino - Baton Rouge            |       | 2,406                                 |       |   |   | 2,266 |   |   |   |
| Argosy  Casino - Sioux City             |       | 972                                   |       |   |   | 1,123 |   |   |   |
| Argosy  Casino - Lawrenceburg           |       | 3,701                                 |       |   |   | 3,412 |   |   |   |
| Empress  Casino Joliet                  |       | 2,346                                 |       |   |   | 2,800 |   |   |   |
| Corporate                               |       | 652                                   |       |   |   | 611 |   |   |   |
| Depreciation  and amortization expense  |       | 15,626                                |       | 15,626 |   | 14,225 |   | 14,225 |   |
|                                    |       |                                  |       |   |   |   |   |   |   |
| EBITDA  (1) (2):                   |       |                                  |       |   |   |   |   |   |   |
| Argosy  Casino - Alton                  |       | 6,208                                 |       |   |   | 4,710 |   |   |   |
| Argosy  Casino - Riverside              |       | 11,840                                |       |   |   | 11,845 |   |   |   |
| Argosy  Casino - Baton Rouge            |       | 7,009                                 |       |   |   | 4,891 |   |   |   |
| Argosy  Casino - Sioux City             |       | 4,236                                 |       |   |   | 3,542 |   |   |   |
| Argosy  Casino - Lawrenceburg           |       | 36,913                                |       |   |   | 36,528 |   |   |   |
| Empress  Casino Joliet                  |       | 12,883                                |       |   |   | 13,155 |   |   |   |
| Corporate  (2)                          |       | (10,466                               | )          |   |   | (32,651 | ) |   |   |
| EBITDA  (1) (2)                    |       | $                                     | 68,623     |   | $ | 68,623 |   | $ | 42,020 |   | $ | 42,020 |   |

 

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(1) ”EBITDA” isdefined as earnings before interest, taxes, depreciation and amortization.EBITDA is presented solely as a supplemental disclosure because managementbelieves it is 1) a widely used measure of operating performance in the gamingindustry, 2) a principal basis for valuation of gaming companies and 3) is usedas a basis for determining compliance with our credit facility. Management usesproperty-level EBITDA (EBITDA before corporate expense) and EBITDA margin(EBITDA as a percent of net revenues) as the primary measures of our properties’performance, including the evaluation of operating personnel. EBITDA should notbe construed as an alternative to GAAP-based financial measures such asoperating income, an indicator of our operating performance, or cash flows fromoperating activities, as a measure of liquidity. We have significant uses ofcash flows, including capital expenditures, interest payments, taxes and debtprincipal repayments, which are not reflected in EBITDA.  We believe the performance of our operatingunits is more appropriately measured before these expenses, since theallocation of our capital is decided by corporate management and is subject tothe approval of the board of directors. In addition, we manage cash and finance our operations at theconsolidated level and we file a consolidated income tax return.  We do not consider EBITDA in isolation. Ourcalculation of EBITDA may not be comparable to similarly titled measuresreported by other companies. For a further discussion of such limitations, seeour additional disclosures in this report under the heading “Non-GAAP FinancialMeasures.”

 

(2) Because we do not includecorporate expense in our computation, property-level EBITDA does not reflectall the costs of operating the properties as if each were a stand-alonebusiness unit.  Corporate expense includessignificant expenses necessary to manage a multiple casino operation, certainof 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) Includes $25,277 ofpre-tax expense on early retirement of debt for the three months ended March 31,2004.

 

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**Three months ended March 31,2005 compared to three months ended March 31, 2004**

 

A discussion of each ofour properties operating results:

 

*Lawrenceburg*– Net revenues decreased $0.2 million to $112.7 million as admissions decreased4.5% and win per admission increased 5.0%. Operating expenses decreased $0.3 million to $79.5 million.  Selling, general and administrative (“SG&A”)expense decreased $1.6 million due primarily to a $1.2 million incentive creditin city development fees due to the amendment to the development agreement withthe City of Lawrenceburg that reduces our annual fee paid to the City ofLawrenceburg.  This decrease was offsetby increases in gaming and admission taxes of $0.6 million as our effectivegaming tax increased slightly over last year with the remaining increase inother operating expenses.

 

*Riverside*– Net revenues decreased $0.8 million.  Casinorevenues increased $1.5 million, or 4.1%, to $39.8 million and food, beverageand other (“FB&O”) revenue increased $0.3 million.  Admissions were constant and win peradmission increased 4.4%. Offsetting these revenue increases was an increase inour promotional allowances of $2.7 million, primarily in our increased couponofferings.  Operating expenses increased$0.6 million in the following areas: depreciation and amortization expense increased $1.5 million as we areaccelerating depreciation on our current parking garage (to be demolishedduring the second quarter 2005 to allow construction on our new hotel), gamingand admission taxes increased $0.5 million corresponding with our increase incasino revenues, offset by a reduction in our SG&A expense of $1.3 millionas advertising and promotions were at reduced levels during the three monthsended March 31, 2005, compared to 2004 as our new larger barge-basedcasino was newly opened in the first quarter 2004 (officially opened in December 2003).

 

*Joliet*– Net revenues increased $0.9 million due primarily to an increase in casinorevenues of $1.1 million, or 1.9%, to $56.3 million.  Admissions increased 5.9% and win peradmission decreased 3.8%.  Operatingexpenses increased $0.8 million due primarily to an increase in gaming andadmission taxes of $0.8 million corresponding to the higher revenue levels.

 

*Alton*– Net revenues increased $1.2 million as casino revenues increased $1.1million, or 4.1%, to $28.3 million due primarily to an increase in win peradmission.  Operating expenses decreasedslightly by $0.1 million due primarily to a decrease in casino expenses of $0.6million due to operational efficiencies offset by an increase in gaming andadmission taxes of $0.7 million corresponding to the increased revenue levels.

 

*BatonRouge* – Net revenues increased $4.0 million as casinorevenues increased $2.8 million, or 13.0%, to $24.5 million due primarily to anincrease in admissions of 25% (due to the City of Baton Rouge hosting theAmerican Bowling Congress) and the addition of a poker room offset by adecrease in win per admission of 10%. FB&O revenue increased $1.5 million due to a remodeling of ourrestaurant and increased admissions and hotel occupancy due to the bowlingcongress. Operating expenses increased $2.0 million primarily due to anincrease in gaming and admission taxes of $0.8 million corresponding with theincrease in casino revenues and an increase in FB&O expense of $0.8 millioncorresponding to the increased FB&O revenues.

 

*SiouxCity* – Net revenues increased $1.9 million due to an increasein casino revenues of $2.1 million, or 17.6%, to $13.7 million due to thepositive impact of the transfer and renovation of our Riverside riverboat toSioux City that was placed in service on September 1, 2004, and provides125 additional slot machines and six additional table games. Additionally,admissions have increased 27% while win per admission decreased 7%.  Operating expenses increased $1.0 million primarilydue to an increase in gaming and admissions taxes of $1.0 million correspondingto the increase in casino revenues.

 

*Corporate*– Operating expenses increased $3.1 million due primarily to costs of $2.7million associated with our pending merger with Penn.

 

Otheroverall company costs were as follows:

 

*OtherIncome (Expense)*– Net interest expense decreased $3.4million to $14.6 million due primarily to refinancing our 10.75% Notes with new7% Notes, due 2014, in February and June 2004.

 

*Expenseon Early Retirement of Debt* - Associated with the noterefinancing above, we incurred a pre-tax charge of $25.3 million in netpremiums and fees for the three months ended March 31, 2004.

 

*IncomeTax Expense –*Income tax expense increased $11.3 million to$17.1 million as pre-tax earnings increased primarily due to increased earningsat our Alton, Baton Rouge and Sioux City properties and expenses related to theearly

 

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retirement of our 10.75%Notes in the three months ended March 31, 2004. Our lower overalleffective tax rate for the three months ended March 31, 2005, as comparedto the three months ended March 31, 2004, is primarily due to recording atax benefit related to this debt refinancing at its’ marginal effective taxrate which was lower than our recurring effective tax rate.

 

**Competition**

 

Our Alton Casino facescompetition from four other casino operators in the St. Louis area (twoadditional casinos have been approved for the St. Louis market).  One competitor opened a hotel expansion andfacility renovation during the third quarter 2004.  Our Riverside Casino faces competition fromthree casinos in the Kansas City area.  OurBaton Rouge Casino faces competition from one casino located in downtown BatonRouge, a nearby Native American casino and multiple casinos throughoutLouisiana. We face competition in Sioux City, Iowa from video gaming devices innearby South Dakota, from two land-based Native American casinos and, to alesser extent, from slot machines at a pari-mutuel racetrack in Council Bluffs,Iowa and from two riverboat casinos in the Council Bluffs, Iowa/Omaha, Nebraskamarket. Our Lawrenceburg Casino faces competition from two riverboat casinos inthe Cincinnati market. Our Joliet Casino faces competition from seven othercasino operators in the Chicago metropolitan area, including four casinos inIndiana.

 

There could be furtherunanticipated competition in any market in which we operate as a result oflegislative changes or other events.  Forinstance, several states have discussed adopting or expanding gaming in variousforms, which could cause increased competition in our markets.  We expect each market in which weparticipate, both current and prospective, to be highly competitive.

 

**Liquidity and Capital Resources**

 

In the three months endedMarch 31, 2005, we generated cash flows from operating activities of $24.7million compared to $36.8 million for the three months ended March 31,2004. This decrease is due primarily to a change in the timing of our interestpayments as our 7% Notes (with payments in January and July) replaced our10.75% Notes (with payments in June and December).

 

In thethree months ended March 31, 2005, we used cash flows for investingactivities of $16.7 million compared to $30.3 million for the three monthsended March 31, 2004. During the three months ended March 31, 2005,our investing activities included purchases of property and equipment of $16.8million (including $7.2 million on our current Riverside and Lawrenceburgconstruction projects) compared to $30.7 million in property and equipmentpurchases for the three months ended March 31, 2004 ($20.6 million inresidual payments on our Riverside construction project completed in December 2003).

 

Duringthe three months ended March 31, 2005, we used cash flows of $10.6 millionfor financing activities, primarily for repayments on our Credit Facility,compared to using $2.0 million for the three months ended March 31,2004.  For the three months ended March 31,2004, we used cash flows of $356.2 million for payments related to therepurchase of our 10.75% Notes offset by cash provided through the issuance of$350 million of our new 7% Notes. Additionally, for the three months ended March 31, 2004, weincurred $6.7 million for deferred finance fees related to the 7% Notes.

 

On September 30,2004, we entered into the Third Amended and Restated Credit Agreement (the “CreditFacility”) with a revolving line of credit up to $500 million and a Term Loanof $175 million maintaining our total facility of $675 million.

 

OurSubordinated Notes due in 2011 and 2014 contain certain restrictions on thepayment of dividends on our common stock and the occurrence of additionalindebtedness, as well as other customary debt covenants.  In addition, the Credit Facility requires usto maintain certain financial ratios, based on terms as defined in the CreditFacility, which, as of March 31, 2005, are as follows:  (1) Total Funded Debt to EBITDA Ratio ofa maximum of 4.75 to 1.0; (2) Senior Funded Debt to EBITDA Ratio of amaximum of 3.50 to 1.0; and (3) Fixed Charge Coverage Ratio of a minimumof 1.50 to 1.0.  As of March 31,2005, we were in compliance with these ratios.

 

Underour Subordinated Notes indentures, our ability to make dividends and otherdistributions on our common stock and make investments outside of the Companyand its restricted subsidiaries is generally limited to 50% of our consolidatednet income since July 1, 1999.  Inaddition, we are restricted from incurring additional indebtedness, which,after giving effect of the additional indebtedness, would cause our InterestCoverage Ratio (Consolidated EBITDA to Consolidated

 

14

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Interest Expense for the mostrecent four fiscal quarters on a pro forma basis) to be less than 2.0 to 1.0.  None of these covenants currently places anymaterial limitations on our anticipated future operating or capital plans.

 

DuringMay 2003, we announced the Board of Director’s 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, we havemade no stock repurchases under this program. Additionally, under the terms of our merger agreement with Penn NationalGaming, Inc., no dividends can be declared, set aside or paid and we canmake no redemptions or repurchases of our stock prior to consummation of themerger.

 

Wecontinue to make capital investments at our existing properties for expansionand product enhancement, including continued expansion at Riverside for a new1,400-space parking garage (estimated to be completed in the third quarter2005), our proposed Lawrenceburg expansion project and maintenance capitalexpenditures. The new garage at our Riverside property is part of a $75 millionexpansion project that also includes a new 250-room hotel.  The Lawrenceburg project includes thereplacement of the existing three-level boat with a larger single-level boatthat would add 1,200 gaming positions to the existing 2,875.  The expansion plan also includes a new 1,500-spacegarage and a 350-space surface lot.  Thetotal cost of the project is estimated to be approximately $250 million, andwould be partially offset by the 10-year, $50 million credit from the City ofLawrenceburg.  Additionally, in October 2004,we entered into a contract to purchase Raceway Park in Toledo, Ohio forapproximately $20 million, subject to various conditions including regulatoryapproval.  We expect to fund theseexpenditures from internally generated cash and availability under our CreditFacility.

 

Givenour significant cash generation capabilities, we seek investment opportunitiesat our existing properties or into new assets. In addition, we may from time totime seek to retire certain of our outstanding debt through open market cashpurchases, privately negotiated transactions or otherwise. Such repurchases, ifany, will depend on prevailing market conditions, our liquidity requirements,contractual restrictions and other factors. Under the terms of our mergeragreement with Penn, we cannot incur, assume or prepay any long-term orshort-term debt or issue any debt securities, except for borrowings underexisting line of credit and actions taken in the ordinary course of businessconsistent with past practice. At March 31, 2005, we had approximately$77.4 million of cash and cash equivalents; $250.7 million was outstanding onour Credit Facility ($76.6 million on our revolving Credit Facility and $174.1million on our term loan) and $550.0 million of Subordinated Notes (due in September 2011and January 2014).  As of March 31,2005, we had outstanding letters of credit of $9.9 million and additionalavailability under the Credit Facility was approximately $435 million.

 

Consistentwith gaming industry practice, we conduct our operations with a net workingcapital deficit. Unlike traditional industrial companies, a gaming company’sbalance sheet has limited accounts receivable and inventories. In addition,casinos generate significant cash on a daily basis. We generally apply ourdaily cash flows to fund capital expenditures or pay down debt under ourrevolving Credit Facility and pay our current liabilities pursuant to theirnormal cycles.  Given the significantdaily cash flows generated by our operations and the financial flexibilityprovided by our Credit Facility, the existence of a working capital deficit hasno impact on our ability to operate our business or meet our obligations asthey become due.  We believe that cash onhand, 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.

 

Becausewe have no direct operations and no significant assets other than ownership ofstock in our subsidiaries, we are dependent on our subsidiaries for payments ofdividends and other distributions to generate the funds necessary to meet ourcash needs.  Although there are currentlyno restrictions on the flow of funds between our subsidiaries and us, shouldour subsidiaries be unable to remit dividends or other payments, our ability tomeet our financial obligations may be impaired.

 

Ourlong-term debt, as of March 31, 2005, matures as follows (in thousands):

 
| One  year and less |   | $       | 2,559   |   |
|--------------------|--------|---------|---------|--------|
| 1 -  3 years       |   | 3,920   |    |
| 3 -  5 years       |   | 80,618  |    |
| After  5 years     |   | 716,084 |    |
| Total              |   | $       | 803,181 |   |

 

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# **Off Balance Sheet Arrangements**

 

# **We have not entered into any transactions withunconsolidated entities whereby we have financial guarantees, subordinatedretained interest, derivative instruments or other contingent arrangements thatexpose us to material continuing risks, contingent liabilities or any otherobligation under a variable interest in an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to us.**

 

# **Critical Accounting Estimates**

 

Ourconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States, which requires ourmanagement to make estimates and assumptions about the effects of matters thatare inherently uncertain.  Of ouraccounting estimates, we believe the following may involve a higher degree ofjudgment and complexity.

 

*Goodwill –*We have approximately $727 million of goodwill recorded onour balance sheet at March 31, 2005, related to acquisitions.  We regularly evaluate our acquired businessesfor potential impairment indicators. Additionally, we adopted the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets,” on January 1, 2002, that requires us toperform impairment testing at least annually. Our judgments regarding the existence of impairment indicators are basedon, among other things, the regulatory and competitive status and operationalperformance of each of our acquired businesses. Future events could significantly impact our judgments and any resultingimpairment loss could have a material adverse impact on our financial conditionand results of operations.

 

*Propertyand Equipment –*Our operations are capital intensive and wehave made significant capital investments in each of our properties.  At March 31, 2005, we have approximately$548 million of net property and equipment recorded on our balance sheet.  We depreciate our assets on a straight-linebasis over their estimated useful lives. The estimates of the useful lives are based on the nature of the assetsas well as our current operating strategy. Future events, such as property expansions, new competition and newregulations, could result in a change in the manner in which we are usingcertain assets requiring a change in the estimated useful lives of suchassets.  In assessing the recoverabilityof the carrying value of property and equipment, we must make assumptionsregarding estimated future cash flows and other factors.  If these estimates or the related assumptionschange in the future, we may be required to record impairment charges for theseassets.

 

*InsuranceAccruals –*Our insurance policies for employee health, workers’compensation and general patron liabilities have significant deductible levelson an individual claim basis.  We accruea liability for known workers’ compensation and general patron liabilitiesbased upon claims reserves established by the third party administratorprocessing our claims.  Additionally, weaccrue an amount for incurred but not reported claims based on our historicalexperience and other factors.  Ouremployee health insurance accrual is based on our historical claims experiencerate including an estimated lag factor. These accruals involve complex estimates and could be significantlyaffected should current or future claims vary from historical levels.  Management reviews our insurance accruals foradequacy at the end of each reporting period.

 

*EffectiveGaming Tax Rates*– The states of Illinois, Indiana and Iowaassess gaming taxes on a graduated scale based on casino revenues.  In these states, we record gaming taxes basedupon effective gaming tax rates for each of our casinos.  These effective rates are based upon gamingtax 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 oureffective gaming tax rates at the end of each reporting period.

 

Forthe three months ended March 31, 2005, we have recorded gaming taxes atour Illinois properties at the current tax rates without giving benefit to astatutory rollback in gaming tax rates scheduled to go into effect July 1,2005.  Should the reduction in Illinoisgaming taxes occur on July 1, 2005, we expect to record a cumulativebenefit for the impact of the reduction in our effective gaming taxes at ourIllinois properties during the three months ended September 30, 2005.  If we recorded the benefit of the enactedrollback in our calculation of our effective gaming tax rates for the threemonths ended March 31, 2005, we estimate our gaming tax expense at ourIllinois properties would have been approximately $3 million lower beforeconsideration of federal and state income taxes.

 

*IncomeTaxes*– We are subject to income taxes in the United Statesand in several states.  We account forincome taxes in accordance with SFAS Statement 109, “Accounting for IncomeTaxes.”  Our income tax returns aresubject to examination by various taxing authorities. We regularly assess thepotential outcomes of these examinations in determining the adequacy of ourprovision for income taxes and our income tax liabilities.  Inherent on our determination

 

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of any necessary reservesare assumptions based on past experiences and judgments about potential actionsby taxing authorities.  Our estimate ofthe potential outcome for any uncertain tax issue is highly judgmental.  We believe we have adequately provided forany reasonable and foreseeable outcome related to uncertain tax matters.  When actual results of tax examinationsdiffer from our estimates, we adjust the income tax provision in the period inwhich the examination issues are settled.

 

# **Non-GAAP Financial Measures**

 

EBITDA is a supplementalmeasure of our performance that is not required by, or presented in accordancewith Generally Accepted Accounting Principles (“GAAP”). EBITDA is not ameasurement of our financial performance under GAAP and should not beconsidered as an alternative to net income, operating income or any otherperformance measures derived in accordance with GAAP or as an alternative tocash flow from operating activities as measures of our liquidity.

 

EBITDAis defined as earnings before interest, taxes, depreciation and amortization.Our compensation plans base incentive compensation payments in part on EBITDAperformance measured against targets, and we use it to establish our budgetsand analyze our operations as compared to our budgets. In addition, our CreditFacility and our indentures use measures similar to EBITDA (with additional adjustments)to measure our compliance with covenants such as interest coverage and debtincurrence. We believe EBITDA facilitates operating performance comparisonsfrom period to period and company to company by backing out potentialdifferences caused by variations in capital structures (affecting interestexpense), tax positions (such as the impact on periods or companies of changesin effective tax rates or net operating losses) and the age and bookdepreciation of facilities and equipment (affecting relative depreciationexpense). We also present EBITDA because we believe it is frequently used bysecurities analysts, investors and other interested parties in the evaluationof the operating performance of companies in the gaming industry, the vastmajority of which present EBITDA when reporting their results.

 

Inaddition, in evaluating EBITDA, you should be aware that in the future we willincur expenses such as those used in calculating EBITDA. Our presentation ofEBITDA should not be construed as an inference that our future results will beunaffected by unusual or nonrecurring items.

 

EBITDAhas limitations as an analytical tool, and you should not consider it inisolation, or as a substitute for analysis of our results as reported underGAAP. 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.

 

Becauseof these limitations, EBITDA should not be considered as a measure ofdiscretionary cash available to us to invest in the growth of our business. We compensatefor these limitations by relying primarily on our GAAP results and using EBITDAonly supplementally.

 

Property-levelEBITDA represents EBITDA attributable to a particular casino property beforecorporate expense. We present property-level EBITDA as a further supplementalmeasure of the performance of our casino properties. Management uses property-levelEBITDA as the primary measure of our properties’ performance, including theevaluation of operating personnel at our properties. We also use property-levelEBITDA to make decisions regarding the allocation

 

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of capital among our properties.These decisions are made primarily by corporate management and our board ofdirectors. We believe that property-level performance is appropriately measuredbefore expenses such as interest and income taxes and other non-cash items suchas depreciation and amortization, because we finance our operations at theconsolidated level and file a consolidated tax return.

 

As ananalytical tool, property-level EBITDA is subject to similar limitations asEBITDA. In addition, because we do not include corporate expense in ourcomputation, property-level EBITDA does not reflect all the costs of operatingthe properties as if each were a stand-alone business unit. Corporate expenseincludes significant expenses necessary to manage a multiple casino operation,certain of which, such as corporate executive compensation, development, publiccompany reporting, treasury, legal and tax expenses, would also be required ofa typical stand alone casino property.

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

The information calledfor by this item is provided under the caption “Liquidity and Capital Resources”under Item 2 – Management’s Discussion and Analysis of Financial Condition andResults of Operations.

 

**Item 4.  Controls and Procedures**

 

(a)**         ***Evaluation of disclosure controls andprocedures:*

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theCommission’s rules and forms, and that such information is accumulated andcommunicated 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 ofthe end of the period covered by this Report, March 31, 2005, (the “EvaluationDate”), we carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including Richard J. Glasier, ourPresident and Chief Executive Officer and Dale R. Black, our Senior VicePresident and Chief Financial Officer, of the effectiveness of the design andoperation of our disclosure controls and procedures.  Based upon that evaluation, the President andChief 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 in internal controls:*

 

There was no change inthe Company’s internal controls during the period covered by this Report thatcould materially affect, or could reasonably be expected to materially affect,the Company’s internal control over financial reporting.

 

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

 

**Item 1.**           *LegalProceedings –*

 

The Company is from timeto time a party to legal proceedings arising in the ordinary course ofbusiness.  No material changes haveoccurred since our last filing.

 

**Item 2.**           *UnregisteredSales of Equity Securities and Use of Proceeds*–

 

(a)                                  None.

 

(b)                                 None.

 

(c)                                  None.

 

(d)                                 None.

 

(e)                                  OnMay 6, 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 may be made at management’s discretion without

 

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prior notice from time totime in the open market or through privately negotiated third partytransactions in compliance with applicable laws and depending on marketconditions. During the quarter ended March 31, 2005, and inception todate, we have not made any stock repurchases under the program. The stockrepurchase program has no expiration date. Under the terms of our MergerAgreement with Penn, no dividends can be declared, set aside or paid and we canmake no redemptions or repurchases of our stock.

 

**Item 3.**           *DefaultsUpon Senior Securities –* None

 

**Item 4.**           *Submissionof Matters to a Vote of Security Holders –* Information required isincorporated herein by reference from Item 4 of our 2004 Annual Report on Form10-K

 
| **Item 5.**           *Other  Information –* | (a)  None |
|-----------------------------------------------------------------------------------------------------|----------------|
| ** **                                                                                          | (b)  None |

 

**Item 6.**           *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 |

 

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**ARGOSYGAMING COMPANY**

**SIGNATURES**

 

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

 

 
|                                                  | Argosy Gaming Company                            |       |
|-------------------------------------------------------|--------------------------------------------------|------------|
|                                                  |                                             | Registrant |
|                                                  |                                             |
|                                                  |                                             |
| Date:      May  6, 2005 | /s/ Dale R.  Black                               |       |
|                                                  | Dale R. Black                                    |
|                                                  | Senior Vice President -  Chief Financial Officer |
|                                                       |                                                  |            |  |  |

 

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